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4 Tips for Dealing with High Interest Credit Card Debt

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By Eva Norlyk Smith, Ph.D.
May 22, 2009

If you have credit card debt racking up high interest charges, it’s important to be proactive and take steps early on to deal with the beast. Your best defense is a combination of getting your average interest rates reduced and shrinking that credit card debt as fast as you can. Here are four tips for dealing with high interest credit card debt. Taking these simple steps will not only help you deal with the situation at hand, they will also save you a bundle of money.

Tip #1. Call Your Credit Card Issuer
If you have good credit and don’t have any late payments on your account, it is often possible to negotiate a lower credit card interest with your issuer. Unfortunately, if you’re one of the millions of consumers whose rate was raised in the fall-out from the economic crisis, this will be harder. Your credit card issuer will get lots of calls in response to those rate increases, so you’ll be one of thousands of people calling in to reduce their rate. Still, it’s an important step, which often can get you better terms.

Tip #2. Look for Ways to Reduce Your Average Interest Rate
If you can lower the interest rate on just some of your debt, you’ll reduce the average interest you pay on all your debt and cut your overall interest expense. Look into redistributing your credit card debt to other loans or credit cards to lower the average interest rate you pay on your all debt. Even transferring just some of your high interest debt to lower interest debt will make a difference.

Tip # 3. Supersize your monthly payments on high interest debt
Making a higher monthly payment on high interest debt can save you a bundle in interest costs, and it’s one of the best ways to shrink that high interest debt fast. Even just paying $100-200 more each month can literally save you thousands in interest charges.

For example, let’s say you have an $8,000 credit card debt at a 22.99% APR. If you pay off the debt with $200 a month, it will take you 6 years and five months to pay off the card. And, you’ll pay about $7,300 in interest charges.

Instead, say that you double the payment to $400 a month. Now it will take you only two years and two months to pay off the debt, and you’ll pay only $2,185 in interest. That’s more than a $5,000 savings in interest charges!

So how exactly do you get funds for higher monthly payments? Firstly, if you transfer credit card debt to lower interest debt, your minimum payment on those cards will get reduced. Use the money left over to pay down any high interest debt faster.

Tip #4. Make a Large Lump Sum Payment
When it comes to credit card debt, a stitch in time saves more than nine. When you have debt, particularly at high interest, the powerful force of compounding interest works against you. By making one large payment early on, you can reduce the effect of compounding and save a bundle.

Again, let’s say your owe $8,000 on your credit card at a 22.99% APR. Let’s say that you raise $1,000 to pay down the balance on that $8,000 credit card debt early on. You then pay down the debt at $200 a month. Under this scenario, it will take you a little less than five years to pay off your credit card debt. During that time you’ll pay about $4,700 in interest.

That’s $2,600 less than the $7,300 in interest accrued in the scenario where you just pay $200 a month. In short, you can pocket a $2,600 savings—just for making a one-time large payment.

Even better, make the $1,000 extra payment, and pay $400 on the balance each month. You can now lose that high interest debt in 22 months, and you’ll only pay $1,609 in interest.

So just how do you come up with extra money to pay down your credit card debt? Look for ways to liquidate some of the possessions you can do without. Have a garage sale, sell your second car or downgrade it to an older model. Or maybe a family member or friend will help you out with a small bridge loan until you get back on your feet—particularly if you show them how much you’ll save.