Credit Card Debt 101

Credit Card Debt

Many Americans have a large amount of credit card debt and see no end in sight. Fortunately, there are many ways that you can reduce credit card debt and get your financial situation back under control.

Figuring Out Where You Stand

The first step to reduce your credit card debt is to understand the problem. You need to know your debt to income ratio. Credit card issuers use this ratio, among other data, in assessing whether to allow an individual more credit, but may be helpful to you in figuring out where you stand.

To determine your debt to income ratio, first add up all of your monthly expenses. Then include your mortgage or rent payment, credit card monthly payments, your monthly car payment if you have one, student loan payments, and child support payments. That’s your monthly debt.

Figuring your monthly income is probably a lot easier – just add up your paychecks. If you get annual bonuses or other reasonably predictable yearly income, divide that figure by 12 and add it to your income figure. Now divide your monthly debt payment by your monthly income – you should come up with a percentage figure.

Ex: Monthly Debt Payment /Monthly Income= Percentage Results

If your percentage is 35% or less then congratulations! You are not considered to be carrying an excessive debt burden. If your number is between 35% and 50%, then you are considered in the danger zone. Stop adding the new debt and figure out a way to lessen your monthly expenses. If your debt to income ratio is 51% or higher, then you are considered in the red alert and need to reduce credit card debt immediately and quickly.

Taking action to reduce credit card debt may be difficult, but it has rewards. Imagine not having to work and it barely paying your bills. Imagine getting the mail with a cheerful attitude, knowing that there are not any ominous non payable bills waiting for you. It’s worth doing – you just have to make the commitment.

Options on Reducing Credit Card Payments

Cut Back

There are a number of ways you can reduce credit card debt. The most obvious way – stop adding to your debt by buying things on credit, and start putting every penny you can into paying down your debt. But clearly this option is not that simple considering millions of Americans are in credit card debt.

Bankruptcy

Declaring personal bankruptcy is usually a last resort. Recent legislation has changed the way bankruptcy works making it more difficult to walk away from unsecured debt. The downside to bankruptcy is that it is devastating to your credit history and makes it very difficult to get loans for new cars or mortgages in the future years to come. If at all possible, bankruptcy should not be used unless absolutely necessary.

Debt Consolidation

A debt consolidation loan pays off your existing credit card debt and puts it into one easy monthly payment, usually with a lower rate of interest. This allows you pay off your debts in a more controllable fashion, and does not hurt your credit rating.

Debt Settlement

Debt settlement is a process of negotiation between you and your creditors resulting in a lump sum payment at a discount from the total you currently owe. Although this is the fastest option in eliminating credit card debt besides filing for bankruptcy, it also may damage your credit report.

Depending on your particular circumstances, one or more of these strategies is your best bet to reduce credit card debt.

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