Knowledge and Insights

Through February, you may dread every trip to the mailbox. How did I manage to run up my credit card balances so high? Why did I open those new store card accounts? Were the discounts I got worth the interest I am going to pay?

If financial overindulgence this past holiday season has you feeling sick, do not worry; we have remedies that will help you gain control and feel better.

First, do not hide from your spending spree; get organized and create a plan. Make a comprehensive list of all your credit card balances, including:

• Outstanding balance owed;
• Current minimum payment required;
• Payment due date;
• Current interest rate; and, importantly,
• Date the low introductory interest period ends.

After you have created the list, rank your credit card balances from most to least expensive based on current interest rate and introductory terms.

Next, total your monthly minimum payments to see the total minimum required per month. Although you want to pay more than the minimum each month, you cannot afford to miss a minimum payment or make a late payment. In addition to late fees, you will likely face a substantial increase in your interest rate, not only for the card on which you missed or made the late payment, but also on all of your other cards. Late or skipped credit card payments negatively affect your credit rating, which directly impacts the interest you are charged on all of your cards.

Now, I have to say this – and they are not dirty words – the next step is to set up a monthly budget. It does not need to be elaborate. In fact, keep it simple! Start by making a list of your recurring monthly bills, such as

The essentials:

• Mortgage payment or rent
• Utilities – heat, electric, cable, phone, water and sewer
• Food and household supplies
• Transportation expenses
  Insurance

The non-essentials:

• Gym membership
• Dining out and other entertainment
• Clothing and other discretionary spending

This exercise is critical – you need to think about wants and needs and be very realistic. Needs keep a roof over your head, get you to work safely and keep you healthy.

Now it is time to put numbers on paper. Start with the money coming in on a monthly basis; subtract your total monthly essentials amount and total minimum payments due on your credit cards. Take a look at what you have left and divide into three categories:

• Extra credit card payments – the largest share;
• Emergency savings – you should try to tuck away some amount every month in a contingency fund; and
• Discretionary spending – only after you have adequately covered the first two.

Apply the money set aside for extra credit card payments to the most expensive credit card balance on your list, sending it along with the minimum payment amount required.

Stick with this plan once you have cleared off your first credit card balance. Take the monthly payment you were making, both the minimum and extra amount, and add it to the next expensive card payment, thus beginning to pay down that credit card balance. This practice will have an accelerating effect by clearing balances and reducing the total minimum payment requirement. By keeping the total amount paid each month on all your credit cards the same, you are continually increasing the amount of extra credit card payments on individual balances as the total number of cards to be paid off decreases.

By focusing on the most expensive cards first, you increase the pay down of principal by lowering your overall interest costs. Remember, the minimum payment amount on credit cards is designed to keep you in debt and paying interest for years! You must pay more than the minimum to get ahead!

Stay disciplined; follow your plan; keep your needs met and your wants in check. You will be feeling better financially in no time!