Getting Out Of Credit Cards

Getting out of credit cards can seem impossible. After all, going in was more fun. The prospect of now paying all the cards off seems so hard. Yet, thousands of people do it every day, and so can you. It is just a series of small, but dedicated steps. Your goal should be to carry only one or two credit cards with balances paid in full every month. Start with these well recommended steps...

1. Stop using your cards. Sounds simple, and it is! Cut up the cards if that's what it takes to stop using them. Some people keep their cards out of reach by freezing them in glasses of water. Realistically, you might need one in an emergency, but having to melt is out of a chunk of ice may make you think about using it.

2. Stop credit card offers. The reason is that it will be too tempting having another zero balance card within arms reach. You don’t need the temptation. You can force credit bureaus to stop selling your name and address. Dial 1-888-5-OPTOUT to get the forms.

3. Always pay more than the minimum. Avoid the minimum payments since it will take forever to pay off the cards. Cut back on other areas, and pay as much as you can above the minimum every month.

4. Have a strategy. Your strategy will be different from a friends. It must fit your circumstances and lifestyle. You'll want to start by paying off the card with the highest rate first, and then the next highest, and so on. If you want a moral booster, pay off a card with a low balance, just to have one paid-off card. Top...

5. Reduce the interest rate. Negotiate with your credit card company for a lower rate. Call them up and ask for something in the range of 11%. All they can say is no.

6. Consolidate your debts. Combine your debts onto one or two of your lowest rate cards, if you've got some credit room on them.

7. Throw money at the balances. How? There are ways but each has a disadvantages...

Cash out your savings account
You could cash out your savings and investments and use the proceeds toward debt repayment. Even when debt interest is at 12%, your investments would have to pay more than 18% before federal and state taxes to equal that outflow of dollars. Pay off the debt, and it's the same as getting that 18% return without any risk on your part. The higher the interest rate on your debt, the more attractive repayment versus investment becomes.

Borrow against your life insurance
Do you have life insurance with a cash value? If so, borrow against the policy. The interest rate is typically well below commercial rates, and you can take your time repaying the loan. If you die before it's repaid, the outstanding balance plus interest will be deducted from the face value of the policy payable to the beneficiary.

Family and friends
Chances are you'll get a very favorable interest rate. They may even tolerate a late payment or two. But if you want to maintain the relationship, it's best to keep repayments on time.Top...

Get a home equity loan
Do you own your own home and have some equity that's accumulated through the years as you've paid off the mortgage? If so, now is the time to consider a home equity loan (HEL) line of credit for the maximum amount possible. An HEL gives you a double advantage. First, you use the loan proceeds to pay down your debt, thus trading something like an 18% loan for a 9% loan. Second, most homeowners itemize on their income tax returns. HEL interest under most circumstances is a deductible item. In a 28% marginal tax bracket, the 9% loan really has an effective rate of 6.5%, and that's probably the cheapest interest rate you'll see on personal indebtedness. The real danger here is falling into a trap. Many get an HEL, pay off existing debt, and then ring up the charges on the credit cards all over again. Now they have the HEL to repay on top of the credit cards.

Borrow from your 401(k)
Most 401(k) plans have a loan feature that lets you borrow up to 50% of the account's value, or $50,000, whichever is smaller. Interest rates are usually a point or two above prime, which makes them cheaper than that found on credit cards. Not only is the interest typically much lower than that on credit cards, the best part is you pay it to yourself. That's right, every dime in interest paid on a 401(k) loan goes directly into the borrower's 401(k) account, not the lender's. But there are some drawbacks. First, the loan and interest will be repaid with after-tax dollars, but the interest will be taxed again when you finally withdraw money from the 401(k) years later. Additionally, you must repay this loan in five years or less. If you leave your employment prior to full repayment, the outstanding balance becomes due and payable immediately. If it's not repaid, that amount will be treated as a distribution to you. You'll be taxed on that amount at ordinary rates. And if you're under the age of 59 1/2, you will also be assessed an additional 10% excise tax as a penalty for an early withdrawal of retirement funds. Accordingly, ensure any 401(k) loan can be repaid before you leave your job.Top...

Learn more about credit card industry traps here...