Are you carrying ever-increasing balances on your credit card? If so, you must take steps to control it before you enter a debt spiral – a situation where you are accruing so much collective debt and interest on that debt that it becomes effectively unpayable. You can never catch up without a drastic change in spending or income, or in the worst case, bankruptcy.
How can you prevent a debt spiral? We offer 5 tips to prevent a trip to the poorhouse.
1. Track Income and Expenses – It's not rocket science to figure out where your debt comes from. On a regular basis, you spend more money than you make. It's that simple.
Greg McBride, Chief Financial Analyst at Bankrate.com, puts it succinctly: "Force yourself to keep track of expenses, calibrate the amount you're bringing in on your net income with what's going out the door. This is really your score card to tell you whether or not you're living within your means."
Compile all your anticipated expenses for the month so you know where your income is going. Use receipts and credit card statements from the previous month as a guide. Compare expenses with your regular income, and this will lead you into Tip Number 2.
2. Create a Reasonable Budget – You can't reduce debt until you create a surplus to use in paying down the debt. Use the "offense" and "defense" approach advocated by Adam Carroll, Founder and Chief Education Officer of National Financial Educators, to address both ends of the shortfall. "Great offense is 'How do I make more money?'...Defense is 'How do I decrease my monthly expenses to the absolute ridiculous?'"
Review the expenses you compiled and see which ones can be reduced or eliminated. Perhaps you can eat out less often, scale back your cable/Internet/phone package, or reduce your new clothing budget – but make sure you leave a small amount for discretionary spending or you will lose motivation to continue. Meanwhile, consider other means of increasing your income such as selling off unused possessions, or making a side income through some marketable hobby or skill that you possess.
Once you have a final plan, outline that in a monthly budget and stick to that budget. Don't forget to put aside a small amount for a monthly emergency fund.
3. Pick a Debt Payoff Strategy – There are two basic strategies to paying down debts: pay down the highest-interest rate debt first or pay down the smallest debt first. In both cases, you pay the minimum on all debts except one while devoting the rest of your resources toward eliminating the chosen debt.
It makes the most economic sense to pay down the highest-interest rate debt first and minimize interest charges, but some people require the momentum and sense of accomplishment of paying off one debt to stay on track. Pick whatever strategy works for you – just make sure that you follow the one that you pick. If you want to reduce your interest payments and lower your debt, try the free Debt Optimizer by MoneyTips.
4. Monitor Results – It doesn't matter whether progress is slow or fast, but it does matter that you are moving in the right direction. Track your progress each month. If your debt is still increasing, it's time to revisit the first three tips and adjust your plan.
5. Debt Consolidation – If you have multiple cards with relatively high interest rates, consider the advice of Personal Finance Expert and Author Jordan Goodman: "Go to a non-profit credit card counseling place, because they can combine all the different cards you have at very high rates into one at a lower rate." You can enjoy significant interest savings.
If you qualify for a balance transfer card with suitable terms and an introductory 0% APR, you can consolidate your credit card debt under that card and direct your payments toward cutting down your overall debt instead of addressing interest. You can apply for credit cards on MoneyTips. Remember that in any debt consolidation scenario, you must control your spending.With diligence and the tips above, you can conquer your increasing debt – but remember that diligence is still required after the debt is reduced. Just like your weight, it is easy for debt to increase if you slack off and forget the advice that put you in a healthy position.