5 simple steps to a faster debt payoff

Opening Credits columnist Eric Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.

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Question for the CreditCards.com expert

Dear Opening Credits,
I have a lot of credit card debt, and when I look at the statements each month, they all say it will take three years to pay off. My credit score is real low. My question is: How can I pay off the debt off faster and build up my credit score? My credit card debt is about $25,000, and I can't get a loan to pay off the debt so we could breathe a little easier each month. -- PJ

Answer for the CreditCards.com expert

Dear PJ,
It looks like you're a lucky recipient of one of the new-look credit card statements!

In the not too distant past, your statement would have just included an overview of your charging history for that period, the finance charge information, account balance and minimum required payment with the due date. However, under the Credit CARD Act of 2009, issuers are now required to give you a breakdown of how long it will take to pay the current account balance to zero if you were to only make that minimum payment (and, of course, not add to the debt).

Interesting, isn't it? I hope the disclosure is also motivating. I would love for you to eradicate that debt in far fewer than three years. Here's how you can prepare for and expedite the payoff time:

  1. Acknowledge what went wrong. The past holds the key to the future, so you have to come to terms with how you got into all this debt in the first place. Did you take your eye off the charging ball and allow the balance to snowball? Or did you use the cards to cover unexpected expenses that should have been paid for with savings? To prevent history from repeating itself, pinpoint the decisions you made that led to your present financial situation, and then make a conscious effort to change the pattern for good.
  2. Breathe easy with a budget. When you don't know exactly how much money you have coming in and where it's going, you end up feeling powerless and anxious. Therefore, it's time to develop a budget that will put you in control of your cash and free up money for your debt. Begin by subtracting your living expenses from your monthly net income. After that, refine your spending by looking for areas of waste and cutting them down or out. Be reasonable, though. It's easy to say you're going to cut cable, but then find you simply can't live without 24-hour World Cup coverage.
  3. Get a goal. Enter your credit card balance and interest rates into a good online debt repayment calculator. Then play with the numbers until you can determine a payout time frame that fits within your newly developed budget. For example, let's say you want to pay the entire $25,000 off in 18 months. In that case, you'd have to send about $1,600 to your creditors every month (assuming you have an average APR of 18 percent). Only you know what you can really afford to send, but whatever the figure it is, set it in stone. You will reach your goal by committing to that fixed payment.
  4. Suspend charging. You can't get out of debt until you make a pledge not to charge anymore. For the next year, I strongly suggest you tuck the cards away in a nice safe spot in your home. If you want to pay for something with plastic, use your debit card. That way you'll only be using the cash you have in your checking account. When you are ready to charge again, do so slowly and in increments that you can afford to repay in full when the bill comes in.
  5. Forget the loan. It's fascinating that so many people in debt think that borrowing more money will be the answer to their problems. It really makes no sense. Yes, I know you're thinking that maybe you can get a big, new loan with a better interest rate that you have now to consolidate all of your debt, but the chance of that actually happening is slim to none. At present you have a negative credit rating and an overabundance of money owed. The only loan you'll qualify for is one with poor terms. In short, forgetaboutit.

On to your credit score: Your debt is sure to be considerably lower in 12 months, which will help raise your credit score. Steady, on-time payments will increase it further. When you begin to borrow and repay money again (but this time keeping the balances to zero) you'll really see it zoom up.

So are you ready to pay that $25,000 down while building your score? Stick to my plan and you can do it -- and I'll bet in fewer than three years.

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See related: Interactive: How to read, understand new-look credit card statements, Credit card reform arrives in the form of the Credit CARD Act, 8 things to know about credit card debt, All you need to know about your credit score

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Updated: 12-17-2018