5 Ways To Get Out Of Debt

A recent analysis of household debt concluded that the average American family has about $8,000 in credit card debt. Even with low inflation and interest rates at 0%, the annual percentage rate on a credit card is in the range of 10% to 12%. This means that even if consumers stop charging completely it can still take many years to completely pay off credit card debt making only minimum monthly payments. With families struggling as it is, a few hundred dollars extra per month could be put to much better uses such as saving for retirement or a child's college fund. If you're one of the unlucky few who has excessive credit card debt the following five ways will hopefully help to eliminate this burden and establish financial stability.

# 1 - Consolidate High Interest Debt

Debt consolidation using a home equity line of credit or low interest rate high limit credit card can help consolidate multiple lines of high-interest credit into a single low monthly payment. This is ideal when someone has a half-dozen credit cards averaging 18% to 20% APR where almost all of the monthly payment is applied to interest. By consolidating these balances to a temporary 0% interest rate or longer-term 3% to 5% interest rate, monthly payments will then be applied mostly to principal paying down a large balance quickly.

# 2 - Reduce the Number of Credit Cards

Once credit card balances have been consolidated many financial experts will recommend carrying a maximum of 2 to 3 credit cards. This means canceling all of the other credit cards you currently have. Two of the credit cards will be used for daily purchases and online transactions while the third credit card will be stored somewhere securely and used in emergency situations only. A common scenario for people who get out of debt is to suddenly to see a substantial increase in additional monthly income. This encourages them to fall back into the same self-destructive financial mismanagement behaviors.

# 3 - Pay More than the Minimum Amount

Whether multiple high interest rate balances have been consolidated or not, always try to make more than the minimum monthly payment if at all possible. The sooner a high interest rate balance is paid off the less interest expense there is and the more quickly you can move on to the next credit card. Paying the monthly minimum means paying thousands of dollars in interest, sometimes up to a decade. Money paid to finance charges is essentially wasted as it only serves to line the pockets of financial institutions when it could be put to better uses for you and your family.

# 4 - Create a Monthly Budget

Creating a monthly budget is crucial to getting out of debt as it provides an overview of income and expenses and allows you to more effectively allocate limited resources. Many consumers carrying excessive debt will use what's called a zero balance method of budgeting. At the end of the month every single dollar that has come in as income is redistributed and therefore leaves a zero balance on your budget sheet. A properly crafted budget will eliminate wasteful spending, contribute some small amount to an emergency savings fund and pay all bills, especially high interest rate credit cards, first. When they see their actions result in successfully paying down debt, it encourages them to stick to their budget and continue forward with their plan.

# 5 - Establish an Emergency Fund

An effective debt reduction plan isn't just about paying off current outstanding obligations. It's also about staying out of debt once you are back on your feet financially. The only way to do this is to plan for the future and expect the unexpected. Too many individuals and families live paycheck to paycheck and do not have the recommended 6 to 9 months in emergency savings. All of a sudden life rears its ugly head and there's an emergency $2,000 vehicle repair or $1,500 medical necessity which throws the budget for a loop and leaves credit cards as the go to option. A properly funded emergency savings account can absorb the shocks to the system and prevent you from having to resort to credit cards except in the most dire situations.