The truth, however, is that most people don’t know how to calculate the type of debt they’re in, so they go into looking at debt consolidation without any real idea of what their financial situation is. The biggest problem most of them have is understanding their credit card debt.

Here’s the problem with credit card debt. Most people look at the minimum amount due and decide whether they can pay that amount or not. Though it’s the easiest thing in the world to do, it’s not quite indicative of your debt load. Most people don’t know this, but if you’re paying the minimum amount on your credit card and stopped spending today, it could literally take as long as 9 years for you to pay off that debt, if not longer, depending on the annual percentage rate (APR).

To do some calculations on just what you’re up against, you’ll need a spreadsheet program like Excel, although you can also do it with regular paper and pencil, but it’ll take you longer.

In the first column, put in the amount that’s outstanding; let’s use $500 for our example.

In the second column, put in the amount of your APR, divided by 12. This is the closest you’ll get to figuring out how much your interest is on your balance monthly, as some banks do their calculations twice a month; you should switch to a different credit card account if this is the case. Anyway, the formula for this in Excel would be (+.159*12), if your APR is 15.9%. If it’s something else, put in the number the same exact way. For this example, it leaves a monthly figure of .01325.

In the third column, type in the formula (+A1*B1). This will tell you how much interest will be added to your balance. In this case, we get $6.625, which will round up to $6.63; banks always round up.

In the fourth column, type (+A1+C1). This will give you your new balance, which in our case it $506.63.

In the fifth column, put in your minimum monthly payment amount. For our purposes, let’s say it’s $25.

In the sixth column, type in (+C1-D1); by the way, these don’t have to be capitalized, and don’t include the parentheses. This brings our total down to $483.63.

Then drop down one line. In A2, type +F1. This will bring down the same exact amount as the total in your last column one line above.

Next, highlight all the other entries in the first row, copy them, then come down to the second line, second column, and paste. This will bring down the formulas and other numbers you had above, with one change, that being the final column. That will show your balance decreasing after each payment.

If everything looks kosher, the final piece is to copy the entire second line, drop to your third line, and copy the formula into multiple lines at one time. Go down at least 25 lines for right now. What you’ll see is that on line 24, your outstanding balance that’s left is $9.67, which means your total balance will be paid off with your next payment. Count every 12 lines as a year, and this balance will be paid off in two years by making only the minimum payment and not putting anything else on this account.

Now, what you can do is alter the column that shows the minimum amount and put a different dollar figure in there. For instance, if we put $40 in instead of $25, this account will be paid off in 15 months, which not only saves you 9 months of payments, but around 42% in finance charges.

These simple steps will give you a much better idea of where you sit financially with your outstanding credit card debt, and you can use this same formula for other payments you have to make that have interest rates. Knowledge is always the most important thing to have when you’re looking at your outstanding debt, especially if you’re thinking about consolidating it.

Which mistakes should you avoid while consolidating your debt online?

When you’re getting help from online debt consolidation or debt management options, you must take certain steps before you carry on with it. There are a lot of scammers where they are waiting to take the money from you and not consolidate your debt. Take a look at the steps you must follow when you’re consolidating your credit cards:

1. Not planning in advance
You must have a financial strategy or a plan that’ll help you pay off your credit card debt on time. Even if you’re taking help of a professional or getting relief from debt situations yourself, you need to have a plan so that you’re comfortable in paying off your debt. If you have a savings account or an emergency fund, you can use the amount to pay off your debt every month. You need to plan your payment strategy so that you know how much you have to spare every month to pay off your debt. Some months you can pay more on your monthly amount so that you can get out of debt fast.

2. Not search for the best online company
Since these are online companies, there are a lot of chances that you may fall in scams. But if you search for the best online company, you’ll get the best of the lot. You can check the fee structure of the companies and also the type of work they do. Check for the testimonials and whether the people are friendly and knowledgeable. If they are not, you can go for another company. Just check if they have phone service so that you can call them up if you have any doubts. According the recent FTC rules, the for-profit companies are not supposed to ask for any advance fees before they resolve your debt. If they’re charging advance fees, they are trying to cheat you.

3. Not checking any accreditations
You must always check with the company’s ranking by the Better Business Bureau (BBB) for better knowledge about the company. If the company has other accreditations, be sure of them and do research on the company. Ask your relatives and friends about the authenticity of the company before you go for it. If you check the company’s profile with the BBB, you’ll also get to know any consumer complaints and if it’s accredited by the bureau.

Before you take any step regarding enrolling in an online debt consolidation or a debt management program, you must check your credit report. If you see any negative information, you can rectify them and then get relief from debt.

See Also: Should I cancel my credit cards?

Should I Cancel My Credit Cards?

There’s a raging debate among financial experts as to whether people should cancel credit cards or not. Once the first recommendation of every financial expert, over the last five years that advice has been questioned and there’s a reversal from some sides of the aisle, whereas the other side of the aisle has stood firm.

The side that’s changed came upon a different landscape. They now saw outstanding credit as a good thing, whether it was being used or not. Creditors were relying more on Fico Scores/Reports
, which used as part of their algorithm how much credit a person already had been approved for, how much they had available, and how well they were keeping up on it. A great FICO score would come from someone who had available $50,000 of credit or more, but had no outstanding balances. The credit had to be shown as being used in some fashion also; a person couldn’t just be sitting on credit that wasn’t being used to get a positive score.

The new advice totally went against the grain of long standing fiscal responsibility principles that said if you weren’t using credit, and didn’t see yourself needing it, to close it out and get it off your report. Also, if you were someone who was trying to work your way out of a debt hole, canceling credit cards would keep you from using them again, giving you control over your financial situation, which would improve as you started to see benefits from paying down your debt.

It’s recently come to a head as the world has been dealing with its recessionary state. All those credit card letters that used to come at least once a day have dried up. People with good credit are suddenly seeing their interest rates going up, whether they’ve ever missed a payment or not. People who miss a payment by even one day are seeing drastic jumps in their interest rates. And some banks and credit card issuers are retroactively capping balance amounts, making people pay a lump sum to get out from under a high level or else risk getting penalized for being over their credit limit.

Now, those who have said that cutting up credit cards was a bad idea are having to challenge their own thinking. Recently on CNN Money, a financial counseling expert said that he believed most people who saw these jumps in interest rates should keep their cards and try to pay them off quickly so they wouldn’t be hit as hard with the higher rates. That answer didn’t get a positive reply from the person he was on with, and he quickly added that each consumer had to decide for themselves if they wanted to put up with higher interest rates, and that they could possibly switch to a different credit card with lower rates, or possibly apply for new cards at low introductory rates.

Of course, since no one is getting those offers for no-interest introductory rates anymore, the point is moot, and the advice is weak. Of course every person has to decide for themselves; that didn’t have to be said. But it does point out something that many of us have known for years. Even financial gurus can’t always offer the best advice for everyone as far as determining the best way to go.

Here’s my take on it. FICO scores are heading the way of dial up internet service. The housing crisis has shown that a good FICO score still won’t always get you a loan if the bank can find another way around giving you a loan. If the same continues to happen for anyone else looking for good financial deals, FICO becomes obsolete and means absolutely nothing to anyone.

Therefore, the decision does really come back to you, the consumer. If you feel you can’t get a handle on your spending, cut up your cards and pay down your debt. Keep at least one card, since many hotels, car rental companies, and other businesses won’t allow you to reserve anything without a credit card number on it. Get rid of temptation if you must. Always take care of your most immediate need first. Make the best decision you can live with, and let time take care of the rest.

See more:
Credit Card Debt Consolidation
Credit Card Companies Raising Rates on Consumers
Old Credit Cards – Should I Cancel Them

Well, there’s an upside and a downside to all of this. Let’s look at the upside of it first.

First, you’re not getting bothered by all those requests for your participation. Truth be told, if you had taken the time to fill out all of those applications, you’d have been doing yourself more harm than good. Two things happen, neither one of them good, when you continually fill those forms out. One, your credit statement shows every time you apply for credit, whether you get it or not. Having too much credit is almost the same as not having enough; other creditors get scared and wonder what’s going on. Two, if you get turned down, that shows up also, and it also affects your credit score and rating.

Second, strangely enough, the pressure is off. When all those mailings kept coming, you felt like one day you just had to fill some of them out. I almost hate to admit this, but what I used to do was open them up, darken my name and address, put it into the envelope they sent and put it back in the mail. Of course I only did that if they’d already paid for postage. My theory was to waste their time as much as they wasted mine; petty I know, but I felt better.

Now, let’s look at the downside. The first is that it indicates just how bad the banking problem is. We always say credit card companies, but the truth is that almost every credit card offer we get comes from a bank of some sort. Banks hurt, they stop giving out credit.

Second, we need that credit, or at least some of it. As banks start tightening up the rules for who gets what, suddenly even good credit scores aren’t working for us. There have been more people with good credit being turned down because it’s not good enough, or any other stupid reason banks want to give. It doesn’t even give you an advantage to apply from your own bank anymore.

Three, why might we need that credit? Right now there are a lot of people in some tough financial straits. It wouldn’t hurt to have the opportunity to apply for one of those no-interest credit cards for at least a year right now, at a high enough interest rate to consolidate some of the outstanding debt and be able to make smaller payments for awhile to ride out the bad financial storm. It’s much easier to apply for another credit card than it is to apply for a consolidation loan, and you learn the results much quicker also.

Am I nostalgic for credit card offers? No, but it does seem a bit off without them.

Stop Using Your Credit Cards

The first and most important thing to do if you plan to pay your debt off is to stop using those credit cards. It is impossible to pay your balances down if you do not start living within your means. Create a budget that you can live with and commit to, then cut all but one emergency card up. Give up the luxuries, you do not need something from every convenience store in your city and you do not need to eat out several times a week, spend wiser, your financial independence depends on it.

Transfer balances to a Low or 0% interest credit card

If you have credit card debt and you are paying interest on carried balances, you are throwing money away every month. If you have good credit and get the opportunity, consolidate your balances to one credit card, or as few as possible. This will help reduce the amount of money you toss away every month by paying interest fees and it will free up additional cash that you can use to begin paying down your balances.

A great way to start consolidating your credit card debt is to look and see if you have available credit on any lower interest rate cards. If you do have available credit, call your company and ask them to transfer the balances; do not forget to ask if they have any balance transfer offers. When calling your company, start with your oldest credit card, you might end up discovering that you already qualify for a higher limit. In addition, banks and financial institutions appreciate your business and if you have been a good borrower, you could get a credit increase and a lower interest rate.

You may also be able transfer balances from one card to another by using promotional checks that you received from your credit card company in the mail. If you do use a check, make sure it is a balance transfer check, and not a cash withdrawal check tied to a high interest rate.

If you lack available credit on any of your current cards, it might not be a bad idea to open a couple new accounts that offer low interest rates on balance transfers. You have already stopped using your cards, so open new cards if they will help get you into lower interest rates. It is common for people to constantly transfer and consolidate debt to cards with lower interest rates.

Pay More than Your Minimum Payment Each Month

If you are trying to pay off your credit cards, you will need to create a plan that makes the most out of your monthly payments. Everyone has a unique set of circumstances, so there is not a plan that fits everybody. A few things however, work best for most people.

If you are paying interest on credit card debt, the card with the highest balance is usually the card that is costing you the most in interest each month. Pay the minimum on your lower balance cards and attack the principle on the card with the highest balance.

When the balance on that card gets lower, re-evaluate your cards to make sure you are still paying off the most expensive credit card. When doing this, consider the interest rates on the cards. If you were previously paying off a card with a 4.99% interest rate, it might be a good idea to start paying off that card with a 12% interest rate. The only way to know is by looking at your monthly statement to see which card charges you the most in interest fees each month, look at the amount and not the interest rate.

Evaluations may occur as often as each month, but if you continue to put extra money towards the most expensive card, you will save more money each month. After you get a few cards paid down, check to see if there is an opportunity to consolidate debt from high interest rate cards to cards with lower interest rates. Do not forget to call your card companies and ask for a better interest rate after you pay down balances, you might be able to get a great deal.

Consolidating your credit card debt and paying your balances off is not always an easy task, but a debt free life provides more opportunity for you to save for your future. Buckle down and stick with your commitment, a debt free life is a great feeling.

See Also:

Knee Deep In Debt – Federal Trade Commission

3 Tips to Alleviate Your Debt