The next step in building your complete financial
portfolio is to develop a plan for paying down high interest
credit card debt.
- Take the balance sheet you prepared and, on a separate sheet of paper, rank all of your debts by the interest rate you are paying; highest first.
- Decide how much you can afford to dedicate to debt reduction each month from your regular income. If you are making regular contributions to a mutual fund or investment account outside of your 401k match, temporarily stop and add that money to your “debt-reduction” funds.
- Pay the minimum balance on all of the debts except the highest ranked on the list (i.e., the card with the highest interest rate.) The highest ranked card should receive all of the capital you can afford to part with until it has been completely paid off.
- When you’ve wiped out a balance, cross the card off your list and put it in a drawer (do not cancel the card; this will lower your credit score and cause the interest rate you pay on variable rate and new debt to increase!) Do not charge to it again.
- Continue this process until all of your accounts are paid-in-full.
The process may take months, or even years. The key is to avoid making new charges and find extra money to pay down debt faster. This doesn’t mean you have to abandon your cards all together; they are not inherently evil. In fact, credit cards can be a valuable financial tool if used responsibly.
