Eliminate Credit Card Debt for Good

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The easiest way to handle credit card debt is never to let yourself get into debt in the first place. But if you've gotten yourself in over your head, never fear: you can still eliminate credit card debt once and for all if you can follow a few simple steps.

Later in this article, I'll give you my simple four-step plan to getting rid of your debt. But first, I want to warn you about some of the things that credit card companies do that make it harder than you might think to get your debt paid off .

It's a money game
If you've ever wondered why you get so many credit card offers in the mail, the answer is simple: credit cards are a huge moneymaker for the entire industry. On one hand, Visa ( V ) and MasterCard ( MA ) make their money by establishing huge networks of merchants that accept payments using credit cards and agree to the terms by which those network companies reimburse them -- taking a fee off the top, of course.

At the same time, issuing banks, led by industry giants Bank of America ( BAC ) , Citigroup ( C ) , and JPMorgan Chase ( JPM ) , make their money in a couple different ways. They get a big cut of every transaction you make through what's known as interchange fees , which get split between the issuer, the network, and the bank that the merchant uses to authorize charges. These fees come in regardless of whether the cardholder carries a balance.

But where issuers really make money is from interest charges from people who don't pay off their balances every month. With rates still in the double-digit percentages despite rock-bottom interest rates for most investments, credit cards are a goldmine even despite customers who default on their obligations.

4 steps to financial freedom
That's why once you're in debt, banks make it so hard to get out. But you don't have to be trapped. Follow these simple steps:

1. Pay more than the minimum.
One of the most misleading ways that card companies keep you in debt is to give you low minimum payments. Sure, you can pay as little as that minimum, but if you do, it'll take you years before you'll even come close to paying down your balance. To get out of debt, you need to ignore those minimums and devote all your spare cash toward getting your total balance down as quickly as possible.

2. Focus on high-rate cards first.
Not all credit cards are created equal. Find out what your interest rate is on all your cards with outstanding balances, and focus your efforts on whichever card has the highest rate. That'll help you bring your total interest charges down the quickest.

3. Go cold turkey, at least temporarily.
Another bad thing about carrying a balance is that you don't get the grace period on new purchases that people get when they pay off their balance every month. So to avoid taking one step backward for every two you take forward, try to stop using credit cards entirely while you're trying to eliminate your debt. At the very least, if you have one available, use a card that you can pay off every month so you can get the benefit of a grace period.

4. Don't lose steam.
It's tempting to take a break once you get one or two of your cards paid off in full. But the better strategy is to apply what used to be minimum payments on those cards toward your remaining balances. Doing so will get your debt paid off even faster.

Moreover, even once you're done, consider using the portion of your monthly income that you used toward getting out of debt and apply it toward investing or building an emergency fund. You'll find that it's far more rewarding when you're getting the benefit of interest and dividends on your money rather than letting your card company get all the spoils of your labor.

Eliminating credit card debt isn't always easy, but the steps to follow aren't complicated. Stick with this simple plan and slowly but surely, you'll get yourself out of debt and never look back.

Once you're out of debt, you may want to start investing in the same banks that got you into that mess in the first place. To learn more about the most-talked-about bank out there, check out our in-depth company report on Bank of America. The report details Bank of America's prospects, including three reasons to buy and three reasons to sell. Just click here to get access.

Fool contributor Dan Caplinger owns warrants on JPMorgan Chase. You can follow him on Twitter @DanCaplinger. The Motley Fool owns shares of Bank of America, Citigroup, JPMorgan Chase, and MasterCard. Motley Fool newsletter services recommend Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Personal Finance

Referenced Stocks: BAC , C , JPM , MA , V

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