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Tips For Shredding Debt - Part 2

Balance Transfers
You need to be very careful with this one! You can take the balance of your credit card with the highest interest rate and transfer it to another, new account. Many cards come with very low introductory interest rates (sometimes even 0%) for balance transfers, lightening the burden of the high-interest rate and providing you with more time to focus on paying off the next card. It will also put a stop to the drain your interest rate creates on your money. Here's the catch: an introductory interest rate is just that, introductory. It will eventually end (generally after 12 months, but sometimes 18 to 24 months), and the interest rate on this new card can often skyrocket. Make sure you take this time limit into account when planning, and aim to either pay off or remove the balance from this new card before the introductory period ends.

Point to note--balance transfers typically come with a fee, but some cards offer the service free.

Keep Paying
All right, we've probably all done ill-advised things with extra cash. Once you've paid off an account, it can be very tempting to pocket the cash you're now saving, or worse yet, use it to purchase the most impractical shoes money can buy, or put a 6-foot spoiler on the family wagon. However, the worst thing you could do right now is to pay less on your cards. Use all the cash you save to pay more of your debt! Save the rewards for the time when you've finished the job.

Debt Consolidation
This option is just converting several smaller debts into larger debt. You can potentially borrow money from a bank, private lender, or even a peer-to-peer lender and use this money to pay off all your credit cards. This choice will result in one larger loan, one monthly payment, and one interest rate to manage. It's obviously easier to focus your efforts on one loan than many, and as long as it's a good deal, one monthly interest rate can be less costly than a bunch of them.

Don't Close Accounts
You might think it's a good idea to close a credit card account once you've paid it off, but closing accounts will have a detrimental impact on your credit score. Your score is based partly on your credit utilization ratio. For example, an account with a limit of $5,000 and a balance of $2,500 has a utilization ratio of 50%. It's best for to keep a utilization ratio of 30% or less (10% or less is phenomenal for improving your score). Keeping an account active with minimal use will help to keep your utilization ratio low.

Make a Long-Term Plan
It may seem to take forever, but if you follow these steps, there will come a day when your credit cards are all paid up and current. When that day comes, you need to use that discipline you've learned to stay out of any future problems. The simplest way to do this is to commit to using no more than 30% of the available balance on each card and to paying that balance in full every month. If you can use less than 10% of your credit limit, your score will increase fast. If you can hold to that commitment, your credit score will recover quickly. Your interest rates will drop, and you'll be on the road to long-term financial stability.

Final Word
If you follow these tried-and-true steps on how to fix credit card debt, you'll be on the path to clearing your debt and regaining control of your financial life. It may be a long haul, but remember that the first steps are the hardest. Focus on paying off one card, and when you've done that, the next will be easier. The more you pay off, the easier it gets, and the closer you are to freedom!

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