This past Saturday morning we spent 15 pleasant minutes at the kitchen table updating a spreadsheet of our credit card debt. Yes, pleasant. Hadn’t always been so. We’d always been able to pay bills on time, and often to pay just a little bit extra. DH is a very organized guy when it comes to our finances, but being timely and keeping up was often an adventure in creative financing plotted out in the middle of a sleepless night. We reacted, we didn’t plan. In short, we were pretty much ignorant of our overall credit card picture. That changed a few years ago. In about four years, we went from sleepless nights to pleasant mornings.
To be ignorant is to lack knowledge. To be ignorant of your financial situation, specifically credit card debt, is to lack knowledge of where you are now, and thus, to be unable to formulate a realistic plan to improve your situation. This post is not financial advise– but you don’t need financial advise to know what your situation is.
What knowledge do you need? How can you attain it? Here’s what worked for us.
Sit down with a month’s worth of credit card bills. (Or print out your current statements if you go the e-pay route.) Categorize the bills: bank cards, retail cards, gas cards.
For each card, what is the
typical monthly payment (if you pay more than the minimum)?
For each card, calculate the debt to limit ratio (balance divided by limit).
Subtotal balance, limit, ratio, and so on for each of the three categories, and determine the grand totals.
There you have it: knowledge of your credit card debt. Now what can you do with that knowledge? That depends on what you want to achieve, but here are some thoughts.
What is your overall debt to limit ratio? Are you nearly maxed out on every card? Or do one or two account for the lion’s share? Different sources advise different “too high” percentages, but if your credit score is important to you (planning on buying land or a house in the country?) you may want to focus on first paying down those cards with high ratios. (This is why you need to know what the minimum payments are. Can you divert the little bit extra you pay each month on a low debt to limit card to one with a higher ratio?)
If your goal is to get the biggest bang for your buck, you may want to target cards with the highest interest rates.
Some folks like to see progress quickly and so pay off cards with the lowest balances first. In a few months, they pat themselves on the back and move on to the next one.
Whatever your goals and strategy for paying off credit card debt, step one is lifting the veil of ignorance, because ignorance is just, well, ignorance.