Eliminate Credit Card Debt Legally

Want to know how to eliminate credit card debt legally? Easy.

Pay off the balance.

OK. All joking aside, I think it's pretty obvious how to eliminate credit card debt legally. But when you involve multiple cards, different balances, and various interest rates, it can get a little confusing on what approach to take. We recommend these steps:

• Do not close any credit card accounts!

  Closing your credit card accounts can hurt your fico score...and quite dramatically. When you close an account, you lose all the credit history behind that card. No credit history is only slightly better than bad credit history.

  Keep all major credit card accounts open so you can rebuild your credit. However, an exception to the rule is to close all retail account cards (i.e. Best Buy, Victoria Secret, Sears, etc.). This will actually help your credit.

• Cut up all cards but two credit cards.

  Ensure that the two cards you have intact are major credit cards (i.e. American Express, Visa, MasterCard, Discover, etc.) From now on, all future charges are to be made only on these two cards. Every month, pay off the monthly activity on your primary cards in addition to the minimum monthly payment. This gets you into the good habit of paying off the monthly activity.

  Which cards you choose for your primary charges is up to you. You can base it on interest rate, rewards, vendor acceptance, or any other factors.

  Now, if you cut your other cards, be sure to have the account information on hand somewhere else. (You really don't have to cut them up...unless it just makes you feel better.)

• Focus on the card with the highest minimum monthly payment.

  Dave Ramsey says focus on the card with the lowest balance and pay it off first. Others say to focus on the card with the highest interest rate.

  But remember, the name of the game is cashflow. So, I suggest focusing on the card that has the highest minimum monthly payment. I think it's best to put your attention on the card that is affecting you the most in your monthly cashflow. Get rid of the liability that's taking the most money from your pocket.

• Find $100-$200.

  Now, I don't mean go look for loose change in your couch. Find $100-$200 in your budget (or adjust your budget to make it available) and put it towards the card with the highest minimum monthly payment found in step 3. This is to accelerate paying off this credit card. But don't forget about the other cards. Continue paying just the minimum balance on them.

  Of course, if you can always put more towards the payment. The more the better.

• Lather, rinse, repeat.

  Once you have paid off the card with the highest minimum monthly payment, you've just learned how to eliminate credit card debt legally.

  Now, move onto the next card that has the highest minimum monthly payment. To that card's payment, add the amount that you were paying on the previous card. Repeat this process each time a card is paid off. This is often referred to as the snowball technique.

• Pat yourself on the back.

  Be patient for this can be a long process. Celebrate each time you accomplish paying off a credit card. Whether it be a pat on the back or a nice dinner, congratulate yourself because working to eliminate credit card debt legally isn't easy.

  Remember, once you're done, do not close any credit card accounts!

How about an example?

(This illustration assumes no new charges are made to any cards during the debt payoff process.)

The cards are in order (from left to right) according to minimum monthly payment. The new monthly payment for the American Express card is now $300 because of the additional $200 being added.

After the American Express has been paid off, its monthly payment has been added to the minimum monthly payment of the MasterCard. The MasterCard's new monthly payment is now $380.

After the MasterCard has been paid of, its monthly payment has been added to the minimum monthly payment of the Visa. The Visa's new monthly payment is now $430. Look at what the minimum balance was before: $50. You've increased the monthly payment by $380 without any extra effort!

Can you see why this is typically called the snowball effect? With each new card, the minimum monthly payment gets larger and larger. It's like pushing a small snowball downhill. As it rolls, it picks up momentum and gets bigger and faster with no additional effort.

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Part of developing your millionaire mindset is taking accountability. If you got yourself into consumer debt, you should be the one to work to get yourself out. You can eliminate credit card debt legally.

Believe you are able to do it. Once it happens, you have developed the discipline, focus, and energy to achieve greater goals. How about financial freedom?