Even tasks as challenging as eliminating credit card debt can be boiled down to less than a dozen steps.  Notice I called them simple, but that doesn’t mean they are not difficult to follow through on.  It will take sheer determination, and a lot of sacrifice, to see all those credit card balances go to zero. However, eliminating credit card debt is one of the smartest financial moves you can make, and you can do it without filing for bankruptcy.

Before you even begin the steps below, there is one important task to complete.  Identify why you want to be debt free. Saying you want to be debt free is not enough, you must identify why you want to be debt free.  For me, it was because I was tired of not having options. Credit card debt forced me to stay in a bad job longer than I should have.  Debt forced me to skip out on opportunities because I just couldn’t afford to take the risk. Once you have identified your “why” move on to tackling the steps below.

Ten Steps To Eliminating Credit Card Debt Without Bankruptcy

1. Save three months of expenses in an emergency fund.  You may be asking yourself, “I thought this was a list of tips for getting out of credit card debt?”  It is, but to do so you must first create a cushion between you and the emergencies currently financed on your credit cards.  I didn’t take my own advice here when I first started my journey for debt freedom.  It wasn’t long before our home’s air conditioner broke, my car’s brakes began to fail and I was forced to run up debt to make repairs.  Back to square one. 

My second attempt began with saving up three months of expenses in a savings account.  Not $1,000, not $5,000, but three months worth of expenses; no more, no less.  This provided a buffer for future emergencies so I could avoid resorting to credit cards to finance the inevitable hiccups that happened along the way.

2. Take an inventory of your debt.  Once you have identified why you want to get out of credit card debt, and have saved an adequate emergency fund, you will need to list all of your credit card accounts.  Include the account number, current balance, interest rate, minimum payment, credit limit and contact number. This is a painful step, because most of us walk around not really knowing exactly how much we owe.  We have some idea, but it usually significantly less than the actual number.  Finding out the actual amount is kind of like having a bucket of ice water dumped on your head.

3. Contact each credit card issuer’s customer service number.  Take a deep breath, dial the number and walk through the verification procedures.  Then explain that you are in the process of consolidating cards and would like your account reviewed for a lower interest rate.  If they decline, ask to speak to a supervisor and repeat your pitch.  If they decline, thank them and hang up.  Resist the temptation to close the account at this point, no matter how angry they make you by refusing to lower your interest rate.  You will be calling back to cancel the credit card soon enough.

4. Get a low interest credit card (apply HERE). Now try to consolidate as much of the high interest debt to cards with lower interest rates.  You may have to visit the card issuer’s website you want to move money to, or contact their customer service department again to request a balance transfer.  Ask if there are any balance transfer fees associated, and ask to have them waived as a one-time courtesy.  Some banks will waive the fee, some won’t.  It doesn’t hurt to ask, but don’t let it be a show-stopper.  If a balance transfer is not available, consider a low-interest consolidation loan from a social lending site like Lending Club.  At this point we are interested in getting as much of your debt as possible to lower rate cards.

5. Get angry. I mean get angry at that credit card debt staring up at you.  At this point you are half way through the ten steps to paying off your credit card debt, but the trail ahead is about to get much steeper.  Take another look at your spreadsheet.  How many dreams have been put on hold by that number?  How many sleepless nights have you stayed awake worrying over that number?  Do not suppress your anger.  Harness it. Use it to get fired up about this plan to pay off your credit card debt, once and for all.

6. Cut up all but the card with the highest available credit.  You are deep in a hole, and it is time to stop digging.  Grab the sharpest pair of scissors you can find, and set up your cards in firing squad fashion.  Set aside the card with the highest available credit – you will keep this one in a sock drawer at home for emergencies until all your debts are paid off.  Cut up all the other cards, and be sure to clear their numbers from any online store you frequent.

7. Reorder your list of debts, putting the smallest debt at the top.  Put a big “#1″ next to it.  Write its name in bold.  Highlight the amount.  Draw a big bulls-eye next to it.  Do whatever you have to do to put the focus squarely on that credit card account.  Imagine that card sweating under the lights in a police holding room.  It is guilty of robbing you of your dreams, and it is going down!

8. Throw every single dime you can find at debt #1. For this step I opened up another free checking account at my bank and tossed every bit of found money in it I could find.  Loose change, birthday and Christmas gifts, and proceeds from sales of my CD collection on eBay all qualify.  Consider taking on a part-time job, or starting a side hustle like mowing lawns or painting house numbers on neighbors’ curbs.  Every single extra penny goes into this account, and at the end of the week transfer the exact balance in that second account to the credit card with the lowest balance.  You may want to do it every other week, but don’t wait an entire month – you’ll pay slightly more in interest at the end of the billing cycle.  Some weeks it might only be an extra $17 payment, others may be as much as $85.  No amount is too small to getting you closer to getting out of debt.

9. Close your paid-off credit cards.
9a. If you are planning to buy a home, skip to step 9b. When the balance reaches zero, and you have paid off the entire balance for that credit card, call the issuer again and close the account.  Immediately follow up that phone call with a letter to the issuer’s correspondence address asking that the account be closed, and ask for a written confirmation.  I know the card has sentimental value.  Maybe you opened it in college, or it has a picture of your dog on it.  Tough.  It has to go.  You just don’t need the headaches associated with carrying a wallet-full of credit cards.  Debit cards and cash spend just fine.  Repeat step 9a with all but your last credit card.  When your last credit card balance reaches zero, move on to step 10.

9b. This step is for those planning to buy a home after they are debt free.  Closing a credit card account, even if it is paid off, can have a negative effect to your credit score.  If you are considering applying for a mortgage in the near future, it is a good idea to leave your credit card accounts open, particularly accounts you have had open for many years.  Length of credit history is an important factor in calculating your score, and by closing older credit cards you are effectively lowering the average age of your active trade lines.  You have already cut up the card, canceled any automatic billing and removed it from your online shopping profiles, so just let it sit for now.

10. Put away that final credit card.  Presumably, this last credit card was the one with the highest credit limit and the best interest rate – that’s why it is last in the lineup.  If that is in fact the case, tuck the card away some place safe around your house.  Maybe stash it in a sock drawer, or locked away in a safe or lock box.  Wherever you decide to store it, just be sure it is not in your wallet, unless you are traveling and need to take it along for emergencies.  Keep this card around until your fully-funded emergency fund is in place, at which point you can consider yourself “self-insured” against future emergencies.  At this point you may decide to keep the card to score rewards points, or scrap it.  It’s up to you.  Me?  I say dump it.  Who needs the hassle?

If you are like me, you have probably been accumulating debt for years, but now it is time to stop.  Draw a line in the sand, and vow to never cross it again.  It is time to start living the rest of your life debt free.  Living without debt reminds me of being a kid again and pedaling your bicycle like crazy to climb that tall hill in your neighborhood.  Just when you think you can’t spin those pedals another turn you see the top of the hill.  You crest the top of the hill in complete exhaustion and then begin to descend the other side, wind blowing in your hair, the sun warming your face as you look up and smile.  That is the feeling of living debt free, and I can’t wait to coast down that hill again soon.  How about you?

Additional Resources:

• Buried In Debt? We Can Help. Get A Free Consultation Now!
• Get a Low Interest Credit Card – Apply HERE
• 0% credit card balance transfers
• If you are seeking debt help visit tfgi.com to start your journey to financial freedom.

I’ve been an AT&T Universal Card customer since 2001, starting out with a small classic card and eventually upgrading my way to a Platinum Rewards Mastercard. When I went through my financial turnaround a while back I cut up all but two cards with the idea that when my debt was eliminated I would run utilities through one credit card for convenience (and to earn rewards), and travel/emergencies through another credit card.

AT&T Universal Card survived the plastectomy because I liked their rewards program, it was one of my older accounts, and because I had a very low variable rate (which had floated down to around 6% thanks to rate reductions).  I consolidated my remaining debt to this card because of the low rate and was making monthly payments to reduce the balance.

To my surprise, I received my bill last month and noticed that my stated annual percentage rate (APR) was 24.99%.  What?!  My rate went from 6.3% to 24.99% in one month? I immediately wondered if I had forgotten to pay the bill.  Nope, payment cleared several days ahead of the due date.  I haven’t applied for any new credit, my only other credit card is in good standing, and a recent check of my FICO yielded an above-average score.  Convinced this was some type of mistake, I called customer service for resolution.  I would not have believed the explanation received had I not heard it myself.

“It’s the Economy, Stupid”

Yes, that is essentially the answer I received.  The customer no-service representative answering my call explained that my account had gone through a “change in terms.”  Apparently, I was notified of these changes back in November, but because I had failed to “opt out” the issuer saw it fit to increase my interest rate by 18 percentage points.

I confessed to the representative that “like most customers I don’t read every single statement message, advertisement and piece of credit protection insurance garbage you include in my monthly bill,” but that I did not remember seeing anything indicating my rate would be increased this drastically.  The representative indicated that “opting out” of the change in terms would have meant my account would be closed to future charging and my rate would have remained the same.  Huh?  And the reason for such a brainless move?  “The tough economic conditions.” No joke – that was the explanation.  I asked to speak to a supervisor, and eventually the supervisor’s boss, and they all repeated the same canned response.

Apparently, AT&T Universal Card thinks it is a good idea to chase away customers with good credit, pay on time, occasionally carry a balance and have been customers for eight years.  I could cite statistics showing the increased costs to acquire new customers, or the negative effects of chasing away loyal, profitable customers in a recession, but you don’t have to have an MBA to know this is just plain stupid.  Then again, what would you expect from a credit card issuer?

To their credit, AT&T Universal Card was nice enough to reduce my annual percentage rate back to where it was prior to the change in terms, but only if I would agree to close the account. That wasn’t a hard sell.  I was closing it either way, because I am tired of doing business with people who do not appreciate their customers. After all, there are too many people out there doing it right – too many options for better service, a better product and probably even better terms.  I’ll just keep my one card for now, and maybe one day I’ll even let that one go.  I’m officially tired of playing games with credit card issuers.

Credit card companies are looking for new ways to manage consumers’ risk of defaulting on balances.  Apparently, they now plan to review cardholders’ spending patterns, including which merchants they frequent, to determine build their risk model.

Credit card issuers are no strangers to using behavioral analysis to shape much of their business.  Trust me; I used to work for one.  I remember attending a number of meetings with marketing people arguing across the table from risk people about raising late fees from $25 to $29.

Marketing would point out that people may be less likely to sign up for the card, or cancel the card, if fees were increased.  Risk pointed out that the fees may deter people already on the edge from falling behind (assuming if the fee was higher for their card they would keep it current, and let the card charging a lesser late fee go past due.

The compromise reached involved risk-based pricing, a way of separating cardholders into various “buckets,” and each group being be charged different sets of punitive fees, interest rates, etc. But now it seems credit card companies are taking this idea a step further.

Attention Wal-mart Shoppers, Hide Your Credit Cards

Just the other day, Writer’s Coin passed along a story originally appearing on Good Morning America.  From the Writer’s Coin, a brief description of the video:

It featured Kevin Johnson, a responsible credit-card user that had recently seen the limit on his American Express Blue card go down by $7,000. What could possibly cause AmEx to lower his limit when he pays his card in full every month, has a 764 FICO score, and owns his own business?

When Johnson questions American Express to find out why his credit limit was decreased, he received the following response:

The answer: Kevin Johnson had recently visited a Wal-Mart that he doesn’t typically go to, and the reason AmEx gave him was:

“Other customers who have used their card at establishments where you recently shopped have a poor repayment history with American Express.”

Yikes!  So American Express is now determining credit worthiness based on where you shop?  If people use an American Express card at a Wal-mart where someone else used the same card and subsequently went bankrupt, does that mean Kevin Johnson will go bankrupt?

I don’t like the idea of being lumped in with others, but this bothers me on another level.  I wonder if Amex would do the same thing to a cardholder shopping at a swimming pool supply store?  One could assume that shoppers there are homeowners, and relatively affluent because the have a swimming pool.  Of course, that doesn’t tell the whole story.  They could be two months behind on their mortgage and buying pool supplies to get the water blue in time to show the house for a motivated sale!

The pool supply store example is just as flawed as the Wal-mart example.  Wealthy people may choose to shop at Wal-mart to save money, or search thrift shops because they are frugal.  It is not an indication of financial troubles. The end result of all this analysis by credit card issuers is that they will ultimately lose loyal customers.  The problem is there are hundreds of people ready and willing to take their place.

The following exercise will be enlightening to those deep in credit card debt, entertaining to those not in debt, and a cautionary tale to those too young to have experienced it. If you are in the former category, like me, I encourage you to hunt down your most recent credit card statement, or simply lookup your credit card balance online.

How Much Of Your Debt Can You Itemize?

Now that you know how much you owe, set aside five minutes, grab a sheet of paper, and brainstorm all the things you purchased with that credit card. How much of the outstanding balance can you account for? 50%? 75%? 100%? Your answer is probably indicative of your relationship with credit cards. The lower the amount you can account for spending, the higher the chances your spending is out of control.

A Credit Card Debt Audit

I’m fortunate that I’ve been able to whittle away at my credit card for some time now, and am finally seeing the light at the end of the tunnel. But even as the balances decrease, memory of the purchases made to run up the debts fail me. Well, there was the vacation we took in 2007; back to school clothes for at least a year or two; the occasional car repair; and the new bedroom furniture we just “had to have.” That represented about 70% of my remaining balance, and I’ve paid it down over the last year!

The other credit card charges were mostly forgotten living expenses. Expenses charged because we were living beyond our means. Sure, we had our share of legitimate emergencies, health scares, and educational expenses associated with my dream of completing a degree. But to justify accumulating debt for these reasons is to make excuses for our lack of financial planning. We should have had an emergency fund in place. I should have saved for school and paid cash.

I guess the lesson learned from this exercise is that the things that we “just had to have” probably could have waited, because only a year or two later I can’t even remember what half of them were! Sad. The rest is accumulated interest and probably the occasional fee assessed before I got my act together.

Armed with this information I can do two things: I can sell as much of the stuff I bought as possible and apply proceeds to my remaining debt, and I will no longer charge impulse or lifestyle items on my credit cards. I keep exactly one card in my wallet for emergencies, and I promptly pay it off immediately in the event I have to use it for car repairs, a replacement appliance, etc. Never again will I find myself wondering where half of my credit card debt comes from. Never again!

In response to a recent article on credit cards closing accounts, a Frugal Dad reader (we’ll call him John) submitted the following scenario and question.  I told him I’d answer his question here with his permission, and solicit feedback from fellow readers who may have more experience with similar situations and be able to add to my response.  Here are the pertinent details of John’s story:

I started my own business 3 years ago.  In that process I got a $15k debt on one credit card.  Since that time I have hardly used it–maybe $500-600 tops.  I make $400-500 or more payments every month.  I have never missed one.  I have been late a few times here recently due to them moving the due date around, and also due to decreased income in the economic crunch. They have raised my rates to 29%.  I have had this card 7 years and been a good customer.  I have never been even 5 days late but they tell me that they can move my due date around by 5 days which they do often now.

I have asked nicely, begged, pleaded, and threatened bankruptcy to them to try to reduce the rate to a reasonable level so I can try to pay it off.  I have made like zero headway in 3 years.

The only option they give me is to cancel the card and they put me on a payment plan which would drop the interest to 4.75% and have no due date as long as I made a payment each month.  Also, if I make the minimum they said it will be paid off in 5 years and I can pay it off sooner with no penalty.  I want all that in writing because I don’t trust them.  Do you know if this would negatively affect my credit score?

John, a couple different things in play here.  I’ll try to address them at a high level and then turn things over for comments.  First of all, kudos to your for starting up your own business.  The entrepreneurial spirit and industriousness of Americans is what built this country, and you had guts for giving it a go.  Having said that, accumulating $15k in credit card debt trying to float your business is not sustainable.  Not much you can do about it now, but I hope others reading this will think twice about funding a business venture on their credit cards.

You mention being late “a few times here recently,” and I suspect that is what triggered the default terms now in effect on your credit card.  Unfortunately, the card issuer was probably within their rights to increase your rate according to the terms you agreed to when you began using the card.  That doesn’t take away from the fact I think charging a 30% interest is borderline usury!

From the sounds of it, the card issuer has offered you a work-out arrangement whereby you surrender your charging privileges in exchange for a lower rate on the remaining balance, and a more manageable minimum payment.  To answer your question, yes, this will probably negatively your credit score, but no more so than being late several times.  I suspect the damage to your FICO score is already done, and if that is the case, having your card canceled by the issuer isn’t going to matter much.

The terms you have described seem reasonable, but your natural instinct to be distrustful is good.  Get everything in writing before agreeing to do anything–especially closing your account! In the near term, I would talk with a local bank or credit union to see if they would be willing to loan you the amount to pay off the card and close it on your own.  Unless you have some collateral to put up, or your FICO score has not been damaged as I suspect, you might not be able to qualify for a signature/personal loan for this purposes.

Another thing to check out is social lending via a provider such as Lending Club.  You may find more favorable rates, and a more forgiving group of lenders (many of whom are entrepreneurs themselves) here than you would at a traditional bank.

If you go the work-out route with the credit issuer, do not allow it to drag on for five years, particularly since there is no early prepayment penalties.  Investigate strategies for getting out of debt and do it with urgency!  I hope this all works out well for you.  Thanks for sharing your story here with us.

Ask the Readers:  Any additional advice you can provide John?

I received a letter from my credit card issuer the other day that indicated they were closing my account due to inactivity. It didn’t bother me really, because this is a credit card that I had paid off and never used. However, it was a card I’ve had since 2000 and I was concerned that the canceled card may negatively affect my credit score.

Do Canceled Credit Cards Affect FICO Scores?

The short answer is yes, closing a credit card can affect your FICO score. But the effects on your score are determined by a couple different criteria, so it is important to weigh the pros and cons before closing credit card accounts yourself. If your bank closes them, particularly for reasons such as inactivity, you may want to contact the bank and ask to have your card restored. Here’s why.

The length of time your accounts have been opened ranks third highest in the various factors used to determine your FICO score. Closing an old credit card account effectively reduces the average age of your credit history and can reduce your credit score accordingly. However, closing new accounts can have the opposite effect.

Before you go canceling all of your new credit cards, consider that credit utilization also plays a role in determining your FICO score. Let’s say you owe $2,000 on a credit card, and nothing on a second card, both with a $5,000 credit limit. Your current total credit utilization is 20% (anything less than 30% is considered ideal, in terms of scoring models). One of those accounts was opened last year, and after running up a couple hundred dollars you paid it off and it sat in your sock drawer. The other credit card, the one with a remaining balance, is five years old. The issuer of the newer, debt-free card closes your account due to inactivity, increasing the average age of your active accounts. However, your credit utilization now jumps to 40%, well above the 30% threshold between helping your score and dragging it down.

If this happens to you, act quickly by contacting the credit card issuer and asking for the account to be reopened. They may ask for authorization to check your credit report to make sure you haven’t declared bankruptcy in the last couple months, and in most cases will reopen the account under the agreement that you use the credit card at least a couple times a year.

To avoid this scenario, use credit cards a few times a year to fill up at the gas station and then pay the bill off when it arrives. You won’t be carrying a balance, but you will show signs of activity. That is usually enough to keep credit card issuers happy, and your FICO score intact.

Need help paying off credit card debt?  Consider a low-interest consolidation loan from Lending Club.

The following guest post is from Tisha Tolar.  Tisha is a freelance writer providing content for CreditCardAssist.com, where she regularly writes about credit cards, rewards programs and general consumer finance issues.

Credit cards certainly are not what they used to be. There is so much competition in the industry it seems each company needs to implement a new concept each week to keep account holders happy. When you applied for credit cards back in the day, basically you received a credit limit and a piece of plastic, along with monthly statements. Now, it’s a whole different story.

Too Much At Once

From cash back rewards cards to bonus miles to free airline miles, credit cards have come a long way and not always for the positive. While credit card spending has hit record highs and consumer debt is even higher, credit card responsibility is essential to maintain great credit scores and good money management skills. It becomes all the more difficult to stay on top of your financials when terms keep changing, interest rates keep rising, and more fees and penalties are getting tacked on to your account balance each month.

What’s Up With Insurance?

Adding to the frustrations are the additional programs your credit cards want you to sign up and pay for, such as disability and life insurance. Most people will be offered the insurance option during the application process. If you decline at that time, chances are good that you will be solicited by phone and mail in the near future. The credit card company will likely present the sales pitch that in the event of your death, disability, or serious illness all of your credit card payments will be taken care of. Your family will not have to be concerned with your credit card debts during that tragic time. You can obtain this additional insurance by paying a small percentage of your monthly balance.

The Things You Don’t Need

What the credit card company does not tell you is what really happens should you fall ill or die. In the event of your untimely demise, only your minimum credit card payments are covered by the insurance. Your entire balance is not paid off in a lump sum, which means that finance charges still accumulate on to your balance. The credit card company is essentially selling you a policy that protects them, and not you.

If you have already fallen for the pitch to buy insurance, you will already know that it becomes difficult to cancel the policies. You end up having to deal with the insurance company directly and the credit card company will not be offering you assistance. On some occasions, simply contacting the insurance provider becomes an impossible task. The credit card companies can be particularly forceful and oftentimes customers end up signing up for coverage without adequate knowledge. Companies will also offer free introductory periods that you will find hard to cancel.

Your best bet is to read everything in detail before signing up for anything. Do not be afraid to say no when asked or pushed into a policy. If you are interested in insurance policies that will truly take care of your debts and your loved ones, speak with a qualified insurance agent and find a policy that will work for you and most likely cost you less money.