Four steps to paying down debt

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According to the National Foundation for Credit Counseling, the top New Year’s resolution in 2011 regarding consumer finances was cutting back on debt. If you are one of those people who made that pledge, and your resolve is starting to fail, the Pennsylvania Institute of Certified Public Accountants offers these tips to help you along.

Get the big picture

Begin by adding up all your outstanding consumer debt. You may be in for a pleasant surprise if you come up with what seems like a reasonable number, or you may be in for a rude awakening if the total is larger than you expected. In either case, before you can create a plan to eliminate debt you must know how much you’ve got. What you find may change how much money you want to pay off each month and how long you can expect your efforts to take.

Time to cut the cards?

Once you know where you stand, take a long, hard look at your credit cards. If you have little or no balance on your cards, good for you! If you have multiple cards where you only pay the minimum balance, you need to evaluate and limit your use of creditcards. It is important to take steps to prevent adding to that amount: Stop using your credit cards. Lowering your existing balances won’t happen if you continually add to them each month. If doing away with plastic is not possible, budget a specific amount that you can spend on credit monthly and stick to it. Keep track of everything you spend so you are sure to stay within that budget.

Attack the highest rates first

As a general rule, begin by paying off the debts with the highest interest rates because those balances cost you the most each month. If you’re not sure how much interest you are being charged on each credit balance, check your monthly statement or contact the credit card issuer for more information. If you have a strong payment record, this may also be a good time to try to negotiate a lower rate with all of your credit card companies. Your CPA can answer any questions you may have related to the interest rates you are paying.

Pay above the minimum

The longer it takes you to get rid of debt, the more time you will spend paying interest on it. For example, if you have a $3,000 balance at an 18 percent interest rate and pay only a minimum $60 each month, it will take you 26 years to erase that debt. You will end up handing over a total of $6,863 in interest in addition to paying off the original $3,000 debt. Raising your payment to just $100 every month allows you to wipe out your debt in about three and a half years, and slashes your total interest to $1,016. Always attempt to pay more than the minimum due on any account. (Use this Federal Reserve website to see how changing payment amounts can alter your situation: http://www.fed­reserve.­gov/­creditcardcalculator/) You may notice some helpful incentives on your monthly statement for paying off your amounts. Legislation passed a couple of years ago requires credit card issuers to disclose how long it will take consumers to pay off their balance if they only send in the minimum amount due each month. In most cases, it can be sobering to realize how many months–or years–you will spend paying interest on your outstanding balances. In fact, 25 percent of consumers said that seeing those numbers made them pay more each month, according to the National Foundation for Credit Counseling.

Consult your CPA

If you have questions about budgeting, interest rates, debt management, or any other issues related to your financial life, remember that your local CPA can help. Turn to him or her with all your financial concerns. To find a CPA near you, visit http://www.IneedaCPA.org. The CommonWealth Tips columns are a joint effort of the AICPA and the Pennsylvania Institute of Certified Public Accountants, as part of the profession’s nationwide 360 Degrees of Financial Literacy program.

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