Four Steps for Paying Down Your Debt Once and for All

According to the National Foundation for Credit Counseling, the top financial new year’s resolution for consumers in 2011 is cutting back on debt. Now that the year is nearly halfway over, how many people have kept that pledge? If your resolve is starting to fail, the California Society of CPAs ( offers these tips for making it happen.

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 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 realistically expect your efforts to take.

Cut the Cards

Now that you know how much you owe, you must take one important step to prevent adding to that amount: Stop using your credit cards. Lowering your existing balances won’t help you if you are only adding to them each month. If doing away with plastic altogether is not possible, budget yourself a specific amount that you can spend on credit monthly and stick to it. Then keep track of everything you spend so that you are sure to stay within your budget.

Attack the Highest Rates First

As a general rule, it’s best to begin by paying off the debts with the highest interest rates because carrying those balances is costing 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 or lender 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 offer further advice on 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. In the meantime, 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 in about three and a half years and slashes your total interest to $1,016. That’s why you should always attempt to pay more than the minimum due on any account. (Use this Federal Reserve calculator to see how changing your payment amounts can alter your situation.)

You may have even noticed some helpful incentives for paying off your amounts right on your monthly statement. 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.

Copyright 2011 American Institute of Certified Public Accountants.

The Money Management columns are a joint effort of the AICPA and the California Society of CPAs as part of the profession’s nationwide 360 Degrees of Financial Literacy program.