Tame Your Credit Card Debt

They start out sounding like a good deal: Credit cards allow you to buy now and pay later. Plus, they're essential to helping you build a credit history and learning to manage debt responsibly.

But as bills come due and interest charges rear their ugly head, perhaps you've realized that you've gone a little wild with your plastic. After all, it's a bit too easy to rely on your credit cards as a sort of get-out-of-jail-free card, allowing you to push your bills to the very back of your mind. The average credit card balance of consumers ages 25 to 34 is more than $5,000, and one-third of that age group say that their primary New Year's resolution this year is to pay down their debt.

Sound familiar? Act now to tame your debt. We have six smart moves you can make with your credit cards to lighten your load, manage your plastic more effectively and regain control of your finances today.

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1. Tackle high-rate debt first. Credit card debt is costly. The average rate on a standard variable-rate card is nearly 15%, according to Bankrate.com, and it's not uncommon for young adults just starting out to pay even higher rates. You need to get rid of that debt as quickly as possible, so if you carry balances on multiple cards, focus on paying off the highest rate cards first while continuing to make the minimum payments on your other accounts. And this rule goes for your other debt too. If you have a credit card charging 15% interest and a student loan charging 6.8%, it makes the best financial sense to focus any extra payments toward your high-rate credit card. Find out what it will take to pay off your balance.

2. Put your payments on autopilot. Most card issuers let you set up automatic payments from a checking account and allow you to decide how much you pay. This strategy keeps that money from becoming a temptation for you to spend on something else because it's already gone. It also helps you avoid late payments that can damage your credit score, cost you a bundle in fees and trigger an interest rate hike. Use our Budget Worksheet to take an honest look at your spending and see how much you can afford to pay each month. Then set your account on cruise control.

Once you've gotten your debt under control, you can arrange to have your balance automatically paid in full each month so that last-minute snags never stop you from paying on time. But make sure you still monitor your statements, particularly if you make new purchases on the account. Automatic bill-paying can come with its own set of headaches.

3. Consider a balance transfer. No doubt you've seen offers with 0% or low introductory rates. If you're confident that you can pay off your balance over the introductory period -- typically six to 12 months, start shopping around for a low-rate card that will give you enough time on good terms. Check the contract for whether the low rate applies just to balance transfers or also to new purchases, and whether you'll have to pay annual or balance transfer fees.

Be careful, though, because this is not the quick fix a lot of banks would have you think, and low APR cards tend to come with nasty fine print. Most will hit you hard when you slip -- by missing a payment or letting a balance carry past the teaser period -- so you need to be crystal clear on your card's terms and exercise extra diligence to pay on time. And resist the temptation to bounce your debt around on card after card. It will take a toll on your credit score and will only delay the inevitable -- you still have to pay.

4. Ask for a lower rate. Sometimes, a solution really is this simple. A few minutes on the phone with your lender could save you hundreds of dollars in interest charges. "Talking to your credit card issuer and letting them know your situation is always a good idea," advises Nick Jacobs of the National Foundation for Credit Counseling. If you have been a good customer they'll be eager to work out a solution, which could include a temporary suspension or permanent lowering of your interest rate.

You can try this if you're not mired in debt too. Call your issuer and tell them about the credit card offers you receive in the mail everyday -- they will likely be willing to lower your APR to keep you as a customer. Surveys have found this approach works over 50% of the time, and a successful call will knock 6% off your APR, on average.

Be persistent, and ask to speak to a supervisor if necessary. Call back a couple of days later if you're unsuccessful -- a lot depends on getting the right person on the phone. Try this approach if you're hit with unfair fees too.

5. Never max out a card. This is, of course, a good strategy to avoid getting in over your head in the first place. But it can also salvage your credit history. According to Fair Isaac, a credit scoring bureau, about one-third of your score depends upon your "utilization ratio," or how much of your available credit you actually use. Experts recommend that you keep your balance below 30%, or $300 for every $1000 of available credit. If you're currently maxed out, try to get your ratio down into the safety zone as soon as possible. That ratio matters both for the sum of your available credit and for each individual card you own. You want to keep your balance below that magic line at all times -- even if you pay your cards off in full each month.

6. Think twice before closing an account. It may sound like a good idea to close an account once you pay it off. But when you do, you slash your total available credit, which raises your utilization ratio and takes your credit score for a tumble. Your score also factors in the average age of all your accounts (the older the better), so closing an older account is a double-whammy.

One disclaimer: if you have real trouble controlling your spending, it's better to close a card than to rack up more debt. But always close newer accounts first and never close a card within six months of applying for a loan. Or, simply keep the account open but cut up the card -- and continue clipping when your lender sends you a new one after the old one expires. That way you get the advantage of having a debt-free card on your record without the temptation to actually use it.