Top tactics to reduce pricey credit-card debt

In her book “Pay it Down: From Debt to Wealth on $10 a Day,” “Today” financial editor Jean Chatzky describes how being financially disciplined and setting aside $10 a day can extract you from indebtedness within a shorter time than you might imagine. In this excerpt, she deals with the issue of paying off credit-card debt.

When it comes to paying off your credit cards, there’s only one basic rule: Pay the highest interest rates first.

I know there are differing opinions on this. Some people say you should pay off the smallest debt to get rid of one card faster. I’ve heard others say that when you get a great balance-transfer offer, you should start paying on that card so that you make headway while you have access to those low interest rates.

Both are wrong. You pay off your highest-rate debts first because those are the ones that are costing you the most. Let’s say you have four credit cards and that you owe a total of $12,000 (see below). For simplicity’s sake, we’ll say you owe an equal amount on each. That gives you:

• Card A: $3,000 at 24 percent
• Card B: $3,000 at 18 percent
• Card C: $3,000 at 12 percent
• And you just transferred a balance onto Card D: $3,000 at 0 percent

The minimum payment on each card is $60 a month. Since you’ve been setting aside your $10 a day, you have an extra $304 (on average) each month to put toward the card of your choice.

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If you take the cards in order of highest interest rate, paying off A first, then B, then C, then D (while paying the $60 minimum on the rest), it will take you 31 months and cost you $13,684. In other words, you’ll be out in under three years. And that’s truly impressive.

Another tactic: You call all your credit card companies and see if you can talk your way to lower interest rates. You do all the balance transferring you’re going to do (for now at least), then lay all your cards out on the table. Note the interest rate you’re paying on each one and that’ll tell you where to put your muscle in terms of paying it off.

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Note: As you pay down this first card, your minimum payment will decrease. Your goal — under the $10-a-day plan — has been to pay what you were paying before [the minimum] plus an extra $10 a day or $304 a month, but if you maintain the minimum payments you started with and then add your $304 a month, you’ll get out of the debt hole even faster.

Excerpted from the book “Pay it Down: From Debt to Wealth on $10 a Day,” by Jean Chatzky. Published by Portfolio, an imprint of Penguin Group (USA).  Used by permission of the publisher.  All rights reserved.

Jean Chatzky is the financial editor for “Today,” editor-at-large at Money magazine and the author of “Talking Money: Everything You Need to Know About Your Finances and Your Future.” Her latest book, "Pay It Down: From Debt to Wealth on $10 a Day," is now in bookstores. Copyright ©2005. For more information, go to her Web site, www.JeanChatzky.com.

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