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Ask Dr. Don

Dealing with high credit card debt

Dr. Don,
I have gotten myself in a significant amount of credit card debt. I spoke with a financial adviser, and he told me the best solution is to apply for a low interest rate credit card and transfer all my balances and pay off that credit card in an aggressive manner. This would be a great idea, but I can't get approved for another credit card. Is it worth me asking someone to co-sign and get such a card? Or should I just continue paying them off one by one?
Kim Knotty

Dear Kim,
That's the problem with those low interest rate balance transfer offers. The people who could really benefit from them don't qualify for the offer.

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Asking a friend or family member to co-sign for a credit card isn't a very good solution. They become legally responsible for the card balance, and you could wind up hurting their credit rating, too. That's a high price to pay for a few months of debt at a lower interest rate.

What is the answer? Debt consolidation can work if you have equity in your home. If you can't see a way out, then credit counseling will help you put together a repayment schedule, and the counselor may be able to reduce the interest rate on your outstanding credit card debt. Credit counseling will hurt your credit rating, but won't hurt it as badly as filing for bankruptcy; which is a last resort.

If you decide to work it out on your own, then concentrate on paying down the balances on the credit card with the highest interest rate while making minimum payments on your other cards.

You are trying to make more of your monthly credit card payments go toward paying down principal instead of paying finance charges and fees. By paying down the card balance on the most expensive card you are reducing the total finance charges on next month's bills.

Assuming that you've put the brakes on spending and you keep paying more than the minimum payment, you'll see that card's balances start to come down. Soon you're ready to take on the next card. Before you know it you'll qualify for that low interest balance transfer offer on your own. This Bankrate credit card calculator can help you set up a payment schedule.

You didn't get into debt overnight, and you won't get out of it overnight. But you should be able to turn things around. Then you can start thinking about investing for your future instead of spending all your money on credit card interest.

-- Posted: July 27, 2001

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