Time to Tackle Credit Card Bills

So, despite your best intentions, you leaned on your credit card to get through the holidays. You weren't alone -- consumers charged $232 billion on their Visa cards from November 1 to Christmas Day, an 18% increase over the same period the previous year. Now that the eggnog buzz has worn off, it's time to face the bills.

But you now face an additional challenge in making your monthly payments. In the new year, credit card issuers are requiring higher minimum payments due to new federal guidelines aimed at encouraging consumers to pay off their debt sooner. That means your minimum payment could double -- rising from 2% to 4% of your balance, says Ed Mierzwinski, consumer program director for the U.S. Public Interest Research Group. And just in time for those holiday bills.

Say you have $1,000 of debt on a card charging 18% interest. Paying a 2% minimum would take you 19 years to pay off the debt and cost nearly $2,000 extra in interest. A 4% minimum payment, however, would take seven years and cost $516 extra. (Calculate your true cost of paying the minimum.)

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"The reality is consumers are going to be able to pay their bills off faster. But in the short run, it's going to hurt like hell," says Howard Dvorkin, founder of Consolidated Credit Counseling Services. "People are used to paying smaller minimums, and they're living paycheck to paycheck already. They don't have the extra cash."

Make a plan

Seven years is still a terribly long time to make payments on a sweater your Dad will have worn out, or a DVD set your brother will have lost interest in. Aim to have your holiday debt wiped out within two to three months, Dvorkin says. You don't want to carry this debt around your neck for the rest of the year or start the next holiday season under its weight. No matter how much you're tempted when you see the bills piling up this month, ignore the impulse to run and hide. A few simple steps will help you tackle your debt and get your finances back on track.

Step 1: Put your credit cards away, at least until you've paid them off. Out of sight, out of mind. Remove the temptation and take your cards out of your wallet. Try the bottom of your sock drawer, or entrust them to a friend or relative for safe keeping. You could even place them in a bag of water and throw it in the freezer -- you'd have to wait for it to melt before you could use it, which would hopefully be long enough for your impulse to pass.

Step 2: Dig for loose change. To make those larger minimum payments -- or to pay extra toward your principal -- you'll need to come up with more cash. The couch cushions are a prime target, but think bigger. Take a good look at your spending and find areas that you can cut back. "Everybody has 15% to 20% of fat in their budget," says Dvorkin. For example, forgoing that $4 latte every day would save you about $120 a month. Dvorkin also suggests reshopping your car insurance, using a lower grade of gas or reading your newspapers online.

Step 3: Consider a balance transfer. Many credit card companies offer 0% or ultra-low interest on balance transfers for a limited time -- usually four to six months. If you qualify, such a deal will help you wipe out your debt faster because all or most of your payments would go toward your principal, not the interest. It could also buy you the time you need to pay off your purchases entirely.

This strategy could backfire, though, if you don't use it properly. Watch out for exorbitant balance transfer fees -- they should run around 3% or less. And after the introductory rate expires, some cards may charge you more than your previous card did. Aim to pay off your entire balance during the introductory period. Then evaluate if the card is worth keeping for new purchases, or whether you'd be better off cutting it loose and shopping for a new one. Either way, get in the habit of paying off your balance every month throughout the year, so you won't enter the next holiday season buried in debt.

If you don't qualify for a low-rate balance transfer, try calling your credit card company and simply asking for a lower interest rate, Mierzwinski advises. "It works 50% of the time," he says.

Step 4: Pay off cards with highest rates first. You should always pay at least the minimum on all your credit cards each month to avoid late fees and damage to your credit rating. But if you have some extra cash, put it toward the card that charges the highest interest rate, says Dvorkin, and keep doing that until the card is paid off. Then, put the excess cash toward the card with the next-highest rate, and so on until your debt is wiped out. You basically get a return on your investment equal to the interest rate. Put $20 extra toward your card charging 18% interest, for example, and you just got an 18% return on your investment. Not too shabby.

Step 5: Get help if you need it. If you simply don't have the money to make the payments, don't wait until you've already skipped a payment or two -- get help now to set up a strategy. You can visit the Association of Independent Consumer Credit Counseling Agencies or the National Foundation for Credit Counseling Web sites to find nonprofit credit counselors in your area. They can set up reasonable repayment plans with creditors, as well as help you create a budget that works.