Free Yourself From Credit Card Debt

Here's how to wean yourself off credit - and start saving instead.

According to David Kuo here at the Fool, seven out of ten credit applications are likely to be rejected by the time we reach 2012.

For the millions of Britons who are currently getting by on plastic, this is obviously a pretty scary thought. What would our lives be like if we couldn't use credit cards, or go into our overdrafts, or take out loans?

However, every cloud really does have a silver lining. This could be the push we all need to hoist ourselves out of debt - and there's still time to get our finances in order.

Obviously, one way to protect yourself from future turbulence in the credit markets is to get into a position where you don't need so much credit.

So, here's how to get away from being credit-dependent:

Reality check

The first step on the road out of debt is to admit - to yourself - just how much trouble you're actually in.

So, before you do anything else, work out your expenditure, and exactly how much you owe. You can figure this out easily using the Fool's Statement of Affairs calculator.

Once you've done this, you should have a much clearer idea of where corners can be cut.

Slash your outgoings

To minimise your need for credit in the future, you need to tackle the debts you have right now.

So, have a look at your outgoings. If you can, cut the interest payments on your debts. For example, switch your credit card debt to one offering 0% on balance transfers. This means you will stop paying interest on your existing debt, and should allow you to pay it off quicker (as long as you stop spending!).

Set yourself a goal - for example, to reduce your monthly outgoings by £100. Shaving money off household bills, cutting your travel costs and remortgaging your home could all be ways to achieve this.

Snowball!

Once you've whittled down your outgoings to a minimum, snowball your remaining debts. This will help clear them as quickly, and cheaply, as possible.

To do this, work out which of your debts is charging the most interest. That's the one that's growing the fastest - so attack it first.

But before you start, remember that you need to make the minimum payments on all of your borrowings. If you have any spare cash after this, aim it at the most expensive debt. If you don't have any spare cash, make switching this expensive debt to a loan or a credit card that charges less interest a top priority.

When you've paid this 'nasty' off, switch your attention to the next most expensive debt. The cash 'snowballs' you throw at your debt will get larger and larger, and eventually you'll be clear of all your debt.

Up your income

Another good way to get out of the red is to up your income. As Cliff D'Arcy points out in Five Ways To Increase Your Income, you can often do this without taking on another job.

Even an extra £100 a month could make a big dent in your debts - and paying them off more quickly could save you hundreds, or even thousands, in interest charges.

Debt free? Start saving!

After all that dealing with debt, you may want to take your foot off the Foolish pedal and enjoy yourself. Just don't go spending mad!

Instead, start saving your spare cash to set up an emergency fund. If you manage to save over three months' income a year in a good high interest savings account or cash ISA, you'll have a fairly sturdy cushion against the unexpected.

That way, if David Kuo's latest prediction does come true in 2012, you'll be in an excellent position to weather the storm!

You're not alone

Remember, you're not alone. You can visit the Fool's Dealing with Debt discussion board for excellent, non-judgemental advice from fellow Fools. And if you're on a tight budget, the Living Below Your Means and Money Saving Tips boards are also great places to pick up helpful tips.

Good luck!

> Visit The Motley Fool's Credit Card Centre to compare interest-free credit cards and check out our Loans Service to find a competitively-priced personal loan.