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How to manage your credit hangover Add to ...

Visiting one electronics superstore over the weekend, I saw more people waiting in the returns line than at the checkout counter. I'm sure many were exchanging unwanted holiday gifts, but I'd bet that at least a few of the shoppers were rethinking expensive impulse purchases.

The December sales seem too good to miss, until the damage shows up on your credit card statement. If you've started the New Year with a credit hangover, all you can do is resolve to do better and start tackling that debt.

Here are some tips to reduce what you owe on your credit cards as quickly as possible:

Don't be late with payments. This is one we all should know. Don't try to hide or ignore the evidence of your overspending. One of the most critical aspects of building a strong credit history is to pay your bills on time. No matter how difficult your situation, try to pay at least the minimum amount due on time.

Figure out your total cost of debt. You can't fix the problem until you know what you're dealing with. To start paying down what you owe on all your new clothes and toys, tally up the balance on each of your credit cards. Then, make a note of the annual percentage rate on each card. If you just pay the minimum amount on each card, due to compounded interest, you are going to end up paying a lot more for a very long time. To get a sense of how much you will be paying for the life of the debt, use an online calculator such as this one provided by Credit Canada, a not for profit credit counseling agency. Seeing the results is a sure way to motivate yourself to make larger payments. If you have financed some purchases through a store, you'll have to contend with that debt as well. Canada's Office of Consumer Affairs has a helpful calculator that allows you to tally how long it will take to pay off all of your financed debt.

You need some quick wins in order to stay pumped enough to get out of debt completely. Dave Ramsey

Decide which debt to pay down first. If you are carrying debt on more than one credit card or through a financing arrangement, you're going to have to decide which to pay down first. There are a few ways to approach this.

A common rule of thumb is to pay down your highest rate debt first. To do this, simply list your debts, in descending order by interest rate, regardless of how much you owe, putting accounts with the highest interest rates at the top. You'll continue to make the minimum payments on each debt, but you'll put all extra money in your budget to the debt at the top of the list. When the first debt is paid off, you should take the minimum payment and the extra payment you were making on the first debt and combine them with the minimum payment you've been paying on the next debt, so that you're making the largest payment possible. Continue until you're debt-free.

Another approach is to start paying your smallest debt first, regardless of interest rate, to achieve some momentum in your debt reduction. This is the approach favoured by personal finance guru Dave Ramsey and he calls it the " debt snowball plan."

"The math seems to lean more toward paying the highest interest debts first," Mr. Ramsey writes on his website, "but what I have learned is that personal finance is 20 per cent head knowledge and 80 per cent behavior. You need some quick wins in order to stay pumped enough to get out of debt completely. When you start knocking off the easier debts, you will start to see results and you will start to win in debt reduction."

For the debt snowball plan, you list your debts in order with the smallest balance at the top. Attack the smallest debt first, still maintaining minimum payments on everything else. Once you pay off the first loan, you should increase the payment to the next loan on the list so that your total payments don't change.

Whichever method you choose, you'll make good progress, although starting with the higher-interest debt should get you debt-free faster.

Cut down on discretionary spending. This would be a good time to try and cut out those expenses which are not absolutely essential. This would include items such as expensive dinners out or new books and magazines. Small things add up quickly, as this daily spending calculator from Canada's Office of Consumer Affairs shows. Skip the coffees and the sandwiches at work and put that money to your debt instead.

Ask for help. Don't wait for your debt to get the best of you. If you're having trouble managing your payments, don't be afraid to call the credit card companies to try to negotiate better terms. You can also consider using a credit counseling agency. Look for a non-profit firm and be sure to check out its profile with the Better Business Bureau.

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