My credit cards are maxed out! How many times have I heard that cry. Most people only see the terror of the debt, the decreasing FICO score, and the hopelessness that becomes part of the problem. While it is difficult to see the solution when you are in the heart of the problem, often the solution is right in front of our nose. In this article I present three strategies to pay off your debt and to raise your FICO score while doing it.

When faced with overwhelming debt the first step is to not add to the problem. Put your credit cards in a bank vault or some other secure place where you cannot easily get to them. Pay cash, write checks (so long as you have available funds) or use a debit card to pay for everything. Do not apply for new credit. Just stop. Okay, so you won't be able to make impulsive purchases, but that is good while you are trying to pay off your current debt.

Now that you have placed yourself on a strictly cash diet you will need to make a decision. There are three apporaches that make the most sense.

- Sort by interest rate
- Consolidate
- Low to High sequence

The Sort by interest rate approach suggests that you make an effort to pay off those creditors that charge the highest rate of interest first. If you choose this approach you must be sure to pay at least the monthly minimum in an on-time fashion on all your other bills. If you can't do that this approach is probably not a wise choice. Once you decide on the order in which to pay off your charges, call the first creditor on your list and ask if there is any way to lower the interest charged as you really want to pay the bill off as quickly as possible. Because your creditor is interested in getting paid they will often agree to reduce interest and, in rare cases, suspend interest altogether. Once creditor number one is paid off, repeat the process, including asking for a reduced interest rate. Keep going until your last creditor is paid off.

If you choose to consolidate you must be aware of the risks involved. Often consolidation makes the most sense if you can borrow at a lower interest rate than you are paying on your credit cards. If, for example, you have significant equity in your home, you can apply for a home equity line of credit and pay off all your outstanding bills using the proceeds from that loan. There are, however, significant risks involved with consolidation. First, if you didn't make your credit cards unaccessible you may be tempted to run up new balances which put you in a far worse situation than before you had the loan. Now you have a loan and a new round of credit card debt. Secondly, if you default on your home equity line of credit you may lose your home through foreclosure or have the property tied up with a lien. Consolidation is a way of trading debt for debt. It only makes sense if you have equity in your home and can negotiate a lower interest rate through the bank than you are paying on your credit card debt.

Choosing the low to high sequence approach lets you pay off the smallest debt first, then the next smallest and so on until your debts are paid. Like the sort by interest rate approach, you must be able to make the minimum monthly payment on all of your credit card debt at the very least. This approach provides you with quick victories and a nearly immediate sense of relief.

Keep your credit cards locked up after you have paid off your debt. You are developing a pay-as-you-go strategy. You can then use debt to add value to your life as the need arises rather than using debt to just consume.

Learn more about this author, Roger Passman.
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