Coming to terms with credit card debt

But before you take this route, think carefully. Non-secured credit card debt is expensive for several reasons. First, credit card interest payments are typically higher than debt secured by your home or even a car. Second, the interest isn't tax-deductible. And finally, and this could be the most insidious part of it all, debt can beget more debt. If you're not paying off the principal, interest payments begin to compound and, for some people, can spiral out of control.

There are plenty of good reasons to use credit cards. They're convenient, of course, and often necessary — try to rent a car or buy an airplane ticket without them. Sometimes they come with valuable benefits — extended warranty coverage or frequent flyer miles. But there's rarely a good reason to pile up credit card debt; and if you do, it's time to get yourself a plan for eliminating it.

Here's why: Interest payments are an expense, and if you're paying 36 percent of your income on interest payments, that's more than a third of your earnings devoted to debt service. Obviously that cuts into your lifestyle, significantly. For example, if you make $50,000 per year and spend 36 percent on debt service, that amounts to an $18,000 reduction in your income. Now turn it around and instead imagine that you receive an $18,000 pay increase; that's a pretty substantial improvement in your personal financial situation. Paying credit card interest gets you nothing. In effect, you're sacrificing money you could be using for savings or improving your standard of living.