Ah the holidays. If you are like me you have a serious discussion with your spouse related to staying within a defined budget for the amount of money you would like to dedicate to your holiday gift giving and then spend the entire month of December ignoring it. It feels good to give — let’s be honest — but the blues that hit us in January once the credit card bills fill our mailboxes or the low balance in your checking account now need to be dealt with. This is a mortgage blog, right? Why in the world would we be talking about how to pay off all those fantastic gifts you bought your friends and family? Well, it is all interconnected.

Your credit card balances and corresponding payments can get out of control so that they hurt your ability to refinance. The reality of the situation is that your holiday binge spending can limit your financial freedom. If you start the holiday shopping spree already strapped financially, adding more to what you owe can push your credit card payments just out of reach. Then you can get trapped in a cycle of balance transfers that never really pay off your balances. Let’s face it, carrying a balance on your credit cards is no way to live. When you do that, if there is any disruption in your cash inflow, then you may be just months from financial ruin. Not making payments on time to your credit cards or making late mortgage payments will seriously hurt your ability to refinance your mortgage or to qualify for a mortgage when purchasing a new home.

From study and experience, attacking the problem of credit card debt with a clearly outlined strategy is the only way to pay it off. here is what I suggest:

1. Gather all your credit card bills. Once the credit card bills have arrived in January, get them all together in a pile and take a look at the damage. Now is not the time to hide your purchases or the amount you owe and be dishonest with yourself. Make a list in Excel or on a sheet of paper and list the name of the account (Visa, Mastercard, etc.), the interest they charge you, the total amount owed, and the monthly payment due. Now sort the list by the interest rate, listing the cards by interest rate from highest to lowest.

2. Organize a payment schedule. This is the easy part. Set a budget for how much each month you will pay against your credit card debt. You will focus on paying off the card with the highest interest rate first, the second highest next, and so forth until you have all your credit card debt paid off. Think of this as a street fight — your will knock off your strongest opponent first and work your way down from there.

3. Decide how much you will pay. So let’s assume you have your list of three credit cards put together and organized from highest to lowest interest rate. You will pay the interest due each month on cards number two and three so that your balance does not continue to climb. You have set the budget of $1000 for credit card payments and the amount of interest on those two cards is $150 each for a total of $300. You will then take the left over $700 and pay it all towards card #1, the account that charges the highest amount of interest. The balances on cards #2 and #3 will not change, but you will pay off card #1 more quickly. You will continue on this payment schedule until you have card #1 paid off, then apply the $700 to card #2 in addition to the $150 you are already paying on that card for a total of $850 per month. Continue paying that amount until you have paid off card #2 and then apply the entire $1000 to card #3. Once that is paid off, you can start dedicating that amount to either savings for the next holiday season or investing.

4. Remain disciplined. One of the reasons you may be in the situation you are in is because you were not disciplined enough to limit your spending. As you are going through the process of paying off your debts, you should not put more charges on your credit cards. You will need to understand the difference between wants and needs, between maintaining a lifestyle and providing for your family. That may also mean driving that older car for another year or not upgrading to a 50″ TV so you can get out of debt.

5. Stay the course. Once you get out from under credit card debt, try and maintain a lifestyle where you save your money for major purchases instead of putting them on a credit card and paying for them later. The freedom that being debt free provides is awesome. It is a sacrifice to get to that point, which means you may have to pass up some really cool stuff for the time being. If you do have cards that will allow for a balance transfer at a lower interest rate, be smart about how you use that. Do not get caught in the trap of transferring balances from card to card without ever paying down the balances. I have seen families who will transfer the balance from their Visa to their Discover, fill up the Visa again without paying down the Discover. Then you are really in the debt trap.

6. Educate yourself. One book I really suggest you read is Rich Dad Poor Dad by Robert Kiyosaki. If you want to learn about investing and how to limit your risk, read John Neff on Investing by John Neff. Each book is filled with timeless concepts that can help you learn how to save money and quit throwing it away on stuff you really don’t need and then what to do with it once you start saving. If you want to purchase either, help a brother out and buy them from my Amazon Store here.

While this post did not have much to do with refinancing your home or how to pay your mortgage off early, it does provide you with information related to personal finance and how to get out from under that black cloud of credit card debt. Make your payments on time and reduce your debt load to give you the financial flexibility you deserve. With that extra cash you can always save for the future and even reduce the term of your mortgage. Good luck!

Has anyone had a positive experience using the principles I outline above?