Credit cards are a great way to make purchases and record to penny your spending. They also provide a way to postpone payment on items and thereby earn more interest on your money.

For example, if you have a money market account that gives you 5% annual interest and you spend $1000 a month through your credit card, you can keep that $1000 in your money market account for an additional month. At end of a year you would have earned an additional $51.16 for doing nothing.

Now $51 may not be much but it's free!

Also you can use your credit card statements to keep track of exactly how much you are spending and where your money goes. With some credit cards you can use personal finance software to download your credit card transactions from Internet right to your home computer.

Credit cards may actually save you money. Some people avoid making purchases if they do not have cash. Cash seems to "burn a hole" in our pockets, it just disappears. It is so easy to spend and it is right there. But a credit card takes more effort and you know that you have to pay bill later that month.

Your credit card may also offer a rewards program where you get cash back, frequent flyer miles or discounts on services and merchandise.

Credit cards are convenient. Some purchases, especially those on Internet, will only accept credit card payment. Also you don't have to continually go to bank or ATM to get cash.

A credit card also provides a measure of safety. You don't have to carry large amounts of cash for large purchases. Even if your card or credit card number is stolen, you are not responsible for thief's use of your card.

But credit cards can also be a crutch. Too many people see their credit limit not as maximum amount of debt they can go into, but as an account full of money that they can spend.

Average household consumer credit balances have now topped $7000. The monthly interest charge for a credit card charging 18% interest is over $100. More than $1200 a year just in interest.

And this interest is not like home mortgage interest that you can deduct from your taxes. You are paying an additional 15-36% on top of $1200 for taxes on interest you are charged. That brings your interest charge total up to $1400-1600 each year. Even more if your balance or interest rate is higher.

What is silly is that many people who are paying 18% interest rates on credit are also investing in a stock market that only averages 11%. Or worse, keeping money in money market, savings accounts or CDs that only pay .5-3%.

Want an investment that returns over 20%? Invest in paying down your debts. In above example you can save over 20% with taxes factored in.

Many people have developed habit of using their credit cards to buy what they want now and paying for it later. They then make only minimum payments required. Often minimum payment is set so that you only pay monthly finance charge (interest) or just a small amount above it.

This method will ensure that you pay least amount of interest and repay your debts as soon as possible.

The trick to paying least amount of interest possible is to pay extra money toward debt with highest interest rate. Obviously you want that debt paid off as soon as you can. Each month it costs you most.

The trick to paying off your debts in least amount of time is to set a fixed total amount to pay each month. The trap many people fall into is that they only pay minimum payments. These minimum payments are designed to keep you paying that high interest rate for as long as possible.

By paying a fixed total amount each month, as one debt is paid off, you will have more money to pay towards another debt. This is often called "snow-ball" effect.

But first things first.

First, determine you ability to pay. If your total payments are much more than you can afford, you are in trouble. You may need to contact a non-profit credit counseling agency. You can find them in your local phone book or online.

But be careful of companies that want an up front fee. Check with your local Better Business Bureau for recommendations.

Next you need to make a commitment to stop getting further into debt. Cut up your extra credit cards or put them where you cannot easily get them. If you are living a lifestyle that depends on credit, you will soon dig a hole you cannot easily climb out of.

Stop spending more than you make each month and don't count on future bonuses, inheritances, refunds or other non-dependable income to bail you out. If you make $2000 a month you can only spend $2000 a month. Look for ways to cut back and purchases you can postpone or do without.

Now, let's look at each step of your ultimate debt reduction plan more closely.