One of the biggest culprits of debt is credit cards. Yes, many may have medical and other issues which arise, but the truth is, most Americans claim that their debt consists mostly of credit cards.
According to ValuePenguin, the average credit card debt for the American Family is $5,700. That is a huge amount and the monthly financial burdens can easily become overwhelming.
I know, because it happened to me.
Back in my 20s, I was very careless with my finances. Namely – credit cards. When I got them, I used them for everything. I bought groceries, fuel, clothes…anything I could. My spending also included big purchases of items I really did not need, but feel I “deserved.” After all, I was an adult and if I wanted something then I was going to buy it. No one was going to stop me.
Until it happened.
I got to the point when the monthly payments were ruling my life. Making ends meet was a constant struggle. There was much more debt racked up than what I could pay down. Being young and naive, I thought my only way out was bankruptcy. In August of 2002, I filed. It was not my proudest moment. However, it became my most profound.
In that moment, I knew I was never gong to go down that path again.
After meeting and marrying my husband in 2003, we racked up some debt. For us, it was one small credit card, but mostly autos and a home equity loan. It was still debt and we did not like how it controlled us. We worked hard and were able to pay off our debts (read more about my Debt Free Journey).
If you are struggling with paying off your debt, these folks may be able to help:
In these low moments, I have learned a lot and that is why I can help you figure this out too. If you have credit card debt, I can help.
HOW TO PAY OFF CREDIT CARD DEBT
The first thing you have to do is take responsibility for it. Whether your debt is a result of bad financial times or frivolous spending, it doesn’t matter. The point is that you now have this debt and you need to take the steps to pay it off.
1. Transfer to zero or lower balance cards
If you have a lot of credit card debt, you will want to try to lower the amount of interest you pay. Since that compounds every month, it can mean your $50 payment will only reduce the debt by $10.
Take some time to do some research to find zero transfer cards, or ones with a low introductory rate. If you can drop your interest payments, that will allow you to truly focus on paying off your credit card debts.
2. Get rid of your cards
I recommend you cut up the cards (but don’t close the account). This way, you can have an active account which shows you can pay down the debt without accruing more debt. However, you also can’t be tempted to use the card at all (as you don’t have one).
If that is not something that works for you, then freeze it. Literally. Put the card in a baggie filled with water and drop it into your freezer. Now, you won’t be tempted to dig it out and use it as you would have to put in a LOT of effort to do so.
I also know people who have put their cards in a bank deposit box or even given to a family member to keep at their house.
Do what you have to do in order to stop spending. You can’t use credit cards until your balances are 100% paid off. No exceptions.
Read more: How to Break the Cycle of Credit Card Debt
3. List your debts
Make a list of the current balances owed, minimum monthly payment and the interest rate. Next, add up total the amount of debt you have AND the total minimum monthly payments. This gives you a true picture of the amount of debt you currently have outstanding (and, it may not be pretty to look at).
Go back to your budget and see if you can free up any income. It might mean dropping your dinners out for a while so you can add another $100 a month to a payment. You might find a way to lower your cell phone or cable bill. Anything you can do to cut back your expenses will help. Just make sure that any income you free up immediately gets applied to your credit card debt.
Read More: Prepare Your Debt Pay Down Form
4. Start paying them down
There are two different rules of thinking when it comes to paying off credit card debts. One says pay the higher interest rate and the other says the highest balance. I’ll explain them both so you can determine which works better for you.
Highest Interest Rate First. Review the debt sheet created in step 2. Re-order it and list the credit card with the highest interest rate at the top and then continue listing them in order until the card with the lowest rate is the last one.
You will want to begin doing all you can to make more than the minimum payment on the card with the highest interest rate. For example, if the minimum monthly balance is $25, try to at least double, if not triple the payment being made. Take the money you found in your budget (step 2) and apply that to the balance. Do not increase the payments on any other credit card debt at this time.
Once the first card is paid in full, roll the monthly payment you were making on that card onto the next card. Continue to do this until your debt is paid in full.
The pro to using this method is that you may result in paying less interest, therefore, less overall debt. As you tackle the one which accrues interest at a higher rate first, you will eventually pay out less to the company. The down side is that you may end up tackling an overall higher balance first, which can result in it taking longer and you becoming discouraged.
Lowest Balance First. Look at the list you created in step 2. List those debts by the one you owe the least to and add others to your list until the highest balance is listed last.
You will follow the same rule as you would if you were paying down the higher interest rate card first. Find any additional money you can in your budget and add that to the minimum monthly payment of the lowest balance card. Continue paying on that card until it is paid in full. Once that happens, roll that payment into the next balance. Repeat this process until all debts are paid off.
The reason that this method works is that it tends to be more encouraging. You will see that you are actually making progress as you can achieve a balance paid in full more quickly, which gives you the motivation to proceed. The downside of this method is that you may have to pay a bit more in overall debt due to additional interest on the cards.
The thing is that one of these is not “right or wrong.” I hate when I see so-called experts trying to degrade someone for trying one over the other. We are all different and we know what will motivate us to help us stay on track. Decide which of these two works best for you.
STAYING OUT OF CREDIT CARD DEBT
Once your credit card debt is paid in full, you never want to allow yourself to get into that situation again. Here are things you need to do:
1. Figure out why you got there in the first place
Was the reason you had debt due to poor saving? Are you a spender? Did you just not have a budget and had to use it to cover living expenses?
Whatever the reason, you need to make sure you know what lead you down that path to begin with and make changes in your life so that it doesn’t happen again.
2. Have an emergency fund
Many times, people turn to credit cards when they have an unexpected expense. This is where your emergency fund will come into play.
Instead of turning to a credit card to bail you out, you will use your emergency fund balance instead.
Read more: How to Rapidly Build an Emergency Fund
3. Never charge more than you have in the bank
Far to often, people will charge in advance of a paycheck or other income source they plan on coming their way. But, what happens if that fails to come through? Can they pay off the balance?
If you can not pay off your balance with the money in your checking or savings account, then do not charge it. Just because you are owed money does not mean it will come through.
4. Always pay balances in full every month
It can be tempting not to pay off your card and keep more of the money for yourself. However, this will just put you back into the same situation you just got out from under. Make sure your entire balance is paid off every single month. No exceptions.
5. Review the perks
Many people use credit cards because of the perks. These include cash back, free offers or even airline miles. However, what do you have to spend to even earn the reward? Is it worth racking up a large balance just to get something free?
Companies can change their programs at any time. You could lose those you’ve earned or no longer be eligible to earn new ones. The perks may sound great, but are they really worth it?
Trying to pay off credit card debt is not easy. However, can you continue to live with the financial strain they are causing you? Only you can decide that it is the right time to pay off credit card debt.