How to pay off credit card debt
The sobering truth is there’s no “Get out of jail free card” for credit card debt. You have to make payments. While some companies may try and tell you otherwise, I’d advise you to thoroughly research them first. Many are scams, shams, or will cost you more than their ‘services are worth. The advice I’m about to share is free and works (if you’re willing to stay committed).
From a combination of personal experience, hearing friends’ stories, and reading about others I’ve created a 6-step process to pay off credit card debt. Like any multi-step process, it’s going to look easy on paper but be challenging in execution. Success or failure in your unique situation will depend on your ability to run the course. Before even reading further, understand that ‘Step 0’ is to make this a priority. After you pay rent, and other basic living expenses, getting out of debt should be your sole focus. If you let distractions or obstacles take your focus away you will fail.
Now that you’re (hopefully) committed to ridding yourself of credit card debt… here’s how you can do it in 6-steps:
1. Identity how much debt you have
Most people never take the time to actually add all their debt up. It seems obvious, yet most people skip it altogether or say they claim they already know. If you think you know, you probably don’t.
This step needs little explanation, but you’ll want to look at all your cards’ outstanding balance and their respective interest rates. You will be able to easily find this by logging into your account online. If you can’t find it there, just call your credit card company. When you have each card’s total debt and interest rate, keep this documented in one place and you can update it as you go. It’s important to know the total number you’re working against. This will allow you to be realistic in how long it will take to pay back.
2. Look for options to lower Interest Rates
Now that you know what you’re working against, you’ll want to look for ways to minimize the interest rate on each card. The reason people get into debt in the first place is that they’re living above their means. But, the reason people stay in debt is because credit cards have an exorbitant interest rate on that debt. The average APR or interest rate on a credit card is 15.91%. One way you can lower this is by calling your credit card company and simply asking them to lower it. If you’ve ever noticed all cards when advertised have a range of APR. This is because interest rates are largely based on credit history. Calling and asking might yield nothing, but it also could save you hundreds or even thousands of dollars in interest.
Another option to lower your interest rate is to look for cards that have an introductory period where there is no APR. In some cases, you can do a balance transfer from your existing card to a new one that is interest-free. Keep in mind that there is often a ~3% fee to do a balance transfer, but even with that, it can still save you money in the long haul. You’ll want to check and make sure the interest-free period applies to balance transfers and make sure you can actually get approved for the card. If you have credit card debt your score is likely less than ideal so it serves no purpose to apply for a card that you won’t get approved for. All in all, this can be a great option to minimize interest payments.
3. How will you fund payments?
This seems like it should be a given, and most people will say they know how, but don’t really have a plan. If you don’t already have a budget this is a great time to make one. (Learn how to budget). If you do, consider how much money you can realistically allocate towards debt repayment. Ask yourself where is this money coming from? Is it money from your job? Are you flipping stuff on the side to make payments? If you don’t have a plan on where the money will come from and set a goal for how much you can pay each month then I promise you it will never get done.
The idea here is to set an amount monthly that aligns with the goal of when you want to be debt-free. If you decide you can make $100/mo in payments then stick to that as the minimum. Of course, pay more when possible, but having a set number each month will force you to be consistent.
4. Pick an approach
There are (generally) 2 ways to repay debt. Of course, there are variations that cut the middle, but broadly speaking you’ll want to take 1 of these 2 approaches. I’ve outlined them in detail in another post, which you can find here. But, as a brief summary. The first is is the snowball approach. This is when you take the card with the lowest balance and prioritize payments on it until it’s paid off. It plays on the psychological effect of small wins. It’ll feel better to have a card paid off entirely than a small chunk of the big card. The alternative method is the avalanche approach. This is done by starting with the card with the largest balance. It plays into the financial benefit of counteracting compound interest as much as possible. By paying down the largest balance first you’ll pay less interest in the long run.
If you don’t have much experience paying off debt you’ll want to do the snowball method. Despite it meaning you pay a bit more in the long run, it will make you more likely to actually stay motivated in paying off the debt.
5. Start paying
Pretty self-explanatory, but start making payments. To make it as easy as possible set up auto payments for the amount you budgeted. This will help force you to stick to your goal, and create a positive habit with almost no effort. You won’t have the ability to spend money before you pay off debt or skimp on payments. It forces you to get creative in funding payments when you do lose track of the goal at hand.
6. Continuously look for ways to increase payments
The goal is to get out of debt as fast as possible. Credit card debt is the worst kind of debt. Interest rates are exorbitant. It damages your credit score which can make it impossible to get loans or make them extremely expensive. There’s no real tax/financial benefit to holding credit card debt. That’s why you’ll want to be on the search for things that can expedite your debt repayment timeline. Maybe this is cutting back on spending in other areas. Maybe it’s getting a new no-interest card. Maybe it’s picking up another job or side hustle to make extra payments. Every smidge counts though. An extra $5 a month can literally take a repayment timeline down by months.
The best time to get started on these steps was yesterday, but the second-best time is now. Financial implications aside, it’s very hard to be the best version of yourself without financial security, and that starts with a debt-free credit card. Like anything in life these steps are easier said than done, but I promise you they work when you stay committed to them.
