Take Control of Your Credit Card Debt, Step by Step
Credit card debt can feel overwhelming, but there are strategies you can use to take control of it. High interest rates, exceeding 20%, make it incredibly difficult to make headway on paying off balances. If you’re making minimum payments, most go towards covering interest charges rather than making a dent in the principal amount owed, and the debt snowballs as interest accumulates faster than you’re able to pay.
It’s important to shift your mindset when it comes to debt. Stop thinking of it as normal or acceptable – credit card debt has serious financial consequences. Don’t fall for the entitlement myth that you “deserve” luxuries even if you have to go into debt for it. Tune out marketing from banks and credit card companies aimed at keeping you trapped in debt. Envision how goals like buying a home or retiring could become reality without debt holding you back.
Step 1: Create a Budget Focused on Debt Repayment
The first step is to gain control through budgeting. Make a comprehensive list of all your income sources and necessary expenses like housing, utilities, transportation, and food. Look closely at discretionary spending categories like dining out, entertainment, unnecessary subscriptions, cable TV, and free-form shopping. Identify areas where you can realistically cut back in order to allocate maximum funds towards credit card debt repayment beyond just making minimum payments.
Having a clear budget tailored specifically to debt repayment will allow you to see exactly how much money you can put toward credit cards each month. Every dollar counts when it comes to tackling debt.
Step 2: Employ the Avalanche or Snowball Method
When it comes to paying off credit cards efficiently, two popular methods are the avalanche and snowball methods.
The debt avalanche method involves paying off debts with the highest interest rates first. Continue making minimum credit card payments on the other debts, but put any extra funds towards the card with the highest interest rate. This allows you to reduce the overall interest paid over time.
The debt snowball method takes a different approach. With this method, you prioritize paying off your smallest debt balances first while making minimum credit card payments on larger debts. Once the smallest debt is paid off, you roll the money that was going towards it into the next smallest debt. This creates a snowball effect and helps build motivation.
Choose the method that best suits your financial personality. The avalanche method is more financially optimal, saving on interest costs. However, the snowball method provides more quick wins and a sense of progress. Regardless of which option you select, it’s helpful to keep a record of your progress visible to keep you motivated and focused.
Step 3: Negotiate with Your Lenders
Contact your credit card companies and negotiate politely for lower interest rates. Highlight any positive financial changes you’ve made, and provide competing offers from other companies to motivate them to match or beat the rates. This can potentially save you thousands in interest, which you can redirect towards knocking down the principal balances.
One tactic I’ve used is to tell them that I need to close out all but two of credit cards and I would like theirs to be one that I continue to use. Even if they only drop the rate by one percent, if they all do it, the result can be beneficial.
Step 4: Transfer Balances to Lower Interest Cards
Balance transfer credit cards allow you to consolidate debt onto a single card, often at a very low introductory interest rate, sometimes even zero percent. Compare different offers, taking into account fees and length of the promotional rate offer, to find the best deal. Initiate the transfers up to the credit limit and avoid unnecessary spending during the intro period. Making consistent payments at the lower rate will accelerate your payoff.
You can combine this with the Debt Avalanche method and focus on paying off credit card balances with higher interest rates before getting aggressive with the promotional card.
Be sure to read the credit card statement or credit card disclosure because many of these promotional offers have fine print that states that you will lose the promotional rate if a payment is made late. Also, any charges made on that card, after the promotional transfer, may not be included in the lower rate.
Step 5: Consider Debt Consolidation
If you have overwhelming balances across multiple credit cards, debt consolidation could provide some relief. This involves combining all your debts into one new loan or balance transfer card with lower interest. Consolidating makes managing payments easier, but be sure to assess the terms carefully first.
A debt consolidation can be a personal loan from a local bank or credit union, or it can be combined with a rate-reduction refinance of a home mortgage. Alternatively, you could get a HELOC (home equity line of credit) if you don’t want to refinance your current mortgage.
Another option for debt consolidation is the use of a car loan. If you have a vehicle with no debt (or minimal debt) you may find that you can get a better interest rate using it as collateral.
Of course, the terms of any debt consolidation will be largely dependent on your credit score. Lenders review your credit score to determine the likelihood of you making payments on time. If you’ve had trouble making your monthly payments on time in the past, you may want to consider setting up automatic payments. In fact, some lenders will even offer you a slightly better interest rate if you set up your account with automatic payments (not to mention also avoiding late payment fees).
Step 6: Explore Alternatives If Needed
The Average Daily Balance Method:
Keep in mind that the actual amount of interest you pay is based on the calculation of the interest rate AND the average daily balance. We may not be able to do anything about the high interest rates associated with credit cards if the credit card issuer won’t negotiate but we do have some control over the second part of that equation: The average daily balance.
Thus, if you were to make a larger than normal payment, even if you had to use the credit card to access those funds for other purposes, you would drive down the principal balance. Even if that was for a short time, it changes the average daily balance that is used in the calculation.
Here’s an example: Let’s say the minimum required payment is $180. Now, let’s assume you have $1,000 from your paycheck that you can apply against this credit card but the minimum is really all you can afford to pay. During the course of the month, if you were to use that credit card to pay your other obligations (assuming they take credit card payments), you would have effectively reduced the average daily balance that the interest is calculated against.
Another way to do this is to make multiple payments to your credit cards throughout the month. Even if you have to use those funds, by re-using the credit card, you are reducing the average daily balance.
Seek Help
If you need additional help, seek guidance from a nonprofit credit counseling agency that can negotiate with creditors on your behalf. Be very careful with whom you seek advice from. There are a lot of companies that claim that will negotiate with your credit card issuers to get a reduced payoff but the net result is that it will ruin your credit. Options like debt settlement or bankruptcy should only be considered as a last resort due to negative credit impacts and other consequences.
If you can only afford minimum payments for now, make sure you adhere to a strict budget to avoid any unnecessary spending until the cards are paid off. Put your credit cards away and just use your debit card.
Stay Motivated Throughout Your Debt Repayment Journey
No matter which strategy or combination of strategies you decide to implement, remember that every step forward makes progress, even if it feels painfully slow at first. Maintain focus on the freedom and peace of mind that await you when you finally eliminate your credit card debt. With diligence and the right techniques, you can take control of your debt and pave the path to financial stability.
