If you're looking for a way to get out of your credit card debt, you've come to the right place. Credit card debt can feel like an endless battle but with the right strategies, you will be able to be credit card debt free.
We've created this guide to show you exactly how you can finally take control of your credit card debt and pay it all off sooner rather than later.
Here are 10 effective steps you can take to pay off your credit card debt and actually stay debt free.
Let's get started.
Assess Your Financial Situation
First off you'll need to understand your current financial situation. To do this, you need to make a list of the following:
- All your debts, their minimum monthly payments, interest rates and fees (eg. money you've borrowed, credit card debt, mortgage, auto loan debt)
- Your monthly income (eg. salary, investment returns, government benefits)
- Your monthly expenses (eg. food, transportation, online subscriptions, bills)
Once you've listed down all of your monthly financial commitments, you'll be able to see whether or not you're spending excessively on areas where you shouldn't be and determine which areas require adjusting.
The goal of your new budget is to ensure that you have enough money for your bills, basic cost of living and minimum credit card payments. When you have these sorted out, you'll be able to identify your excess money and unnecessary expenses that can be used to pay off your debts instead. You'll also be able to determine which debts have the highest and lowest interest rates to start planning your credit card repayment plan.
Pay More Than The Minimum Payment
When you make your minimum card payments, you're covering interest charges and your principal only. Paying off more than the minimum payment towards your credit card debt will help you pay off your debt faster and even save you money on your card's interest charges.
However, when you pay more than the minimum payment, you'll be paying off more of your principal balance. This will reduce the overall interest incurred from your loan and also reduce your debt as a whole. Doing this will also improve your credit score in a timely manner.
To perform this method in the most efficient manner, we recommend using the debt avalanche method or the debt snowball method.
Debt Avalanche Method
The debt avalanche method focuses on paying off the credit card debt with the biggest interest rate first. This credit card is costing you the most money so paying it off first will help you save money on it's interest charges. By doing this you'll also also be able to reduce the overall amount of debt that you owe faster.
The avalanche method is simple and consists of the following steps:
- Sort the list of your credit card debts by interest rate.
- Pay the minimum required on all your credit cards, except for the one with the biggest interest rate.
- Put as much money as you can towards the credit card with the most interest rate every month.
- Once it's paid off, move on to the next card on your list and repeat the process.
- Keep doing this until all your credit card debt is paid off!
Debt Snowball Method
If quick wins are a big motivator, you should try out the debt snowball method instead of the debt avalanche method. With the debt snowball method you'll be overlooking interest rates completely and only be focusing on paying off the credit card with the lowest remaining balance first.
When you adopt this method, you'll be able to pay off smaller debts in a jiffy!
Here's how to perform the debt snowball method:
- Make minimum payments on all your credit cards except for the one with the least balance.
- Put as much money as you can towards the credit card with the smallest balance each month.
- Once you've paid off the credit card with the least highest balance, move on to the next card on your list.
- The goal's to keep doing this until you've paid off all your credit card debt.
Debt Consolidation Strategy
Debt consolidation is a useful method that involves combining your multiple debts into one single loan with a lower interest rate. By doing this it'll be easier for you to manage all your debts and save money in interest fees since you'll only have to make one payment every month. This is a great alternative to checking your calendar multiple times to find out when your next payment is due.
There are a few things that aren't as rosy when it comes to debt consolidation, however. For example, if you ever need to extend your loan's repayment period, in the long run, you may end up paying more than what you originally owe. Debt consolidation will also involve application fees, origination fees, late payment fees and closing costs, so be sure to compare different plans out there. Also, to qualify for debt consolidations with better interest rates, you must generally have a good credit score of 650 or higher.
With this in mind, if you do have a good credit score and you're able to consolidate all your debt into a single loan with a better interest rate, you'll and save money in the long run and simplify your entire repayment plan!
Balance Transfer Credit Card
Balance transfer credit cards are a debt consolidation tool that will allow you to transfer all your credit card balances iinto one balance transfer credit card with lower interest rates. These cards normally have an interest free promotional period when you're a new sign up.
Let's look at the following case study of Dave who has three credit cards with the following credit card balances and interest rates to understand it better. Dave has:
- A credit card with 17.77% APR and $5000 debt
- A credit card with 22.64% APR and $3000 debt
- A credit card with 23.91% APR and $2000 debt
Dave wants to pay off his credit card debt and is considering using a balance transfer credit card to help him to do just that. He finds a balance transfer credit card with a 0% introductory APR for 15 months and a 3% balance transfer fee. He goes ahead and transfer the balances from all of his credit cards onto the balance transfer credit card.
Here's how his credit card debt would be affected by the balance transfer:
- Balance transfer fee: 3% of the total transferred balance (3% of $10000) = $300
- His new balance: $10000 – $300 = $9700
- Interest savings: $5000 x (17.77% – 0%) + $3000 x (22.64% – 0%) + $2000 x (23.91% – 0%) = $1116.22
By transferring his balances to the balance transfer credit card, he'll save $1116.22 on interest charges over the next 15 months and will have only one monthly payment to make, which is much more manageable.
It's important to note that after the 15 months promotional period the regular interest rate will be applied. This means Dave will have to make sure he's paid off his debt before the promotional period ends to avoid paying interest charges.
This is how balance transfer credit cards will help consolidate your debt.
Debt Management Plans
Another option you to consider if you're struggling to make minimum monthly payments is a debt management plan, or, DMP. Debt Management Plans are offered by credit counselling agencies. It's a good way to get your debts organized to pay them off over a set duration (usually 3 – 5 years) with the goal of becoming debt-free.
How it works is that a credit counseling agency will create a financial budget with you. They'll then negotiate with your current creditors to lower your existing interest rates and monthly payments. You then make one monthly payment to the credit counseling agency, which in turn pays your creditors.
Doing this can help to lower your monthly payments and make it more manageable to pay off all your credit card debts.
It's important to note that DMPs can have a negative impact on the credit score initially because they involve negotiating with creditors for lower payments and interest rates. This can be reported to credit bureaus as “included in a debt management plan” or “credit counseling” which can negatively impact credit scores. Additionally, DMPs may also lead to late or missed payments, causing further negative impact to credit scores.
Also, not all creditors are willing to participate in a DMP. So, it's important to do your own research and see if it's the right option for you.
However, as long as you stay on top of your DMP and make all your payments on time, your credit scofe will improve and you will be able to get our of debt faster.
Debt Settlement
Debt settlement is an option to can consider if you're struggling to pay off your credit card debts.
To start the process of debt settlement you have to have all your credit card statements and information. Then, you'll need to contact a debt settlement company or a credit counsellor. They'll help you negotiate new terms with your creditors to reduce the amount of debt that you owe.
Once they've reached a settlement, you'll have to pay the agreed upon lump-sum amount to your creditors in full. Keep in mind that this process can take some time and it's important to be prepared for the potential negative impact on credit score.
Debt settlements can significantly reduce the amount of credit card debt that you owe and make it much easier for you to pay off your debts and get back on track financially.
Debt settlements can even help improve your credit score by showing that you're being pro-active in paying off your debts. This is because when a debt is settled, it's reported as “paid in full” or “settled” rather than “charged off” or “defaulted” to your credit bureaus. This can also have a positive impact on your credit score!
However, it's important to take note that one of the cons of debt settlement is that it can have a negative impact on your credit score temporarily in the beginning, similar to debt management plans. Additionally, debt settlement companies may charge high fees and it could take awhile to see results due to all the back and forth.
Debt Forgiveness
Debt forgiveness is when a your lender agrees to forgive or cancel all or part of the debt that you owe them. You'll no longer have to pay back the full amount of money that you borrowed. It's important to note that this process can be difficult and it may not always be an option, depending on your situation.
While this is definitely the ideal outcome when you're drowning in debt, it doesn't always happen, as you can imagine, creditors aren't always easy to negotiate with. However, if you're in overwhelming credit card debt, we believe that no stone should be unturned in the battle to fight your way out of it.
Take Control Of Your Spending Habits
If you're trying to pay off your credit card debt, taking control of your spending habits is extremely crucial. Seriously, it's like trying to fill a leaky bucket – if you don't stop the leaks, all the water you pour in will just leak out again.
If you aren't careful with your spending, you'll end up racking up more debt – even as you're trying to pay it off. And that's just going to make it even harder to get out of debt and even lead to more serious consequences such as lawsuits from your creditors and worse.
So if you're serious about paying off your credit card debt, you need to take control of your spending habits. That means creating a budget, setting limits for yourself, and sticking to them. It might be hard at first but trust me, it's worth it.
Here are some tips to take control of your spending habits:
- Track your spending – Keep track of your spending for at least a month to understand where your money is going. There are many apps that you can use to do this easily now such as Goodbudget: Budget & Finance and Wallet: Budget Expense Tracker. Once you've got a good idea on where your money is going, you can make adjustments accordingly.
- Prioritize your expenses – Only spend money on expenses that are important and you need to get by every month.
- Avoid impulse buying – Resist the urge to buy things on a whim and make sure you give yourself time to think about whether you really need something that you want to buy.
- Tip: You can try out the 4 week rule to help with this. The 4 week rule basically means taking 4 weeks to decide if you need an item before actually buying it. Most of the time, when it comes to impulse buys, you'll change your mind if you don't really need it!
- Use cash – Using cash instead of credit cards will help you avoid spending money that you don't have! You'll reach for your credit cards less when you're only relying on cash and are determined to stick to your budget.
- Don't go shopping when you're emotional – Don't shop when you're feeling down. Shopping when you're emotional can lead to developing bad spending habits that will cause you more harm in the long run.
- Seek help if needed – If it's really difficult for you to control your spending, consider getting help from a financial advisor.
Paying Off Your Credit Card Debts
Paying off your credit card debts is a challenging but extremely rewarding step to take. If you follow the steps we've listed above, you'll be able to be credit card debt free before you know it!
Aidan has been writing about personal finance for over 6 years. Prior to this, he worked as a Corporate Finance Analyst where he specialized in Due Diligence, Company Valuations and more. He is a CFA charterholder.
