No matter how you slice it, getting out of credit card debt is a sound financial strategy. In this guide, we’ll show you 7 crucial steps to get out of credit card debt.
Paying off revolving debt is one of the fastest ways you can improve your credit score and it’ll save you $100’s, if not $1,000’s, in interest charges. Manage it as soon as you can before it gets out of control.
1. Get into the right mindset
Making changes in your financial life to get out of credit card debt can be a little intimidating. You even may associate the effort required to get out of debt with sacrifice and pain. But change you must, and getting your mind ready to make the necessary adjustments will ease the transition.
Shifting your mindset will go a long way towards helping you stay focused and consistent in your efforts. It’ll help you avoid procrastination and keep you engaged with your goal.
You can start with the following:
» Focus on the fact that you’ll be in control of your finances
Remind yourself who stands to benefit from your getting out of debt. Think of the impact it’ll have on you, and on those around you. You’ll be in command of your financial life and in control of your debt.
» Visualize your enjoyment of being debt-free
Achieving this important goal will transform your financial well-being. Your sense of financial security will grow. It’ll feel good being debt-free.
» Believe and trust that you’ll accomplish your goal
Getting rid of your debt will require consistency and sticking to your plan. It’s more like a long-distance run than a sprint. Focus on the belief that you can pay down your debt to drive you forward.
» Start today
Decide the two steps you’ll take after you read through this guide, and act today. Even small actions grow into larger steps if you’re committed.
Eliminating credit card debt doesn’t have to be a lonely journey. Bring your significant other onboard, especially if you got into credit card debt together. Communication ensures that you both understand and share the same goal.
2. Set milestones
Crushing credit card debt will be easier if you break it up into milestones. Milestones are smaller short-term goals which taken together help you reach a big, important goal.
With milestones, you achieve two things:
- You break up a large, difficult goal into smaller, more manageable pieces.
- You give yourself several “emotional wins” as you reach each milestone.
For example, if your goal is to pay off $9,000 in credit card debt in 18 months, you could set three milestones consisting of paying off $3,000 every 6 months.
Milestones should challenge you, but they also should be achievable. The right milestones will help you keep the momentum going as you start reducing your debt.
These milestone wins can help you stay motivated to squash debt and keep you engaged and consistent in your efforts.
3. Free up cash and make a budget
In order to repay debt, you need to adjust your spending and stretch your available dollars as much as you can. This is especially true when your expenses outpace your income.
Cutting back expenses can be tough and using the extra cash to pay off debt might seem wasteful. Don’t dwell on those thoughts. Acknowledge these feelings and move on. They won’t help you get out of debt. Instead, focus on how good it’ll feel to be debt-free and in control of your finances.
According to the Bureau of Labor Statistics, Americans spend more than 65% of their income on food, housing, transportation and entertainment. Focus on these categories first to find real savings in your budget.
Categorize your expenses as fixed or variable
Start by putting together a list of all your expenses and categorize them into fixed or variable:
- Fixed expenses are those expenses which you have less discretion to reduce or eliminate, such as a car payment, insurance, utilities, mortgage or rent.
- Variable expenses, on the other hand, are those expenses you can control and modify more readily. This includes items such as groceries, entertainment or vacations, for example.
Now turn your attention to your variable expense list and review each item. Identify the non-essential expenses first. And for each of these, decide if you can do without the expense altogether, or whether you can do without it partially.
Examples of non-essential expenses that you should be targeting include:
- Vacations
- Eating out
- Luxury shopping
- Entertainment
If you can’t cut back a particular expense, then try reducing its cost with a cheaper alternative. Once you’re done with your non-essential expenses, review your essential ones.
When reviewing your essential expenses, focus on finding cheaper alternatives. For example, if you drive, is your car insurance as cheap as it could be? Could you save by switching providers? If you rent, could you move to a cheaper place when your lease is up?
Make a budget
Accomplishing any goal that involves money can be made easier if you make a budget. A budget will help you match your income with your spending in a given period of time to get to your goal. It’s a roadmap to guide your efforts and keep you on track.
Your budget is a tool to help you navigate your debt reduction journey. As such, it‘s very important that you put one together and follow it.
The key here is to make a realistic assessment to align your expenses with how much money you take in. And all of your expenses in a given month should be accounted for in your budget.
Your budget should include a “debt repayment” line, which doesn’t change month-to-month. Once you’ve cut your expenses and looked for ways to expand your income, you should have some extra cash. Set aside as much of it as you can to repay your debt.
» Further reading: Develop a debt repayment budget with our Shed Debt Faster guide.
If the amount you owe is such that you don’t think that a budget will help, you might want to consider additional options to cope with your debt, including credit counseling.
4. Set up a repayment plan with fixed amounts
Regardless of the payment strategy you choose, you’ll get results if you’re consistent. To that end, budget a fixed amount of cash each month to pay down your credit card debt. Even as your outstanding balances come down, stick with your fixed amount each month.
As you start your repayment plan, avoid new purchases with the credit cards you’re trying to pay off. If you’re carrying a balance, you’ve likely lost your grace period. So, even if you pay off those purchases each month, they’ll accrue interest.
Which cards do you pay off first?
Two strategies you can follow to pay off debt over time are the debt snowball and the debt avalanche methods.
These payment strategies can be applied to any type of debt you have and are especially useful if you carry balances with more than one card.
The debt snowball approach
You’re using the snowball approach when you choose to focus on paying off the card with the lowest outstanding balance, regardless of interest rate. With this strategy, you make the minimum required monthly payments on all your debts, and any remaining cash is used to tackle the smallest balance first.
Then, you continue with this payment method until your smallest balance is paid off. After that, you move on to the next smallest balance and repeat the process with the remaining credit cards. If you carry balances with several cards, this method helps you pay off accounts faster.
The debt avalanche approach
If instead, you choose to focus on paying down the balance that carries the highest interest rate first, you’re using the debt avalanche method. You still pay the minimum on all the cards, but any remaining cash is earmarked to paying down the credit card with the highest interest rate first. Once that card is paid off, you move on to the card with the next highest interest rate.
Which method is better?
From a money-saving point of view, the debt avalanche method should save you more cash because you’re getting rid of the more expensive debt faster. Yet, the debt snowball approach is considered better by some.
That’s because the snowball approach can be powerful: the faster payoff “wins” you get from tackling smaller balances first carry an element of emotional gratification. And having that feeling of accomplishment might help you stay committed to your debt repayment plan and milestones.
If the prospect of saving more cash is more appealing to you than paying off debt faster, then go with the debt avalanche method. Choose whichever way keeps you pumped to pay off your debt.
5. Pay down debt as soon as you have the cash
Getting out of credit card debt is tough because it grows quickly once you start carrying a balance. If you don’t manage your balance, it can trap you. To see why, let’s review the reasons why credit card debt grows so quickly.
» Interest charges are difficult to avoid once you carry a balance. Any amount that you leave unpaid will accrue interest charges until it’s paid in full. Also, you’ll owe interest charges on new transactions even if you pay off those new transaction one month, but did not do so for balances accumulated the previous month.
» Your debt balance compounds daily. Typically, your card issuer will take your applicable annual percentage rate, divide it by 365 and charge you daily interest on your outstanding balance.
When calculating your interest charge for a given day, your issuer will increase your balance by your prior day’s interest. If you haven’t been paying your monthly balance in full, they’ll include new purchases too.
» High interest rates. Credit card debt is unsecured borrowing, so your lender only has your promise to repay them to get their money back. Since they always run the risk of non-payment, they charge high rates.
6. Make payments several times a month
Because of the negative effect of compounding and high interest rates, making smaller, frequent payments can help you tackle your balance faster. These amounts—even if small, will keep a portion of your balance from compounding and growing.
To get your repayment plan going, review your milestones and figure out the total amount you’ll need to pay each month. Your budget will help you come up with the amount you can pay. Then, tackle that amount with smaller payments as you get your funds.
Paying down your balance when you have the cash also removes the temptation to spend it on something that isn’t an essential expense. And it’ll help you stick to your debt repayment milestones.
One last thing to keep in mind with this multiple payment approach is to at least cover your minimum payment due. Any payments you make before your statement’s cut-off date won’t be applied to your minimum payment by your card issuer.
7. Refinance to repay your debt faster
Credit card debt is expensive even if your credit score is spotless. But you shouldn’t shy away from using credit cards or personal loans to get out of debt faster. That might sound contradictory, but it isn’t if you do it right.
You can pay down debt faster by refinancing expensive debt at lower rates and taking advantage of promotional APR offers. If you have good credit, consider 0% APR credit card balance transfers.
Balance transfers
Transferring high interest balances to a credit card with a zero promotional rate can help you get out of debt faster. During the promotional period, your transferred balance won’t incur interest charges.
The money you save by avoiding those charges can be used instead to tackle your outstanding balance and help you crush your debt faster.
Some balance transfer cards also come with a 0% APR promotional rate on purchases. While that sounds convenient, avoid new transactions with it. Using it can lead to higher debt and derail your debt repayment strategy.
How much to transfer
Once you’ve compared balance transfer offers and found the one you want, you’ll need to figure how much you’ll transfer with it. Here’s one simple approach you can follow:
- Take the number of months in your 0% APR promotional offer
- Subtract one from that number
- Figure out how much you can pay consistently every month towards debt repayment
- Multiply 2) by 3). This is the total amount you should be able to pay off by the time your promotional offer ends.
You subtract one in the second step above to cover any applicable balance transfer fee or as an extra payment cushion. If you end up using the payment cushion after your transfer, make sure you cover your minimum due that month to avoid potentially losing your promotional offer.
For example, if you can afford $100 per month towards debt repayment, and your new credit card has a 12-month 0% APR promotional offer, the transfer amount would work out as $100 x 11 or $1,100. Your actual transfer amount will depend on the credit limit you receive.
Stick with your monthly payment commitment, and you’ll have paid off your balance transfer by the end of the promotional period, saving you money.
If you want to transfer a larger amount of debt than the one you obtain by using the above approach, you can explore additional strategies by downloading our Shed Debt Faster guide.
To qualify for a balance transfer offer, you’ll need a good to excellent credit score.
» Related: You can compare balance transfer offers with this tool.
Personal loans
Personal loans are another debt-reduction tool that can save you money. They amortize or self-extinguish as you make your monthly payments. So, by the time the loan matures, you’ll have paid it off in full.
You may be able to get a more budget-friendly monthly payment and save on interest charges, depending on the interest rate and term for which you qualify.
» Personal loans require financial discipline. You’ll need to make consistent monthly payments. This can be good if you’re serious about reducing debt. Look back at your income history and make sure that you can afford the monthly payments before you commit to a loan.
» Personal loans typically range from 24 to 60 months. Some lenders may offer longer terms than that. Other conditions being the same, your monthly payment will tend to be smaller the longer your loan’s maturity, although rates for longer maturity loans will be higher on average.
» Further reading: You can learn more with our complete guide to personal loans.
Unlike balance transfers, you may qualify for a personal loan even if you credit score is less than perfect. In some cases, you can qualify with a credit score in the low 600’s. This calculator can help you decide if a loan to pay off credit card debt is right for you.
» Related: You can compare personal loans with this tool.
The bottom line
Credit card debt can quickly become a slippery slope and stretch your finances. Manage it early before it gets out of control:
- Put yourself in the right mindset
- Establish repayment milestones
- Cut expenses to free up cash and develop a budget
- Set up a repayment plan
- Pay as soon as you have the money
- Make payments several times a month, and
- Use refinancing if you qualify for lower rates
After you pay off your debt, you’ll want to stay debt-free. Build up an emergency fund and grow it in a high yield savings account to help you avoid going back into debt.
