Credit card debt is very easy to rack up quickly but can be difficult to get rid of. High amounts of credit card debt can lower the value of your financial portfolio, lower your credit score and make banking institutions take an extra look at you when asking for a loan. And this is on top of the high interest rates you have to make payments on per month, which makes it harder and harder to cut into your actual debt. On just $20,000 worth of credit card debt at 20% interest you can end up paying thousands of dollars per year in just interest! Because of this, many of your payments are only going straight to your interest payment and not into your the actual balance, just turning your credit card debt into a vicious circle. Here are 10 steps to help you get out of this vicious circle fast.
10 Steps to Paying off Credit Card Debt
Pay off Credit Card Debt Step #1 – How Much Debt Do You Have?
The first thing you absolutely need to know before you get into paying down your debts is to figure out exactly how much debt you currently owe. Find out the exact number of any debts you might have from your credit cards. This number may be shocking at first, but the more you work at and the more your debt goes down, the more you’ll look forward to seeing your progress at the end of each month. Once you clearly know exactly how much debt you have, you can start decreasing your debt.
Pay off Credit Card Debt Step #2 – Higher Interest First (Snowball method)
Once you know the amount of debt you have from all your various credit cards, it’s time to put them in order of the highest interest rates first and the lowest interest rates last. By paying the highest interest credit cards first and just working on the minimum debt payments for your other cards until the card you are focusing on is completely paid off, you could be saving thousands of dollars in interest in the long run. For more information on the snowball method, check out The Easiest Way to Get Out of Debt Fast.
Pay off Credit Card Debt Step #3 – Small Payments Add up (Snowflake Method)
While you’re working to pay off your credit card by paying down one card at a time, making extra small payments can definitely add up as well. We’re literally talking about $3.57 additions to your debt. Or $13.82 additions. Any small contribution that can be made, even if it’s just spare change in your pocket can really add up over the months it takes you to pay down your debt. The good thing about this method is that you won’t even miss the money you end up putting toward your debt, but you will start to see it add up over the course of just a few months. Found $5 on the ground? Put it on your card. If you just put it in your pocket/wallet or park it in the bank, you will end up spending it on something you can go without. If all you find is an extra $2.74 to put on your credit cards per day, that’s an extra $1000 per year taken off your debt!
Pay off Credit Card Debt Step #4 – Check Out Your Savings
Paying down debt can be hard and we all need a little boost from time to time to help us get going (or keep going). Do you have any extra savings you could put onto your credit cards to help the debt disappear faster? If you’re hesitant to use up your savings, consider this – every month you have to pay interest on your debt and if you used up your savings to pay it off, you could save so much money in interest rates and it would be much easier to rebuild your savings instead of having to fight with extra debt related fees. If this still makes you feel uncomfortable, consider simply putting in a portion of your savings toward your debt; this way, you still have enough to cover your bases if something should happen. For more information, check out Should You Save Money or Pay Off Debt? Another thing to consider is using some of your overdraft or line of credit to pay off your credit cards since the interest on those is typically much lower and therefore may be easier to pay off.
Pay off Credit Card Debt Step #5 – Cut up Your Credit Cards
If you aren’t comfortable cutting up your credit cards, the least you can is make them inaccessible so that you don’t end up using them. After working so hard to pay off your credit card debt, the worst thing you can do is be constantly racking up debt again. Hide your cards or put them in a block of ice so you at least have to wait for it to melt before you can use them again (this will give you time to consider if this is a good idea). Many of us end up paying our bills through our credit cards so this might not be an option for everyone, but don’t pay anything that isn’t absolutely necessary or transfer your payments from your chequing account instead until you get your debt under control.
Pay off Credit Card Debt Step #6 – Give Yourself a Budget
So how do you survive without your credit cards at your side? Give yourself a limited budget every week and make sure you carry this amount around in CASH. This way, when you run out of money, you’ll know that you can’t spend any more (we typically lose a sense of a spending cap with credit cards).
Pay off Credit Card Debt Step #7 – Get Another Stream of Income
One of the best ways to pay off any debt of any kind is to get more money flowing into it (this way you’ll pay your debt off faster and end up paying less for interest). A great way to do this is to get a second part time job or work from home (for more information, please see our Beginner’s Guide to Making Money on Ebay and How to Earn Extra Money Online). This doesn’t have to be permanent; you can always quit once you get ahead a little bit. It will be far easier to pay off credit card debt once your debt is already diminished. This way, you can either add extra money on to your debt by living extra frugal, or you can maintain your current lifestyle and still pay off your credit cards at a reasonable rate.
Pay off Credit Card Debt Step #8 – Call up Your Credit Card Companies
The interest on your credit cards may be too much for you to handle; you’d be surprised how many credit card companies will either lower your interest rates or transfer you to a lower interest credit card just for calling and asking. Many credit card companies have interest rates as high 20% or even 30% and this can typically be cut down to 10% at first, and even 5% with some persistence. Don’t be afraid to ask what their lowest rate available is and how you can be eligible for it. This one simple phone call can save you thousands of dollars in interest over the course of a few years.
Pay off Credit Card Debt Step #9 – Consolidation Loan
Getting a consolidation loan can certainly help those who have too many credit cards to manage and too much debt in total. This would mean that the bank would give you a loan for the amount of credit card that you have and you would use that money to pay off the debt and then make easy payments on your consolidation instead. This tends to work out well since the consolidation loan has a much lower interest rate than your credit cards and working on one debt can be easier to manage than multiple debts at multiple interest rates.
Pay off Credit Card Debt Step #10 – Bankruptcy
The last thing you might want to consider is bankruptcy although this is an absolute last resort. Filing for bankruptcy is a serious affair and will be on your financial records for up to 10 years (plus if you want to apply for loans or mortgages you are often asked if you have ever declared bankruptcy – even if it has been more than 10 years). If you want to start over and declare bankruptcy, your slate will be wiped clean but your credit score will suffer greatly. For more information on this, please read Pros and Cons of Declaring Bankruptcy.
The image used in this post is taken from Image: Michelle Meiklejohn / FreeDigitalPhotos.net
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