Few sources of stress are as hard to deal with on a daily basis as debt. A shortage of cash on a day-to-day basis is bad enough, but when you have the additional burden of thousands of dollars in credit card debt, things can seem hopeless.
You probably only make the minimum payments, which cover the interest accumulating every month and usually not much more. And if you’re still relying on credit cards for living expenses, the balances you owe just keep going up.
In addition to lowering your credit score and affecting your financial stability, credit card debt takes a toll on your physical, mental, and emotional health. It’s also a leading source of problems for couples, especially when one partner is more proactive about getting a handle on the family finances.
With some discipline, a smart payoff plan, and consistency, you can take control over your situation and start making real progress on your credit card debt.
Stop Creating More Debt
It sounds obvious, and it’s easier said than done, but this is so important. You can’t keep racking up new credit card debt if you ever want to get out from under it.
Create a budget that involves spending less than you earn. A big part of it is eliminating unnecessary expenses (for many, eating out instead of cooking at home is the single greatest waste of money). And carry around cash. People are more willing to spend more when they’re putting it on a card rather than forking over the cash.
Try to Lower Your Interest Rates
If you got your credit cards with poor or average credit, you probably have really high interest rates even over 20 percent. Sometimes, creditors lower your interest rate if you ask. Yes, it can be as simple as calling and asking for a reduction. The worst that can happen is they say no.
This is more likely to happen if you’ve been a customer for a while and have a solid history of making payments on time (especially payments over the minimum). If you’ve improved your credit score since opening the line of credit, point that out.
Choose One of Two Payoff Strategies
There are two basic strategies to paying off credit card debt: tackling cards in descending order of how high the interest rate is, or going through them in ascending order based on how low the balance is.
From a financial standpoint, the first approach is the smartest. The higher the interest rate, the more new debt you accumulate each month. So, by paying off the card with the highest rate first, you spare yourself from the most new debt. Using this strategy, make only the minimum payments on all but your highest-interest card. Then, pay as much as you can over the minimum on the highest-rate card. When it’s paid off, focus on the next card with the highest rate.
From a psychological perspective, the second approach can be great, even if it’s not as cost-effective. This strategy lets you knock off individual debts more quickly, which feels good and lets you enjoy the motivation that comes from visible progress. Pay only the minimum on each card every month except for your lowest-balance card. Pay as much as you can over the minimum on that card until it’s paid off, then move on to the next lowest balance. Once you pay off a card, add its minimum payment to your payments on the next card. This creates a snowball effect of paying things off faster.
Consider Balance Transfers
Some credit cards offer limited-time no- or low-interest balance transfers to attract new customers. They let you move your debt from one card onto theirs and pay no interest on the balance for a specified time (often 12 months). This can be an effective way to make faster progress paying off your credit card debt.
There are a few things to keep in mind, though. First, it can be a serious pitfall if you don’t have self-control. You’re opening up more credit, and if you use it, you dig yourself into a deeper hole of debt. Once you transfer the balance off a high-interest card, you can’t start using that card again.
Also, there are usually transfer fees. Typically, they’re a percentage of the amount you transfer, but some are flat fees. Do the math to determine whether your savings during the interest-free period are greater than the cost of the transfer.
Consider Smaller, More Frequent Payments
Sometimes, it’s tough to make a large monthly payment. It might be more painless to make smaller weekly or bi-weekly payments than to make one bigger one, especially if you get paid weekly or bi-weekly.
For example, if you get paid twice per month, pay $25 on the credit card you’re concentrating on each time you get paid instead of paying $40 out of your second paycheck. It could prove more manageable, and you’re even paying the card off faster and saving more on interest.
Consider Shifting Some Due Dates
This goes hand-in-hand with the above. It’s difficult to make all your payments—including one over the minimum—if you owe too much at one time. If all your credit card payments come due at the same time, and especially if it’s around the same time as rent, your car payment, and/or utility bills, it makes things harder.
Most creditors and utility companies will change your monthly due date if you just ask. Spread your costs out over the month so payments are more manageable. This also helps with budgeting, especially if you make the common mistake of spending more freely on non-essentials early in the month, before you have to start making payments.
Pay Your Bills on Time
It has to be said. Late fees slow down your payoff and are a complete waste of money. They damage your credit score, too. And the lower your credit score, the less likely you are to negotiate lower interest rates or qualify for potentially helpful options like interest-free balance transfers.
If possible, set up automatic payments online, at least for the cards you’re only paying the minimum on. Then pay as much as you can on the priority card for the month.