11 Proven Ways To Getting Out Of Credit Card Debt
Today I have a special guest post by my friend and fellow PF blogger, Rob Andersen, over at Mustard Seed Money. Enjoy!
I have encountered many people who believe that credit cards are evil. Even when I argue the benefits of credit cards, such as online protection online, extended warranties, and cash back rewards, I can never convince them. So now, I just stay quiet and nod. That’s because I’ve found that a majority of people do not know how to utilize credit cards correctly. According to the latest figures, the average millennial has more than $5,800 in debt. Inevitably, the conversation swings towards how much debt the person currently carries and whether I have a strategy to help them get out. So, I’ve put together eleven steps to help people get out of credit card debt.
1. Make the decision to stop going into debt.
It may sound obvious, but this is, by far, the hardest step. Deciding that you will no longer use credit cards to live beyond your means is difficult, especially when you face peer pressure to go out and have fun with your friends. While it may be difficult in the short-term, I can assure in the long-term, you will be much better off and grateful for making this decision.
2. Figure out exactly how much credit card debt you have.
When I hear, “I have around $2,000 in credit card debt”, I always ask for the exact amount. That’s because most times, people don’t actually know the true figure. Instead, they just estimate. In my experience, the estimates are usually way too low. Once you figure out your exact debt amount, you can determine your target number to pay down each month. Make sure in your debt figure that you include your interest rate on every card that you owe a balance on.
This information can also be easily retrieved by utilizing Personal Capital. This service aggregates all of your accounts to show your outstanding balance, credit card limit, as well as your interest rate.
3. Make a phone call to improve your credit card rates.
I’ve heard numerous stories of individuals who called their credit card company and politely asked if they would lower their credit card’s interest rate. Even if it’s only a single percentage point, that could make a great difference in saving you hundreds of dollars on your credit card bill each year.
4. Transfer your balance (proceed at your own risk).
Admittedly, this isn’t one of my preferred methods to paying off credit cards. But, if you can pay off your debt within 12-18 months, it may make sense to transfer your balance to a lower interest credit card. However, there is a catch. If you don’t pay off the balance within the introductory period, interest rates will sky rocket. Then you are in further debt. You also may be charged with a balance transfer fee. I have seen this strategy work with certain people who are incredibly disciplined. I have also seen the strategy epically fail with others. Be very careful if you choose to go down this road.
5. Take advantage of peer-to-peer lenders.
If you don’t think that you can pay off your credit card in a timely manner, you may consider borrowing money from a peer-to-peer lender such as LendingClub or Prosper. Both of these sites offer loans with fixed interest rates that are significantly lower than your credit card.
6. Choose your debt strategy.
There are two common strategies to paying off debt. The first is the Debt Avalanche, which encourages debtors to pay off the highest interest rate card first, while paying the minimum balances on your other cards. Buy paying off your highest interest rate first, you are able to pay off all of your debt faster.
The second strategy is the Debt Snowball. This strategy is built upon paying off your smallest balance first while also paying the minimum payment on the other credit card debt. While this strategy is not the fastest way to pay off debt, this strategy has been shown to be the most effective, as you receive a psychological boost every time you pay off a balance.
7. Track your expenses.
Create a budget to track all of your expenses. This will allow you to quickly cull through your expenses to determine if there is any fat in the budget to trim. Not going to the gym anymore? Or is your cable bill too high? These are two quick examples of expenses that can be easily cancelled or altered.
8. Make multiple payments a month.
Usually credit card companies charge interest on a daily basis. Therefore, the sooner you make a payment, the less interest that you will pay for that period. So let’s say your minimum payment is $1,000 at the end of the month and you have been paying $2,000 a month to pay it off faster. Instead of making one lump sum payment for the month of $2,000, make two payments for the month: $1,000 on the 15th and $1,000 on the 30th. This can make a significant difference down the road.
9. Make the most of that bonus.
If you receive extra cash for the month, celebrate by putting it towards paying off your credit card debt. You may not feel the benefits of that action immediately, but every dollar helps. Your debt will decrease faster, and you will be closer to attaining a better, debt-free lifestyle.
10. Find or create a support group.
When you are paying off your credit card debt, make sure you find someone that you can confide in and encourage you along the way. Paying off debt by yourself can be really tough. It helps to have someone to motivate you. Find someone or a group with whom you would feel comfortable sharing your success stories as well as failures along the way.
11. Set realistic goals and track your success.
If it took you five years to accumulate all of your debt, you can’t expect it to disappear in a month. Set realistic goals for yourself so that you can track your success along the way. Check in on your progress every month to ensure you’re on track. If you fall off track, don’t beat yourself up. Figure out which strategies work best to keep you on your course.
So readers, have you paid off your credit cards? Do you have any great success stories? Share your thoughts below.