How to Get Out of Credit Card Debt the Right Way, According to Financial Planners
Don't Let Credit Card Debt Ruin Your Financial Future
Credit card debt is nothing to be ashamed of — over 60% of Americans carry some form of credit card debt month over month — but the high-interest debt can derail your financial goals if you’re not careful.
It’s easy to swipe plastic without really thinking much about where that money is coming from (and it was designed to be that way) but if you’ve found yourself in a pile of credit card debt, it might be time to put down the plastic and take a look at how you can adjust your spending and debt repayment plan.
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If you want to handle your credit card debt once and for all, there’s a very clear way to do it, and it goes beyond just making minimum payments and hoping for the best. Below, we spoke to certified personal finance experts to get their step-by-step tips on how to work your way out of debt and the additional steps you might need to take if you feel like you might be in over your head:
Don’t Skip Your Essentials
“The number one priority is to take care of necessities (shelter, food, utilities). That includes paying the minimum on any secured debts, like a house (mortgage payment) or car (vehicle loan),” says Austin Kilgore, Analyst with the Achieve Center for Consumer Insights. “Between the two, pay the housing expense first. If you miss payments there, you risk losing your home and a place to live.”
Understand Your Precise Debt Numbers
It can be tempting to bury your herd in the sand when you’re not exactly where you want to be financially — but taking control and accountability is the only way to move forward and start working your way out of debt once and for all. According to Bobbi Rebell, CFP and Personal Finance Expert, you should start with an information download. Rebell suggests going through all of your credit card statements and listing out exactly how much debt you carry on each card and what the interest rate is that you’re paying on the debt.
Make the Minimum Payments on Everything
Rebell urges those trying to get out of debt to always make the minimum payments on every single card, no matter what. You’ll likely end up focusing more on one card at a time (more on that below) but ignoring a credit card statement will impact your credit score and can end up causing even more late payment fees on top of the already high interest rate you’re paying on the debt.
Consider Focusing on High Interest First
Only then does Kilgore suggest working on paying down credit card and other debt — and possibly starting with your credit cards with the highest interest rate. “Paying off a card carrying a 20% interest rate (today’s average rate is over 20%) is effectively a 20% return — better than almost any other investment. Plus, you’ll then have that money to do something more productive with,” he explains.
Figure out if there is any way you can pay down the debt on your own — using a good budget, and either the avalanche or snowball strategy. To do this, you must determine if you can pay the minimum on all your debts and then have additional money available to use strategically with the avalanche or snowball method.
- Snowball Method: According to Rebell, the snowball method involves paying off the smallest amount first to get a sense of accomplishment and motivation and then move on to the next smallest one. This can be a smart option if you find you lack the determination to tackle multiple debts and need to see the needle moving in order to keep going.
- Avalanche Method: The avalanche method will save you money in the long run — but it can be harder to keep motivated if your higher interest debts are some of your bigger debt loads. This method is basically starting with the credit card or debt that charges the highest interest rate and is costing you the most and paying that down before moving onto the next-highest interest rate.
Be Communicative With Your Credit Card Issuer
“You can also try contacting your card issuer and asking for help,” explains Kilgore. “They may be able to change credit terms, set up payment plans, defer payments or waive interest (not eliminate debt).” It doesn’t hurt to call and ask — the worst they can say is no.
Take Advantage of Reminders and Accountability
Rebell suggests creating a system of reminders in your calendar, or using an app so you can stay consistent. “If you are comfortable, consider getting an accountability buddy to help you stay on track and to celebrate when the debt is finally paid off,” he adds.
Avoid New Debt Like the Plague
Rebell strongly suggests avoiding going into new debt while trying to pay off your credit cards. It’s not going to be easy — but cutting back on your overall expenses is the only way to work your way out of the hole. This might mean deleting delivery apps off your phone, doing at-home date nights, or putting off buying unnecessary clothes, concert tickets, flights, and any other non-essential spending. He also urges those trying to get out of debt to switch to a cash-only budget to pay for purchases, which will make you think twice versus the ease of swiping a card.
If You’re Not Able to Keep Up With Debt From Your Income and Budget Alone…
If the aforementioned steps do not allow you to pay off debt on your own, it’s time to get outside help, which could come in the form of one of the following:
Consider Finding New Streams of Income
This isn’t possible for everyone, but for some, it is. “Many people have taken well-paying part-time jobs or developed a side gig (anything from pet sitting to a creative business) to generate more money in order to pay off their debt and/or make ends meet,” explains Kilgore.
Look Into a Personal Loan
“A personal loan may offer a lower rate than your credit cards, depending on what you can qualify for (lower rates go to those with higher credit scores),” says Kilgore. “You then can use the funds from the personal loan to pay off the high-interest debt and be left with just one loan at the lower rate.”
Consider a Home Equity Line of Credit
“Some homeowners who are struggling with credit card debt are also sitting on a wealth of home equity,” says Kilgore. “If they can qualify, they may be able to access that equity and use the funds to pay off the debt.”
Shop Around for a Balance Transfer
These credit cards, with a low or zero interest rate, are usually available only to those with very good credit. According to Kilgore, the low promotional interest rate will expire, usually in 6-12 months (although there are cards with promotional periods as long as 21 months). “You MUST be able to pay off the balance in full before then,” points out Kilgore, noting that if you don’t, fees can be just as high. Carefully do the math to be sure that the fees won’t outweigh the savings from the transfer.
Use a Debt Settlement Company
“This can be an option for some people in some specific situations: when your income is such that you are having a hard time making even minimum payments, likely as a result of some type of major financial hardship (such as a job loss, major medical expenses, death of a loved one, divorce),” says Kilgore. “Debt settlement companies work on a consumer’s behalf to lower principal balances.”
Create a Debt Management Plan
Debt management plans are provided by credit counseling firms, says Kilgore. Through arrangements they have with credit card companies, they can offer a slightly lower interest rate on a credit card but consumers also pay a monthly fee.
File for Bankruptcy
This is generally considered a last resort, as it negatively impacts credit rating for 7-10 years. According to Kilgore, Chapter 7 bankruptcy does eliminate most consumer debt — although this type of filing is hard to obtain and can be expensive. Chapter 13 bankruptcy, on the other hand, requires a debt repayment plan.
“This filing is available to consumers whose state of residence determines, through its means test, to have sufficient income to repay some determined amount of the debt,” explains Kilgore.”Note that monthly payment amounts in a Chapter 13 filing are generally comparable to payments in debt settlement programs.”
In addition, Kilgore points out that bankruptcy filings are public, so anyone who wants to access the information can find it. It’s also worth noting that non-exempt assets (which could include a house or car) can be liquidated as part of a bankruptcy.
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