Steps to Eliminate Credit Card Debt
Follow these steps to stop drowning in debt
Credit card debt can wreak serious havoc on your finances if carrying a balance means paying high interest or not being able to achieve your financial goals. The interest rate on a credit card balance is usually between 10-30% APR, and such high interest rates can make it difficult to pay down your debt -- especially if you're only making the minimum payment. Just making minimum payments can make even the smallest balance take over a decade to pay off and thousands of dollars in finance charges in the process.
Fortunately, you can get out of debt, if you have a plan in place and commit to following it. And not only can you get out of debt and potentially save money on interest, but you could improve your credit score in the process. Ready to wipe out your credit card debt? Here's how to do it.
- Take an Inventory of Your Credit Cards: First things first, make a list of all your credit cards that you're carrying a balance on. You’ll want to include the outstanding balance amount, interest rate and minimum payment. Your monthly statement should be able to give you all the details.
- Organize Your Credit Cards by Interest Rate: Once you've made a list of the cards you owe debt to, rank them so that the credit card with the highest interest rate is at the top, and the one with the lowest rate is at the bottom. Alternately, you could rank your credit cards by balance, going from highest to lowest.
- Total Up Your Minimum Payments: Next, add up all the monthly minimums you're paying to each card. The total monthly minimum is your absolute lowest monthly payment, and if you want to get out of debt, the goal is to pay more than the minimum every month. To do that, take a look at your budget and see how much extra you can come up with each month in addition to the minimum. Whether it’s an extra $20 a month or $100, every little bit helps.
- Start Your Debt Snowball: The snowball method can be an effective way to eliminate credit card debt. It works like this: as your credit card payments come due, you pay the minimum on each card except for the one at the very top of your list. Remember, that one has the highest interest rate and it costing you the most money by maintaining a balance. For this one, you apply any extra money you have in your budget to the monthly payment.
- Snowball Your Payments Each Time You Pay a Card Off: The idea behind the snowball method is that you increase your biggest payment each time you pay a card off. So if you were paying $300 to your top card and you zero out that balance, you add that $300 to the minimum payment for the next card on your list. You just keep rolling the payment over until you get down to one card, which should have a single large payment until all your debts are gone.
Why The Snowball Method Works for Getting Out of Debt
To understand why this relatively simple process can be effective in paying off debt, it’s important to understand how minimum payments work. Minimum payments are calculated as a percentage of the outstanding balance. That means as your card balance slowly decreases, so does your minimum payment. This is why it can take ten years or more to pay off even a small balance if you only make the minimum payment each month.
With this system, your monthly payment more or less remains constant regardless of your balance. So each month your required minimum payment may go down, but you’re ignoring that, and by doing so you apply more and more money to your principal as time goes on, thus accelerating your debt repayment.
Starting with the highest interest rate ensures you’re targeting the most costly credit up front to minimize the total amount of interest you pay.
A Few More Tips to Get Out of Debt
While this payment strategy will help you get out of debt, you can potentially make things go even faster. First, call your credit card company and ask about getting your interest rate lowered. This won’t always work, but if you've been on time with your payments regularly and have a decent credit score, they may be willing to work with you. It doesn’t hurt to try and it doesn’t cost anything. The worst they can do is say no.
Don’t forget about balance transfers either. This just means transferring your balance to another credit card with a lower interest rate. It isn’t always easy to get credit and the balance transfer deal may not be the best, but if you can find a way to transfer the balance from a card with a 25% APR to a card with an 18% APR, that’s still something. There are also cards that offer 0% introductory rates for balance transfers, but you'll need good credit to qualify. Also, be aware that you may have to pay a balance transfer fee.
Finally, keep in mind that this process still takes time. There's no magic method of paying off debt, so realize that it can still take months or even a few years to become completely debt-free. But by putting a process in place for paying off your cards, you're taking the right steps to get out of debt as soon as possible.