Does your credit card debt have you feeling overwhelmed? It’s very easy to get into credit card debt but a bit of a challenge to get out of it.
According to research from NerdWallet, the average American household is carrying about $15,654 in credit card balances. The worst thing about this type of debt is that interest rates are much higher than other types of debts.
Plus, if you keep feeling tempted to overspend and only make the minimum payment, you can find yourself deeper in debt. If you owe several thousands on your credit cards, here is a 6 step process to work your way out of debt.
Step 1: Figure Out What You Owe
Credit card debt is easy to ignore until you max out your account or you get denied for new credit.
Before you get to this point (or even if you’re already there), start out on your road to recovery by being completely honest with yourself. This involves peeling back the band-aid and accessing your current situation with your credit card debt.
It’s crucial that you find out how much you owe, what your minimum payments are, and what your interest rate is for each card. Also, make a note if you are late or behind on any of your accounts.
You may also want to take an extra step and check your credit to see how your score has been affected by the debt.
Step 2: Stop Using Your Credit Cards
The next important step you need to take is to completely stop using your credit cards. If you want to pay them off, you will just defeat the purpose by continuing to use them each month.
I know this can be difficult to do at first, especially if you’ve been relying on credit cards for everyday expenses or for emergencies.
You may have to adjust your budget and cut some expenses in order to make the transition. You can also completely remove your credit cards from your wallet in order to avoid temptation. My husband and I exchanged our credit cards and hid them in a safe place from each other when we decided to take a break from using them and focus on tackling my husband’s credit card debt.
Step 3: Negotiate Lower Rates With Creditors
If the idea of paying off your credit card debt seems overwhelming, it’s a good idea to reach out to your creditors and let them know.
Contact each credit card company and let them know that you are interested in paying off your balance but would like to receive an interest rate increase to lighten the financial burden.
If one of your cards has a 20% APR, lowering it could save you a ton of money and help you pay it off faster. If you’re in good standing with the company and make regular on-time payments, they may be willing to make the adjustment for you or even waive the annual or monthly fee for your card if it applies.
Step 4: Consider Consolidating Your Debt
If you can’t successfully reach a better agreement with your credit card company, consider consolidating your credit card debt with a balance transfer card.
A balance transfer allows you to transfer your balance from one credit card to another. Why would you want to do this? Typically, balance transfer credit cards will offer you a 0% APR for a fixed period of time ranging anywhere from 6 months to 24 months on average. With a temporary 0% interest rate, you can pay off your debt faster since you’ll no longer have a high-interest rate eating up all your payments.
Most balance transfers do come with a fee. It’s usually $5 or 3% of the total balance, whichever is greater. Also, if you’re taking advantage of an offer you must activate it quickly so it doesn’t expire.
It’s also helpful to read the fine print in regard to the rules. For example, some cards will offer a 0% APR for balance transfer payments only. That means, if you use your new credit card to purchase something, you may be charged the market interest rate if you start to carry a new balance on the card.
This is why balance transfer credit cards should primarily be used to help you get out of credit card debt and not for additional spending.
Step 5: Choose and Implement a Repayment Strategy
After getting clear on what you owe and exploring the option of lowering your interest rate, you want to develop a clear strategy you can use to pay off your debt.
Two of the most common debt repayment strategies are the avalanche and snowball method. Both can be useful if you have balances on multiple cards.
With the snowball method, you focus on paying off the debt with the smallest balance first, then you roll that payment on to the next smallest balance until your debt it completely paid off.
Some people like using this method because it provides motivation and quick satisfaction as you’re likely pay off your small debts faster than the larger ones. If you find it hard to stay motivated during the debt payoff process, you might like this method best.
The avalanche method involves tackling the debt with the highest interest rate first and then moving on to the next highest interest rate balance until all your debt is gone. This method is best for people who wish to pay the least amount of interest as possible.
When it comes to paying off your credit card debt, you can choose one of these methods, both, or neither as they may not apply. For example, if you get a balance transfer and consolidate all your credit card debt to one card, you’ll essentially just be paying off one debt each month.
If you only have a few credit cards with similar balance amounts and the same interest rate, it won’t really matter if you choose the snowball or avalanche method.
The key is to focus on making extra and timely payments for your strategy. Be sure to pay more than the minimum to get ahead of interest charges and even consider making multiple payments per month.
Step 6: Focus on Earning More and Spending Less
The final step is actually two parts. In order to accelerate debt payoff, you’ll need to focus on earning more and spending less.
If you start spending less and commit to living below your means, you’ll be able to save more and better control your spending habits to avoid future credit card debt. Not to mention, you’ll free up some of your income to put more toward your debt.
Try to negotiate lower rates for flexible bill or shop around and consider competitor’s products or services that may be cheaper. Start looking for savings in everyday expenses and adopt a more frugal mindset.
In regards to earning more, you can pick up hours at your current job, ask for a raise, get a side hustle, or even start selling things from your home to make money.
Be sure to funnel all extra earnings toward credit card debt until its paid off.
When you use this 6-step process, you’ll find that you can actively work your way out of it to become credit card debt free.