When you’re dealing with an overwhelming amount of credit card debt, or you’ve grown accustomed to carrying a balance, it can be difficult to see the light at the end of the tunnel. But there are many paths to a debt-free future.
Sometimes getting started can be the hardest part. Jen Lee, a debt and credit attorney and owner of Jen Lee Law in Northern California, said she has people make a list of who they owe, the total balance on each account, the monthly payments and the interest rate.
“One of the biggest issues I see is that clients are not even sure what they owe and to whom,” says Lee. Once you have a big-picture understanding of your debts, you can formulate a plan to fit your financial situation and personality.
Paying off credit card debt isn’t solely a game of tactics, tricks and tools. It usually involves introspection and an understanding of why you’re in debt and what you’re willing to do to get out. Acknowledge the personal component as you determine which options could work best for you, and formulate your plan.
Consider popular repayment tactics
There are many paths to paying off debt. If you have credit card debt across multiple cards, consider the snowball and avalanche methods — or, as Christopher Kimball, certified financial planner and owner of CK Financial Services in Lakewood, Washington, refers to them, the emotional and logical methods.
— The Snowball Method: The snowball, or emotional, method involves making minimum payments on all your accounts and putting what you have left toward the account with the smallest balance. Once you pay off that account, tackle the second smallest debt, and so on.
— The Avalanche Method: The avalanche, or logical, method involves paying off the balance of the account with the highest interest rate. Then, you tackle the debt with the next highest interest rate, until you’ve paid off all the cards.
The avalanche method can save you money on interest payments, which is why Kimball calls it the logical method. But that doesn’t mean it’s the right option for everyone.
[Read: The best credit cards of 2017.]
“The emotional way gives you little victories as you pay off the debts one by one,” said Kimball. The victories can encourage you to stick with your plan and help you follow through. Otherwise, it could be months until you get to celebrate paying off an account, and you might get discouraged.
With either method, Kimball said that after you pay off the first account, “take all the payments you were making to the first card and add that to the second card. Keep it going, and your payments ramp up.”
Make lifestyle changes
Whether you’re using the snowball or avalanche method, or you’ve found another way that works better for you, having a clear view of your household’s cash flow can be extremely helpful.
Budget for success. If you’re ready to tackle your credit card debt, a budget can offer several benefits: It can help you identify opportunities to save money, track your progress and estimate when you’ll be debt-free.
There are a variety of free and low-cost budgeting software programs, including Mint and YNAB, which stands for You Need A Budget, that make it easy to manage your budget. You can even link your debit and credit card accounts, and automatically upload your purchases and payments. And you can use their mobile apps to add cash transactions when you’re on the go.
Kimball recommended creating multiple categories within your budget and tracking your spending within each. “Say you want to spend $75 a month for dining out,” he said. “When you get paid, add a portion of your income to the dining column. When you spend money, take it out.” If you don’t have any money left in the column, you’ll have to forgo dining out for the rest of the month. But if you have money left over at the end of the month, you can roll it over to the next month or use the money to pay off debt.
If you know you need to pay for your car registration or take a vacation every year, you can create a category for these expenses and put aside a little money each month. You can also budget for longer-term expenses or goals.
Sticking to a budget can be difficult, especially if you feel like you’re placing limits on yourself, but consider the long-term benefits: Once you pay off the debt, you could be saving hundreds of dollars in interest each month. That’s money that you’ll be able to save or use however you please.
Control overspending while repaying debt. Credit card debt due to a one-time medical emergency and credit card debt from repeated shopping sprees aren’t the same — at least not in terms of how the person should go about paying off the debt.
A budget can help people who have trouble controlling their spending, if they’re following the plan. “You’ll have to spend less than you make or at least break even,” said Kimball. “You’ll also know that you’ll have money in the future for a vacation, or whatever else, without feeling guilty about it.”
[Read: The best cash back credit cards.]
However, sometimes a plan on paper or in an app isn’t enough. If you have a compulsive spending habit, try to take that option off the table. You can cut up the physical cards and remove your card information from online accounts, or even close your accounts and still pay the balance off over time. Switch to using your debit card and link it to budgeting software to continue tracking your spending.
When credit card debt arises from a one-time accident or emergency, overspending might not be an issue. For those who have a tight budget and live frugally, keeping your credit cards open as you pay them down could help your credit score. It may also make sense to use a cash back credit card and use the rewards to pay off debt. It’s a tricky line, though. You don’t want to use your rewards card to justify purchases.
Get a boost along the way. There are several ways to speed up your debt payoff plan. One is to use windfall gains, such as a bonus from work or a tax return, to pay down debt. You could clean out your home and sell unwanted, or rarely used, possessions.
Another option is to look for ways to drastically cut your monthly payments. When you have tens of thousands of dollars of high-interest credit card debt, plus a large mortgage, selling your home and moving to one with a lower mortgage could be a worthwhile option.
Less drastic changes could include switching from a luxury to an economy car, canceling subscription services or even small daily changes, like preparing work lunches at home rather than eating out.
Also, look for opportunities to increase your income. You may be able to take on extra shifts and earn overtime, find a new part-time job or try one of the many flexible gig economy jobs.
Transfer debt to save money
Moving high-interest credit card debt to a lower-interest loan can save you money and shorten your repayment period if you continue making the same monthly payments.
Here are three types of financial products that may offer a lower interest rate than your credit cards. With a balance transfer card, the card’s issuer will handle the debt-transfer process. If you use a personal or secured loan, you’ll receive cash to pay off your credit cards.
Balance transfer cards: Balance transfer credit cards offer a zero percent interest rate on transferred balances, and sometimes purchases, for a promotional period — about six to 18 months. While many cards have a 3 to 5 percent balance transfer fee, you can still save money by avoiding accruing interest while you pay down the debt.
However, you may need a good credit score to qualify for a card, and there’s no guarantee you’ll get a high credit limit.
If you have a good-to-excellent credit score and a low debt-to-income ratio, known as a DTI, and which refers to your monthly debt obligations compared with your monthly income, you could try starting with a balance transfer card. Otherwise, you may need to pay down your debts or transfer them to an installment loan to increase your approval odds.
Personal loans: Another option is to take out a personal loan, also known as a signature loan because your signature secures the debt. Many online lenders, banks and credit unions offer personal loans, but as with balance transfer credit cards, your eligibility and potential loan amount can depend on your credit score and DTI.
Personal loans don’t offer zero percent APR, but for those with excellent credit, the interest rate could be about 6 to 10 percent, which is much lower than most credit cards. Some lenders charge an origination fee, often 1 to 6 percent of the loan amount. Compare your options and include the origination fee in your calculations to see if using a personal loan makes sense.
[Read: Credit utilization: Understand how it impacts your credit score.]
Using a personal loan to pay off your debt will also free up your available credit on those cards. This can lower your utilization rate and may lead to a credit score increase if you leave the cards open. However, if you have trouble controlling your spending, it may be best to close the cards to avoid temptation.
Secured loans: When you take out a secured loan, you have to put up something, such as a home, car, boat or other valuable possession, as collateral. It may be easier to qualify for a secured loan than an unsecured loan, but it’s also a risky trade-off.
Lee says, “If someone is very disciplined, has run the numbers to be able to afford the new payments, and does not take on any new debt, using collateral for consolidation can work.” However, she also saw a lot of people run into trouble during the recession when they refinanced a home to pay off credit card debt, and then couldn’t afford their mortgage and wound up in foreclosure or a short sale. Or, some used a secured loan to pay off their credit cards and then wound up overspending on credit cards again.
Think carefully and consider consulting a financial planner before using a secured loan to repay credit card debt.
It’s not all or nothing. Balance transfer cards, personal loans and secured loans can all help you save money if you qualify for a lower interest rate. But there isn’t a one-size-fits-all solution, and you don’t need to stick to only one tool.
For example, if you don’t think you’ll qualify for a balance transfer credit card because of your credit score, you may still be able to take out a personal loan. If you can move half your credit card debt to a personal loan, you’ll lower your utilization rate, which could lead to a quick increase in your credit score. This could, in turn, help you qualify for a better offer with a balance transfer card.
Find help with a credit and debt counseling agency
Navigating your way through the different strategies and financial products can be complicated and even overwhelming. If you’d like assistance understanding your options, or help with accountability or dealing with creditors, look for a nonprofit credit counseling agency in your area that’s a member of the National Foundation for Credit Counseling. You may be able to schedule a free consultation, which might be all you need, and for a nominal fee, you can enroll in a debt management plan.
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A guide to eliminating credit card debt originally appeared on USnews.com
