If you feel like you’re drowning in credit card debt, you’re not alone. As of September 2018, the Federal Reserve reported that Americans have more than 1 trillion dollars in revolving debt, which includes things…
If you feel like you’re drowning in credit card debt, you’re not alone. As of September 2018, the Federal Reserve reported that Americans have more than 1 trillion dollars in revolving debt, which includes things like credit card debt. But while virtually everyone agrees that having less credit card debt is better, achieving that goal isn’t always easy.
If you want to pay down credit card debt, it’s essential to not only use the correct approach for you but also to know what options are available to become debt-free faster.
Focus on the ‘Why’
Before you do anything, it’s crucial that you address your reasons for wanting to get rid of your credit card debt at that moment. Instead of thinking about the drawbacks of remaining in debt, though, Chase Peckham, community outreach director for the San Diego Financial Literacy Center, recommends focusing on the positive consequences of eliminating it.
“Be positive about the steps you’re going to take and how they’re going to improve your life,” he says. “It could be that if I pay off my debt, my kids are going to be able to play on that club soccer team they’ve been really wanting to play for, or I might be able to start saving for that vacation that we haven’t taken in 10 years.”
Paying off your credit card debt won’t happen overnight. So that positive reinforcement can help you stay motivated when you start feeling discouraged or tired of trying.
Peckham also believes it’s important to understand why you got into debt in the first place. Without addressing the root causes of your current predicament, you may be more likely to fall back into your old ways.
Stop the Bleeding
Eliminating your credit card debt can be hard if you continue to add to it every month. If you keep using your cards, it’ll feel like you’re taking two steps forward and one step back. So while you’re working to pay down your credit card debt, you’re generally better off using a debit card or cash to avoid spinning your wheels.
Forgoing credit cards can be a tough choice for some people, especially if you like the idea of earning rewards on your everyday purchases. But if you’re paying interest on your balances, the costs usually outweigh the benefits.
There are three primary methods you can use to eliminate debt: the debt snowball, the debt avalanche and the debt snowflake. Each requires a slightly different approach and has both benefits and drawbacks.
Debt snowball method. With this strategy, you make all of your minimum payments each month like you usually would. But if you have extra money you can put toward your debt, you use it to pay the credit card with the lowest balance. Once that card is paid in full, you take its minimum payment plus the extra monthly payment and roll it into your payment on the card with the next lowest balance.
You keep repeating this snowball effect until you’ve paid off all of your cards. The biggest benefit of the debt snowball method is that by paying off your lower balances first, those little wins can help you stay motivated and keep the momentum going. The drawback is that you may end up paying more interest overall than you would with the debt avalanche method.
Debt avalanche method. The debt avalanche method is nearly identical to the snowball method, but the difference is that you target your cards in order of the highest interest rate instead of the lowest balance. By doing this, you can save more money by eliminating high-interest debt first.
Debt snowflake method. Both the debt snowball and avalanche methods require that you budget a certain amount of money for debt repayment each month. With the debt snowflake method, you earmark small amounts of cash you find or save throughout the month — like snowflakes — and use that money to pay down your debt faster.
For example, if you keep a change jar, use that money for debt repayment each month instead of letting it build up. Other opportunities include money saved at the grocery store through coupons or deals, or money earned from odd jobs or selling unused items. The debt snowflake method can be beneficial if you can’t afford to budget extra payments each month. But it’s less reliable and requires more work and dedication than the other two methods.
Regardless of which method you use, the important thing is to put as much money as possible toward your debt. This may mean looking for areas of your budget where you can cut back, or finding ways to earn extra money.
Consider Using a Loan or Credit Card
If you have a decent credit score, a consolidation loan or balance transfer credit card can make it easier to pay down your debt. Here’s how they can help.
Debt consolidation loan. A consolidation loan is a personal loan that you use specifically to pay off higher-interest debt. The average personal loan interest rate, according to August 2018 data from the Federal Reserve, is 10.12 percent. Credit cards, on the other hand, have an average interest rate of 16.46 percent.
Todd Nelson, senior vice president at LightStream, an online lender and division of SunTrust Bank, says, “Most debt consolidation loans offer fixed rates which won’t get more expensive if interest rates rise.” Meanwhile, credit cards typically have variable rates that fluctuate over time.
Another major benefit of a consolidation loan is that it has a set repayment schedule, which you won’t get with a credit card. If you choose a three-year repayment term, for instance, you know that you’ll be debt-free in three years.
Depending on the repayment terms, though, a consolidation loan could have a higher monthly payment than what you’re currently paying, which can be harmful if you’re already struggling to get by. Also, there’s no guarantee you’ll get a better rate than what your credit cards charge.
To see what rates you might qualify for, look for lenders that allow you to get prequalified with a soft credit inquiry, which won’t impact your credit score.
Balance transfer credit cards. Most credit card issuers allow you to transfer a balance from another credit card. But some go the extra mile and offer credit cards with an introductory zero percent APR promotion on new transfers. Depending on the card, you could get close to two years to pay off your credit card debt interest-free.
“If you have debt across multiple cards, you can also save by consolidating those into one payment with a lower rate,” says Nelson.
There are a few things to think about before going this route, though. For starters, most balance transfer credit cards require that you have good or excellent credit. Also, many of them charge a balance transfer fee — typically between 3 and 5 percent of the transfer amount — to process the transaction.
Also, if you have a large amount of debt to pay off, there’s no guarantee you’ll get a high enough credit limit on a balance transfer card to move it all over. Even if you do, you could end up with a high interest rate again if you can’t pay it off within the promotional period.
Credit counseling. With a credit counselor, you can set up a debt management plan to pay down your debt. This typically requires you to make monthly payments to the credit counseling agency, which will then pay your unsecured debts. These agencies may have a set interest rate with lenders that’s lower than what you’re currently paying, so it can save you money. However, credit counselors typically charge a set-up fee and a monthly fee to help you.
Debt settlement. Debt settlement companies can negotiate on your behalf with your credit card issuers to settle your debts for less than what you owe. But debt settlement may require you to stop making payments to creditors and send them to the debt settlement company, which will hold your funds until there’s enough to settle.
This process can be problematic, as debt settlement companies charge fees for their service and there’s no guarantee your creditors will settle for less than the full amount. You’ll still be subject to collection activity, which can include lawsuits and lead to wage garnishment. Missing payments, even with a strategy in mind, can further damage your credit score, as can accounts that remain on your credit report as settled for less than the full amount.
What to Do When You’re Debt-Free
Paying off credit card debt can take a lot of time and effort. As such, it’s crucial that when you become free of credit card debt, you stay that way. For some, avoiding future debt can be easy. After all, you’ve freed up some cash every month now that you’re no longer using it to pay down debt.
The most important thing you can do, according to Nelson, is to live within your means. “Take time to create a budget, planning out your upcoming expenses against what you have in the bank,” he says. “And do your best to stick to it.”
Other tips for avoiding a relapse of old habits include:
— Stop using credit cards regularly and mix in more cash and debit transactions.
— Choose an accountability partner — such as a spouse or other family member or friend — to keep you honest.
— Request alerts from your card issuer when you’ve reached a certain balance threshold.
— Stop using credit cards altogether if the temptation is too strong.
Use these tips and continue setting financial goals that will keep you motivated. Remember the feeling of being free of debt and consider how living within your means can lessen stress in your life.