Tackle Your Credit Card Debt

Is credit card debt taking over your life? Limiting your life choices? Causing you stress? There is good news: You CAN be DEBT-FREE! You may feel unsure where to start, or worry that your debt is too high to ever pay off. But don’t give up, don’t be overwhelmed. We’ll break it down to simple steps, so you can build a plan to knock out your credit card debt and stay debt free. Learn who can help you and how you can get out of debt faster. Whether your debt is small or large, no matter how you got here, the important thing is that you have made this decision to get out of debt and stick with it! So let’s make a plan and get started!

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LIVING DEBT-FREE IS POSSIBLE

First, I want you to know that it is possible to live debt-free. Maybe your parents and everyone you know is in debt. Perhaps you’ve always thought that is just how it is. But you absolutely can become debt-free and live debt-free. Getting debt-free and staying debt-free can be hard, but it is also wonderfully liberating. Your income isn’t tied up in payments. You don’t have to fear bills in the mail or phone calls about debt. When you think about your financial future, you will be able to dream instead of feeling crushed or fearful. On the day you pay off your last debt, you will celebrate! Eventually, you’ll even pay for your car purchase in CASH. Let me tell you, the first time you pay for your car in cash is an AMAZING feeling.

What is Your Why?

I love to listen to FaithFi podcasts, and one thing they say that has been really resonating with me is, “Know your Why“. It’s important when making financial decisions and creating your plan, that you know Why you are doing it. This could be a retirement goal, your career plan, or what you want for your family and future. Knowing Why can help you determine how much you need to earn or save. It helps you set a plan to reach your goals.

When finances are tight and you are really getting tired working that side hustle, remember Why you are doing this. I want to be able to be at home with my son while he is young, rather than sending him to a daycare. I’m getting seriously short on sleep from working my current hours. Money is really tight. But I keep going because I know exactly Why I’m doing this. I also know that when I reach my goal, it will be 100% worth it.

First Step: Assess the Situation

You may already know every detail about your finances, or you might not be sure. Either way, it’s time to get organized and take a good look at your debts and assets. Consider getting your free credit report from each of the 3 credit bureaus: Experian, Equifax, and Transunion. Look over the credit report and make sure you recognize each of the items on it.

List your debts

Make a list of each of your debts, and include how much you owe, the minimum payment amount, and the interest rate. Take note if any of the accounts has gone to collections or is delinquent. Also, look at your savings to see how much you have available. Find out how much you are contributing to retirement accounts each month.

List your expenses

Finally, start listing your expenses. These include fixed expenses, like rent, mortgage, or insurance, as well as variable expenses like groceries or the electric bill. If you don’t know how much you spend on a variable category like groceries, take a guess just to get you started. Now that you have everything laid out, we can start making our plan of attack for that debt!

Make a Plan

It is time to start spending your money intentionally, and to know where it is all going. Call it a budget, call it a spending plan, call it whatever you want. The important part is that you know what your expenses will be, and to spend less than you earn. The spending plan or budget isn’t meant to stop all your spending. Instead, it helps you plan and prioritize your spending. That way, you are using your money on the things that are actually important to you!

If you’ve never made a budget before, I can help you get that set up quickly. If you sign up for my email list, you’ll get my free budget spreadsheet. It is so simple, and it does all the math for you. All you need to do is fill in your expenses, and you’ll be ready to go! If you need a bit more help setting up your budget, check out my article on budgeting.

Spend Less than You Make

The key to paying off debt and staying debt free is to spend less than you make. Once you’ve made your spending plan or budget: How does it measure up? If your bills each month are more than your expenses, then we need to fix that. Take a hard look at what you can cut out of your life right now while you pay off debt. It won’t be forever. Once you’ve paid off that debt and you aren’t paying interest to the credit card companies, there will be more wiggle room in your budget again. But for right now, it’s time to be extra frugal. Take on more overtime a work or get a side hustle if you can’t cut expenses any further.

Is it still impossible to pay off your credit card debt due to those high interest rates?

There are some steps you can take to try to get a lower interest rate, which could make a big difference in paying off your credit card debt. With the high interest rates for a large amount of credit card debt, very little of the monthly minimum payment is actually going towards your debt. Most of it is going towards interest, and doesn’t help you climb out of that hole.

The first step to take would be to call the credit card company and ask for a lower interest rate. They might not offer you a lower rate, but sometimes they will. I’ve even heard from people who called and asked for a 0% promo rate, and some of them got it. They likely will only offer the lower rate for a set time period, like 6 months. But 6 months can make a big difference, and allow you to work at your plan in the meantime.

Credit Counseling

Next, you can look into credit counselling. Credit counseling is different from debt settlement. It doesn’t cause the damage to your credit score that debt settlement or bankruptcy would. You can generally get a free initial consultation with a credit counselor, so you can get an idea of what they can do for you before you sign on. Credit counselors have agreements with the credit card companies. This means they can usually get you lower interest rates and lower payments. Christian Credit Counselors says that their clients get out of debt, on average, 80% faster. Those are fabulous results!

Before Putting Extra Towards Your Credit Card Debt, Make an Emergency Fund

When all you want is to get out of debt as quickly as possible, starting an emergency fund first may seem like the last thing you want to do. It is important to have an Emergency fund first, because you need to have a plan for something unexpected. It’s just how life goes – unexpected things happen to everyone and we can’t predict when. If you don’t have an emergency fund, you are one accident or home repair away from financial trouble.

Once you have worked hard to pay off some or all of your debt, you don’t want to have to go back into more debt when an emergency happens.

Continue making minimum payments towards your debts, and put any extra money you have into an emergency fund. Keep your emergency fund in a high yield savings account, or somewhere you can access the money right away if needed. It should also be in a separate account, so you aren’t tempted to spend it. Start with a goal of $500, then $1000. Build up until you have 3-6 months worth of expenses in your emergency fund. To learn more about setting up an emergency fund, click here.

Snowball vs Avalanche: Which is better?

Have you heard people talk about the snowball and avalanche methods to pay off debt? Ever wonder which is the best?

Snowball method:

With the snowball method, you look at the amount you owe for each debt. You pay minimum payments for each of your debts, and put any extra money you have towards the debt with the smallest amount owed. Once that is paid off, all the extra money goes towards the next smallest debt. With each debt that is paid off, you will have more money to put towards the next debt, getting bigger and bigger like rolling a snowball.

Avalanche method:

With the avalanche method, you consider the interest rate on each debt. The debt with the highest interest rate gets paid off first. This debt might be small and could be paid off quickly. It might be a large debt, and you may be working on paying it off for a longer time. Meanwhile, you continue to make the minimum payments towards all your other debts. Once the first debt is paid, start putting all your extra money into paying the debt with the next highest interest rate.

So which is better?

Mathematically, the best debt payoff method is the Avalanche method. That’s because it keeps the amount of interest that you pay to a minimum. Imagine you are working to pay off a small debt with a 7% interest rate, but you have a larger debt with a 25% interest rate. You will be paying a lot of interest on that debt with the 25% interest rate while you work to pay off the smaller debt… ouch!

On the flip side, it may take a long time to get your first win by eliminating a debt with the Avalanche method. For myself, I stay motivated to stick with the plan by setting small goals along the way. But some people really just need to have a win to celebrate to keep focused and motivated. If you are concerned that you or your partner will not stick with your plan to pay off your debts, the Snowball method may be better. Getting a debt paid off quickly and seeing the momentum build as more money can go towards the next debt can be really rewarding.

Ultimately, the best method is the one that will keep YOU focused on your goal of paying off your debt. The same technique doesn’t always work for everyone. If it is working for you, then don’t let anyone tell you anything different.

Time to Grind

Now that you have a plan, it’s time to keep your nose to the grindstone. If you have a good amount of extra money each month to put towards your debts, you may not have to do anything else. But if you don’t have much extra money and want to pay off debt faster, find creative ways to make more or spend less.

I would encourage you to maintain a balance, where there is still some fun and freedom in your life. Depending on the size of your debts, you may need to stick to this a long time. You don’t want to burn out and lose your progress. This needs to be a lifestyle you can maintain for as long as you need to pay off the debt.

Save yourself some headaches, and check out this article on Pitfalls to Avoid While Paying Off Credit Card Debt.