Climbing out of the black hole called credit card debt seems impossible.
Since credit cards have such high interest rates, making the minimum payment can feel like the cards will never get paid off.
Many of us have thousands of dollars in credit card debt. Even $30,000 to $50,000 worth of debt is more common than you think.
I know this can feel like a straight jacket that you’ll never escape. I still remember when my Mom discovered that my Dad had taken on $50K worth of credit card debt when I was little. I’ll never forget the feelings of shame, fear, and uncertainty that the entire family felt for years until it was paid down.
There’s hope. Getting rid of credit card debt IS possible. Lots of folks have done it and so can you. If you trust the process and stick with it, it’s just a matter of time. You will get there.
The True Cost of Credit Card Debt
Credit card debt can sneak up on all of us.
A few months ago, my dog passed after 4 days at the VR emergency room. It was a complete surprise. At the end, we had a $10,000 vet bill hit us out of nowhere. Luckily, I had emergency savings to get me through it. Even if I didn’t have the money on hand, I would have racked up credit card debt and then figured out what to do afterwards.
Sometimes life hits you hard and a credit card is your only option.
And when things start to deteriorate, I have a habit of not wanting to look at the problem anymore.
Gained a few pounds over the holidays? Stop checking the scale. A critical number of work not improving like I need it to? Stop pulling up the report. Too much credit card debt? Stop checking my balance.
Then things really snowball.
“I’ll pay it all off next month,” becomes the monthly motto. The minimum fee gets paid and that’s it.
That’s when the interest rates hit deep.
Annual percentage rates (APR) are typically 15-20%. Let’s say that the total amount owed on a credit card is $10,000, with an APR of 20%, and a minimum payment of $200 per month.
Once that card has been fully paid off, over $9,000 worth of interest will have been paid.
That’s like having every store double the price of every purchase.
If you have a higher APR and only make minimum payments, you generally have to pay twice as much for everything on your credit card.
Compared to just about any other type of loan, the interest rates on credit cards are brutal. Not all debt is bad but credit card debt sucks. Get it paid off as soon as you can.
3 Options For Dealing With Credit Card Debt
Before we jump into the different methods on how to get rid of credit card debt, start by listing all your credit card debt in one place.
List out each card include:
- The card
- Amount owed
- Minimum payment
Put all of this in a spreadsheet, a note-taking app, or a notebook. Whatever you’re most comfortable with.
This will come in handy when working through any of the pay-off methods below.
It’s totally fine if you haven’t looked at this stuff in awhile, that’s normal. It’s also normal to be surprised by amounts or APR. Don’t feel guilty or shameful, you’re taking action which means you’re already ahead of the game.
Method #1: Pay off the highest APR first
Technically, this is the fastest method to paying off your credit cards.
Out of all your cards, find the one with the highest APR and then get as aggressive as possible with paying it down. Start by paying an extra $50 a month. Make double payments. Make payments every week. Look for ways to save money or make extra cash from a side hustle. Put every extra dollar towards that card.
Whatever it takes, attack the card with the highest APR. For your other cards, pay the minimum payment and then pretend they don’t exist.
By paying down the higher APR card first, you’ll reduce the total amount of interest that you’ll pay.
For example, let’s say I have a 20% APR card with $5,000 on it and a 15% APR card with $3,000 on it. I’d focus on the 20% APR card until it was paid off in full.
Method #2: Pay off the lowest balance first
This is commonly known as the snowball method of paying off credit cards.
Instead of going after the highest APR, we pay off the card with the lowest balance first.
Why would we do this?
Paying off a credit card with a high APR might be the best method mathematically but you know what feels amazing? Paying off a card.
Getting a win in the bag feels incredible. You’ll get your confidence back, build up momentum, and be ready to take on a bigger challenge. The value of this win can not be overstated.
If you’re feeling unsure about all this, I highly recommend that you focus on the card with the lowest balance. Get aggressive, make as many payments as you can, and throw every spare dollar you can scrounge up toward that card.
Before you know it, you’ll have it paid off and you can move to the next card.
Method #3: Use the envelope system
Made famous by Dave Ramsey, the envelope system involves using physical envelopes and cash for all your spending.
This is a good option if you’ve tried other methods but still struggle to control your spending.
Grab a handful of blank envelopes. On the front of each, write the most critical budgetary expenditures like groceries, gas, household items, kid’s activities, and anything else that must be paid for each month. Each envelope will be one of your spending categories.
Look over your spending in the last few months and come up with an amount of money that will go into each envelope. Write that amount on the outside of the envelope. Make sure these amounts are sustainable and allow you to get ahead of your credit card payments.
On payday, withdraw the total amount due in all the envelopes and stuff each one and use that money to pay those bills. It’s critical that you do this with real cash.
Essential points in the envelope system:
- No borrowing from one envelope to pay for another. Once an envelope is empty, it’s done for the month.
- Revisit the envelope amounts each month if one goes empty quickly while the other is flush with cash.
- If there’s leftover money in an envelope, do NOT roll it over into the next month.
- Take the extra money and put it into savings or put the additional money towards that credit card debt.
This works by forcing you to make a conscious choice with every purchase. It also adds more weight to each purchase. Instead of swiping a credit card, using the envelopes forces you to pull out cash and watch it disappear. This helps folks make smarter decisions with their money.
How To Avoid Credit Card Debt Moving Forward
Once you get ahead of your debt, then what? How do we avoid sliding back into old habits?
Pay off your cards in full every month
Credit cards can be a great tool to building wealth and living a rich life.
But only if you follow one rule: you always pay your cards in full every month. If you do that, you avoid all fees and interest. Combine that with a few of the sweet rewards you get from the best credit cards and it’s like getting free money back.
Once you pay off your credit cards in full, figure out how much money you can put on your credit. I like rounding down to a number that’s easy to remember like $2,000. If my budget allows up to $2,000 in credit card spending each month, I’ll hold off on all purchases until my next payment cycle once I’ve spent close to $2,000. That way, I know I’ll be able to pay the card in full.
Use a single credit card
There are a ton of reward credit cards that have all sorts of rewards and parks. To maximize those rewards, folks will have multiple cards and use each one for different kinds of purchases.
That’s an advanced personal finance strategy.
If you’ve struggled with credit cards in the past, I highly recommend using only one card for spending.
When I got my second credit card, I couldn’t keep track of my own spending for about 6 months. It was too difficult to always remember how much of a balance I had on each card.
Keep things simple, only use one card. You’ll only have one balance that you need to track.
Only use multiple credit cards after you feel completely comfortable paying one card off in full every month.
Generate side income
If you have the time and talent for a side hustle, go for it.
Having a way to generate some extra cash when you need it really helps staying out of credit card debt.
Surprise expenses hit all of us. Right when you’re hitting your groove, you could get hit with a large, unexpected bill. Eventually, you’ll have an emergency savings account to absorb expenses like that. But when you’re getting out of credit card debt for the first time, you could get hit right when you find your footing.
Having a side hustle is a great way to absorb these shocks if they happen.
If you get hit or if you overspend one month, ramp up the side hustle to bring in some extra cash. This keeps you on top of your payments.
Do dog walking, meal prepping, graphic design programs, check websites like Fiverr and FlexJobs, Uber, or meal-delivery. This is also a great way to build up some extra cash flow so you can start paying down your credit cards in the first place.
Credit Cards: Your Best Friend or Your Worst Enemy?
Considering all that can go wrong, is it wise for a person to have credit cards at all?
Credit cards aren’t evil IF you pay them in full every month.
Not only can you get a bunch of rewards from them, they’ll help you build a good credit rating which will save you thousands of dollars when getting car loans or mortgages.
I use my cards for travel rewards. Every 1-2 years, I usually get round-trip business class tickets to anywhere in the world that only cost me about $100. That gets me once-in-a-lifetime experiences which cost me almost nothing.
You can get there too.
No matter how you owe, eliminating credit card debt is possible.
Look up all the credit card debt that you owe, pick one of the methods above, and get your debt paid off. Then stay on top of your credit cards by paying them off every month.
Then you’ll be on the path to building wealth and living your rich life.