Get Out of Credit Card Debt

Credit card debt is death by a thousand cuts to your personal finance.

Why you want to get out of debt

The average American is over $16,000 in credit card debt alone, up 10 percent from a decade ago. The average minimum payment per card is $189 per month, but if you only pay that, it will take ten years to pay off the average balance -- and cost over $18,000 in interest alone. There are worse things than being in debt, but not many. Debt impacts your total quality of life, causing stress and costing sleep. Being debt free sounds great, but the prospect of getting there is daunting.

Credit card debt is death by a thousand cuts to your personal finance. All the money you’re spending on interest rates and paying down debt is money that should be invested, put into retirement accounts or spent on things you want to spend it on, like upgrading your lifestyle or taking that trip around the world you’ve been planning since high school. The process of getting out of debt can be painful at times, but it’s not impossible.

Here’s how to tackle it:

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Acknowledge the Problem

Acknowledge your debt problems — Step one: objectively evaluate what you’ve been doing that caused debt to accumulate in the first place.

“The first step is admitting that you have a problem,” as the saying goes.

You need to acknowledge that if your debt is out of control, then what you’ve been doing with money isn’t working. If you share your finances with another person, such as your spouse, it’s important to have a frank discussion with them about your financial status. How much money is coming in and how much is flowing out?

Pep Talk

The point here isn’t to beat yourself up. Rather, you want to objectively evaluate what you’ve been doing that caused debt to accumulate. That can be hard, and the consequences might involve making choices that seem difficult. In many ways, being honest with yourself can be the hardest part of your journey, but it’s also the most necessary.

Take a Frank and Honest Accounting

Calculate the interest cost on your credit cards — Your monthly interest cost equals your average daily balance times your daily periodic rate (DPR) times the number of days in the month. DPR can be calculated as the annual periodic rate (APR) divided by 365 days in the year.

Taking a frank and honest accounting flows naturally from acknowledging the problem. You’ll have to look at your debt and see how much it is, what the interest rates are and what you’re putting onto your credit card. The interest rates are as important as the balances. Write them all down by hand (as a percentage and calculated as an absolute monthly amount) — don’t just use an app, though you can do that later if it makes sense.

Okay, Now What?

Next you’ll want to attempt to negotiate a lower interest rate on each and every card. You might not be able to do that, especially if you have missed payments with your creditors. However, if you’ve been paying diligently on time you should consider at least making the pitch, including saying that you’re willing to transfer your balances to or from another card.

Oh Yeah, Balance Transfers

Balance transfer to the cheapest credit card — Transferring balances to your lowest interest card won't immediately eliminate debt, but it will reduce the cost of interest and allow you to pay down the balance faster.

Balance transfers might be able to help you to lower your interest rates and get out of debt faster, but only if you have a solid credit score. They also come with their own risks. Transferring your debt to a new card, thus freeing up the old one, can open up the possibility to get you into more debt if the underlying habits aren’t addressed. You need to be very honest with yourself about whether or not you can do a self-consolidation and not just get into more trouble.

However, if you have solid credit and you’re addressing the underlying problems, balance transfers can help a lot. Find a card with the lowest introductory interest rate possible, then transfer as much of your balance as you possibly can. Even if you fail to pay off the debt within the introductory period of low interest (though this should be your goal), you won’t be slapped with back interest in most cases. That’s hundreds or maybe even thousands of dollars you can save.

Rework Your Budget

snowball method of paying off credit cards — The “snowball method” is a tried and true method of attacking your debt without becoming overwhelmed by it.

Any plan to get out of debt includes reworking your budget. This is an essential part of identifying the behaviors that got you into debt in the first place. You also need to start budgeting for credit card payments. Ideally, pay down as much as you can reasonably afford each month. You’ll likely have to make cuts in your spending to do this and it will likely have to be deeper than “avoid that morning latte.”

Step By Step

The “snowball method” is a good way of attacking your debt without becoming overwhelmed by it. Here’s how it works:

1.) Take the credit card with the highest interest rate and put the most amount of money toward paying it off.

2.) Pay the minimum balance on everything else.

3.) When the first card is payed off, combine the payment you were making on it with the minimum monthly payment on the next highest interest rate card.

4.) Continue this process, working through your cards in order of interest rate, until they’re all paid off.

Do the Math

An example of 'The Debt Payoff Calculator' -- used to calculate when you'll be debt free given different monthly payments.

When you budget, do the math, including interest charges, on when you’re going to get out of debt. A bunch of calculators can help with this, including this one. Knowing when you’re getting out of debt shows you the light at the end of the tunnel. It gives you something to look forward to that’s a little more concrete. That can give you the extra drive you need to keep going when things get hard.

Find Money

Found Money is the Best Money — 'Found' money can be a powerful way to help you get out of debt faster than you thought you could.

Found money can be a powerful way to help you get out of debt faster than you thought you could. “Found” money is laying around in basically everyone’s life. You just need to know where to look for it. Here are some ways to “find” extra money in your life:

Subscriptions:

Virtually everyone has subscriptions to something these days. Movie subscription services, dog treats, shaving supplies, you name it. But if you’re not using these to the fullest, it’s time to cancel them and put the money toward your debt.

Tax Refunds and Bonuses:

Whenever you get a bonus at work or a tax refund from the government, don’t splurge. Instead, buy yourself something small, then put the rest of the money toward your debt.

Selling Big Items:

It’s extreme, but if you can trade your car in for $12,000 and buy a car for $2,000, it can be worth it, at least in the short term. Consider ditching some of your high-end toys and putting the proceeds toward your debt.

Throw a Yard Sale:

Everyone has a bunch of junk they need to get rid of. Be a little merciless, simplify your life and make some extra cash to get out of debt.

Alternative Revenue Streams:

It’s the 21st Century. You don’t have to “get another job” to make extra money. There are a number of work-at-home gigs allowing you to make some short-term money.

A Brief World About Settling Debt

Debt settlement might sound appealing, but you should be fully aware of the facts before you take the plunge. First, it might negatively impact your credit score. Second, unless your debt is very high, you might end up paying more in fees and charges than you save.

You've Got This

You can get out of debt — You can do this!

Getting out of debt isn’t easy, but it is worth it. Knuckle down, get through and look forward to the day when you’re living debt free. Your quality of life will significantly improve.

Get started by requesting your current credit score to know where you stand. Then, improve one step at a time.