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Rule #1 in personal finance: never carry a credit card balance from one month to the next.
While they won’t break your legs if you don’t pay up, credit card companies’ interest ranks up there with mob loans. According to U.S. News & World Report, average credit card interest ranges from 15.56% to 22.87% depending on the type of card.
If you find yourself struggling to pay off your balances, start with these six steps to pay off your credit cards once and for all.
Step 1: Stop Digging Yourself Deeper
When you’re in a hole, the first step to getting out of it is to stop digging.
Reformed shopaholics often cut up their credit cards to avoid further temptation. If you can’t bring yourself to do that, lock your credit cards away in a drawer until you’ve paid off all your balances in full.
Switch over to the envelope budgeting method as you dig yourself out of debt. That means you pay for all discretionary purchases with cold, hard cash.
To use the envelope budgeting method, pull out a certain amount of cash each month and stick it in an envelope. Use that instead of your credit card for nonessential purchases. When the money’s gone, you can’t spend anything else for the remainder of the month. If any cash is left over, put it toward paying down your balances or deposit it in your emergency fund.
Paying in physical cash forces you to count out the full amount, so you understand on a visceral level exactly what you’re spending. With a credit card, you can swipe and forget — until it comes time to pay the piper.
If there is absolutely no possible way to buy something you need with cash, use a debit card. At least it pulls the balance immediately from your bank account, which doesn’t leave you any wiggle room to pay later. Even so, leave your debit card locked away at home to add friction before buying anything.
Step 2: Create a New Budget from Scratch
You may not feel there’s room in your budget to make larger credit card payments, but if you’re serious about being debt-free, you’ve got to make some changes.
Next, look at your spending for the last year to draw up your current budget. Include not just your regular monthly expenses but also irregular expenses like holiday gifts, birthday and wedding gifts, insurance premiums, car repairs, and home repairs.
From here, you can start finding ways to bridge the gap between your current budget and your ideal budget. For example, look for savings opportunities among the following areas:
- Utility Bills. You can’t live without utilities, but you can reduce the costs. Follow these tips to save money on your utility bills.
- Cable Packages. You can save significantly by cutting your cable package and using a low-cost alternative like Netflix, Amazon Prime, or Hulu. You could also try an alternative like Sling TV. If you can live without live televised shows and sporting events, you can save hundreds of dollars over the course of the year.
- Eating Out. Going out for drinks and dining out can add up quickly. Eat more meals at home, and host gatherings at your house rather than at the local bar.
- Put a Moratorium on Elective Purchases. You don’t have to purge elective purchases forever, but until you pay off your credit card debt you can live without that new jacket or purse or spa day.
- Housing. Contrary to popular belief, housing is not an inevitable expense. I don’t pay for housing, and neither do thousands of other Americans. Read up on house hacking tactics to live for free!
Taking on a housemate or other shared living arrangement can save you hundreds or even thousands of dollars on housing expenses. If you live in a bike-friendly area with a good public transportation system, or if your significant other has a reliable vehicle, ditching your car can save a ton on gas, maintenance, repairs, insurance premiums, registration, and loan payments.
My family and I have lived without a car for the past two years, and I don’t miss the headaches.
You can also try budgeting apps like Trim. Trim analyzes your bank and credit card accounts, helping you find places to save. These include recurring subscriptions you no longer need, an Internet bill that can be negotiated lower, or lower car insurance rates.
Step 3: Lower Your Interest Rates
The more you pay in interest, the less of your money goes toward paying down your balances.
When you fail to pay off your credit card balance in full each month, the interest adds to your balance. And then again the following month, compounding so that you end up paying interest on your interest. Which says nothing of fees if you fail to make the minimum payment.
To get your debts paid down faster, look for ways to decrease the interest rates on your cards.
To get your business, many credit card companies offer balance transfers on new credit cards. A balance transfer occurs when you “pay off” one card by transferring the outstanding balance to a different credit card.
If you have a strong credit score, you may be able to qualify for a new card that offers a 0% balance transfer in which you pay no interest on the balance for a predetermined period of time. After the introductory period, which generally lasts between 12 and 21 months, the interest rate reverts to the card’s standard APR.
That can mean avoiding interest completely if you pay off the balance before the introductory 0% APR period ends. But balance transfers offer a false sense of security, causing some debtors to ease off their mission to become debt-free.
Read the fine print and find out what your interest rate becomes after the promotional rate expires. If it’s higher than the rate you’re currently paying, think seriously about whether the balance transfer offer is worth it. To use a balance transfer successfully and avoid excessive interest charges, budget to pay off the entire transferred balance during the introductory period.
Before you agree to a transfer, also check for balance transfer fees — one-time fees assessed on the amount you’re transferring to the credit card. For example, if you’re transferring a $5,000 account balance and the credit card company assesses a 3% transfer fee, it costs $150 to transfer the balance. Balance transfer fees of 3% or 4% are common, although not all cards charge them.
Negotiating With the Credit Card Company
Credit card terms aren’t set in stone. If you play your cards right, you can negotiate with your credit card company on the following:
- Interest Rates. Snagging a lower rate reduces the interest charges you accrue on your balance. Push for this first and foremost.
- Minimum Payment Amount. Negotiating this can help you avoid fees if you can’t meet your minimum payment for certain months.
- Payment Plans. They’re not easy to negotiate, but credit card companies do allow consumers to cease payments for a certain period of time or set up a long-term payment plan at reduced interest rates. Some credit card issuers offer built-in payment plans. For example, Chase Blueprint allows you to easily adjust your payment structure and even pay some charges without interest.
Call your credit card company’s customer service line to ask about your options. Be persistent and be prepared to escalate the issue. You may need to get a manager involved to make any significant changes to your credit card terms.
If the bank does agree to the change, be sure to get a copy of the agreement in writing. You can negotiate with the bank yourself, or you can ask a nonprofit credit counselor for help.
Debt consolidation entails consolidating multiple sources of debt — such as multiple credit cards, student loans, auto loans, and mortgages — into one loan.
The biggest benefit of debt consolidation is that it simplifies your obligations. You’re only responsible for one payment every month, so you’re less likely to forget a payment and get hit with late fees. You may also be able to reduce your total monthly payment for all your obligations by agreeing to a long-term loan.
Emphasis on “long term.” In many cases, you end up simply prolonging your debt.
And, as with balance transfers, many debt consolidation lenders offer low teaser rates that convert into a sky-high APR later. Many consolidation loans also require an upfront fee to consolidate your debts or charge a recurring monthly fee on top of your regular payments.
Avoid debt consolidation loans and stick with the debt snowball method outlined below. If you do opt for debt consolidation, speak with a credit counselor before you agree to debt consolidation. You can find a list of approved credit counselors by state on the U.S. Department of Justice website.
Step 4: Knock Out Your Debts with the Debt Snowball Method
When you have multiple unsecured debts, it feels overwhelming. You don’t know where to start in clawing your way out of debt, making it all too easy to revert to old bad habits.
So keep it simple, and start with your smallest debt balance first.
The debt snowball method involves putting every spare dollar toward your smallest debt, and only making the minimum payment on your others. Once you knock out that smallest debt, you then shift your attention to paying off the next smallest debt as quickly as possible. And the next smallest, and so on until you’ve paid off all your debts.
With each debt you pay off, you have more money each month to put toward the next debt. Hence the term “debt snowball,” as you build momentum with each paid debt.
In a similar variation, you could alternatively use the debt avalanche method. Instead of paying off the smallest debt first, you prioritize your debts by the highest interest rate.
While paying off the highest-interest loans first may save you a small amount mathematically, many people need the confidence boost of an early win paying off their smallest debt. Like Dave Ramsey says, “Debt is a behavior problem, not a math problem.”
Whatever credit card repayment strategy you choose, stick with it to knock out your debts one after the other.
Step 5: Lift Your Income
Cutting your spending only attacks the problem from one side. You can also boost your savings rate by earning more money.
Start by negotiating for a raise at your current job. Remember, you don’t get what you deserve, you get what you negotiate. No one is going to voluntarily start handing out more money than they have to, so it’s up to you to negotiate the full salary you’re worth on the open market.
Speaking of the open market, you can always look for a new higher-paying job somewhere else if your employer doesn’t pay you what you feel you’re worth.
Alternatively, you can earn more money through a side gig. A few popular examples include:
- Make Money With Your Car. Start driving for companies like DoorDash or Instacart. You can deliver meals or groceries and get paid.
- Rent Space: If you have an extra closet or empty basement in your house, you can rent it our for storage on Neighbor.com.
- Take Online Surveys. Next time you’re binging your favorite Netflix show, take online surveys through companies like Survey Junkie.
- Become a Mystery Shopper. Mystery shopping companies such as TrendSource and Coyle pay you to evaluate businesses, hotels, and restaurants.
- Use Your Talents to Freelance. If you have an in-demand skill such as writing, graphic design, marketing, Web design, accounting, or photography, do it on the side as a freelancer. Set up a website for yourself and create a profile on freelancing sites like Fiverr or Contently. Browse job ads on websites like Craigslist or Freelancer to find gigs.
- Do Odd Jobs. You don’t have to be an expert to clean, babysit, tutor, move furniture, wash cars, or do yard work. Advertise your services on a website like Craigslist or Thumbtack.
- Sell Stuff. Get rid of your used books, clothes, and household items, and make some money doing it. EBay, Craigslist, secondhand stores, and consignment shops are all platforms to sell your stuff.
Tackle your savings rate from both ends by both budgeting better and earning more income.
Step 6: Stop the Cycle of Debt
The last thing you want is to successfully pay off your card balances only to find yourself in debt again months or years later. Change the way you manage your finances and the way you think about money to keep yourself out of trouble.
Pro tip: If you haven’t set up a budget for yourself yet, this is a must-do step. It will help you keep track of your spending each month so you know where every dollar is going. By using a budget through Tiller, you’ll drastically reduce your chances of falling back into debt.
Track Your Progress
It’s easy to lose motivation when tackling large debts, or even multiple smaller debts. Tracking your progress helps keep you excited and focused on what you’re accomplishing.
I personally use Mint to track my assets and debts. It also allows you to set goals for yourself (like paying off a credit card), which can help solidify your commitment.
Pro tip: Make sure you also check out Dave Ramsey’s book, “The Total Money Makeover.”
Alternatively, you can track your spending progress offline. Save your receipts and record other purchases in your check register. At the end of the week, categorize the expenses into your budget categories. Seeing how far you’ve come can motivate you to stay the course.
Find an accountability buddy and keep each other up to date on your financial progress. Aim for a friend or colleague rather than your significant other, to avoid conflicts of interest.
Check base biweekly or monthly to disclose your financial dirty laundry or share wins like paying off a credit card. Track each other’s progress with a simple spreadsheet or chart to keep it front-of-mind.
Check Your Credit Report Periodically
As another way to measure your progress, check your credit report at least once per year. You can do so for free through AnnualCreditReport.com.
Better yet, track it with a free tool like Credit Karma. They monitor not only your credit score, but also alert you about new accounts and potential fraud. Plus, they provide ongoing tips to improve your credit score.
Of course, the easiest way to boost your credit score is simply to pay off your credit card balances. Pay off your debt faster to reach good credit faster, which in turn helps you qualify for a cheaper mortgage, lower down payment, lower interest rates on car loans, and other real-world advantages.
Digging yourself out of credit card debt isn’t easy. To do it successfully, you must change your financial behavior and prioritize where you spend your money.
You can probably boost your budget with a few “hacks” that don’t impact your quality of life much. But be prepared to give up some of the indulgences you’ve grown accustomed to, at least while you dig yourself out of the hole of debt.
Finally, brainstorm ways to simplify your financial life. The less complicated your personal finances, the more likely you are to manage them well.
Editorial Note: The editorial content on this page is not provided by any bank, credit card issuer, airline, or hotel chain, and has not been reviewed, approved, or otherwise endorsed by any of these entities. Opinions expressed here are the author's alone, not those of the bank, credit card issuer, airline, or hotel chain, and have not been reviewed, approved, or otherwise endorsed by any of these entities.