Guide to Paying Off Credit Card Debt

The good news? You’ve begun to embrace the idea of living debt free!

The challenge? Where to start! You’ve charged up a large pile of credit card debt over years of living a financial lifestyle that’s gone unchecked. What seemed like innocent spending at the time, a coffee here or a night out at the movies there, ultimately added up to a difficult spot to be in. Perhaps your credit card balances ballooned to maximums, or close. It’s entirely possible that your interest rates increased to 20 percent or even higher. Adding to the pain, would be the penalties derived from missing payments.

The unenviable process of becoming beholden to credit card debt and the potentially devastating consequences of lifestyles, that often many have become extremely accustomed to, can cause a major strain on health, relationships and quality of living.

To anyone who has found themselves in a struggle and fight against credit card debt and tried, let alone succeeded, we salute you. We’ve helped thousands of consumers break the chains of heavy credit card and other unsecured debt and we’ve witnessed countless stories of triumph along the way. One thing is for certain, typically where there is a will there is a way, and while it won’t be easy, rest assured that winning the fight will bring a relief so sweet and rewarding that it will make all efforts worth it!

This guide to beating and overcoming credit card debt has been designed to assist you as motivation or future reference as you take the challenge head-on.

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Take Complete Ownership of Your Debt

Don’t underestimate the power of looking in the mirror and taking responsibility for something you have the ability to change. Credit card debt, and how it has the tendency to slowly spiral out of control, almost always begins with poor choices and that’s okay. It happens to thousands, if not millions of people across the globe every year. The most important thing to realize is that when something goes awry and produces bad results, you can indeed make it better by choosing a different and healthier approach.

While this lesson can be applied to many different facets of life, it’s extremely relevant to the success of digging out of credit card debt. The mounting credit card debt in all reality became a problem when the first balance statement arrived and you couldn’t pay it in full. Credit cards, when used responsibly and with a purpose, can be a good thing. The caveat is the balance owed was never meant to be delayed beyond the first payment due, even in cases where a juicy zero percent interest rate for a number of months is offered, since that ultimately delays the inevitable for many people.

It can feel harsh, but we feel strongly that taking complete responsibility and ownership for your credit card debt will start you off on a positive foot. Considering how many bad feelings, and ultimately the overall negative lifestyle impact that occur from overwhelming credit card debt, taking the initial sting of accepting responsibility early on will make your path to living debt free considerably smoother.

Live by a Budget

As Money Fit’s Education Manager, Todd R. Christensen, routinely reminds attendees of the personal finance workshops he presents, that budgets are for anyone wanting to not just stabilize their finances but also for anyone desiring to avoid debt related problems altogether.

Developing and living by a household budget isn’t just about balancing a checkbook. It’s about being prepared for all spending including items like vehicle repairs, a trip to the dentists and more. Solid budgets take financial goals and priorities into consideration, track actual spending down to the penny and help you identify where you have unnecessary spending.

With a budget that you live by you’ll be armed with your actual spending history and most likely will find additional dollars to assist you in repaying your credit card debt. If you find an extra $20 per month, which would be typically be on the low end, you’ll be able to apply that to your debt and expedite the repayment process. Budgets are a win-win due to the extremely valuable information they apply and the stability they can provide, as well as the freed up funds that may have remained hidden.

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Avoid Home Equity Lines of Credit or Debt Consolidation Loans

In one shot you could wipe out all of your unsecured credit card debt. Gone would be the worries of having multiple payments, cards that are charging high rates and fees, or both. Upon initial consideration this might seem very tempting but as we’ll explain, HELOC (Home Equity Line of Credit) or Debt Consolidation Loans, can cause a tremendous amount of financial strain in the long run.

Consider this, if you swap your unsecured credit card debt for a line of credit attached to your home equity you are essentially wagering that you’ll have no issues with repayment, thus putting your house up as security. Worst case scenario would be you lose your home because you took debt that was unsecured and secured it with your home.

Money Fit advocates for and provides Debt Consolidation for people that need it. We do not promote the use of Debt Consolidation Loans. On it’s face, debt consolidation is the act of consolidating several debts into one payment. This can be an effective strategy when done without a loan. Once you take one large loan to repay several small loans there is a massive risk of running your initial credit card debt right back to where it was, only now you have a large debt consolidation loan to contend with. If you haven’t remedied the source which is typically poor spending habits and still go through with a debt consolidation loan you must avoid using your freshly paid off credit cards at all costs.

Cut-up Your Credit Cards

A powerful and symbolic approach to dealing with credit card debt is to start by cutting them up and removing your access to using them. It can be a difficult step to take but once the cord has been cut you can begin relying on the cash you have from your income. No more borrowing and paying more than necessary. No more staying in a vicious cycle that constantly repeats; charge, pay minimum, charge, pay minimum, charge, pay minimum and never make an impact on the balance of the cards.

You’ve already accepted responsibility for the out of control credit card debt. Now, in a defiant show of power, you’ve cut the credit cards up and have greatly empowered yourself. When you wage a war against credit card debt you effectively take the pledge to never rely on them again. You won’t need the plastic when you reach your destination debt free.

Get a Head Start by Selling Unused or Unnecessary Assets

Take a look around, perhaps you have things that you no longer use or have a need for that you could sell and apply to your credit card debt? Perhaps you could hold a yard sale or sell online? You might surprise yourself with what some of your no longer needed or used items would be worth to someone else.

Doing this can give you a good lump sum to apply to your credit card debt and provide next level momentum as you start your repayment.

On a side note: Do not touch investment dollars such as retirement accounts to repay your credit card debt unless you speak to an investment planner and possibly consider a 401k loan that allows you to pay interest to yourself. While it could be tempting to wipe out a good chunk of the debt right away you must proceed with caution, especially when it comes to your retirement funding. Selling a 401k could cause problems due to being assessed for early withdrawal penalties by the IRS, not to mention leaving yourself short-changed when it comes time to retire.

Pay the Smallest Debt First (Snowball Method)

The debt snowball method, which aims to attack smaller balanced credit cards first and then applying that payment to the next card in line, is a preferred method of repayment for individuals managing their credit card debt on their own. The snowball method, while potentially a bit more expensive than the alternate debt avalanche method (attacks the higher interest rate accounts first) provides the extremely important component of motivation for paying off credit cards.

Psychologically it can be quite important to see progress when we embark on such a challenging mission as paying off credit cards. Smaller rewards like knocking the first card off the list can provide an excellent charge of positive energy and the motivation to keep pressing on.

Debt management plans, such as the program that Money Fit offers through the organizations nonprofit credit counseling services, tend to mix strategies and often attack the higher interest rate payments first. However, the individual relying on the debt management plan is often times more concerned that the balances are going down overall and not as in need of seeing individual account progress as those who are repaying on their own may need.

Micro-Payments Matter - Mix in the Snowflake Method with the Snowball Method if Possible

For the snowball method to really take off and wipe out debt on a quicker pace we recommend blending it with what has been coined as the snowflake method. It’s not really an alternative to the snowball method because it still is contingent upon attacking the smallest balance first until it is wiped out.

Because interest rates are calculated using an average daily balance formula, you can save money in interest by paying as soon as extra money’s available.

Here’s a hypothetical situation, let’s say that during your budgeting you see that you are wasting a considerable amount of money each month on buying a large specialized mocha on the way to work each morning. Instead of spending $5.00 on the coffee you would make a one-time payment to your lowest balanced credit card. Do that 5 times a week and that’s an extra $25 dollars that week towards that card.

Some might think, why not wait until the end of the week and send the $25 payment then? Or wait until the end of the month and pay an extra $100 on the card? There are two reasons to send the payment as soon as the money isn’t spent. First, once the money is sent to the creditor it can’t be spent. Effectively shutting down any reasons not to have it available at the end of the week or the end of the month. Second, interest rates are calculated using an average daily balance formula. You can save money in interest by paying as soon as the money is available.

If you keep at those smaller payments you’ll ultimately get out of debt sooner and the effort will be well-rewarded. You’ll have to stay exceptionally motivated to see it through, but make a routine of it and it won’t be a problem.

Find Additional Sources of Income

At the end of the day, after all the budgeting is complete and the plans are made, it very well may be that your current income isn’t allowing you to fulfill your credit card repayment obligations in a quick enough fashion. To expedite the reprieve you may want to consider finding a part-time job, weekend work or even work from home in your off time.

If you’re in a one job household in which one partner stays home perhaps they can assist for the short term?

It doesn’t sound pleasant, but at the end of the day the additional income could be extremely rewarding. The ultimate goal is relinquishing the burden of debt for the rest of your life. It may be hard to visualize, especially if you’ve struggled making minimum payments for a considerable length of time, but it’s more than worth it. The freedom you’ll obtain to truly begin living life on your terms will be worth the short term sacrifice and it could potentially open up doors you thought were closed such as being able to travel or even start your own business. Maybe you want to help a child through college? The opportunities become almost endless.

Stay Resilient, Find a Motivational Source and Lean on it

It sounds simple enough but the truth is that time has a menacing way of removing the immediacy or urgency of things. That can be a blessing at times but it can also be a hindrance. When you take on the task of repaying your credit card debt you’ll want to stay vigilant the entire time. You won’t be perfect and shouldn’t expect to be but you’ll always want to keep your eye on the prize.

Find an inspirational source and by all means use it. Perhaps it’s following a personal finance expert like Money Fit’s very own Author and Educational Manager, Todd R. Christensen? Maybe it’s as simple as keeping a picture of your loved ones close and using it for motivation when things get tough? Regardless of what you use just know that you aren’t alone and you have the ability to surround yourself with positivity and encouragement. Debt isn’t nearly as taboo of a topic as it once was. People have learned that supporting one another is beneficial to everyone in the long run. Don’t fear judgement. You’re the one with your financial freedom and overall peace of mind on the line.

Once you begin your repayment plan we recommend not looking back unless it’s to look back as a reminder of what not to do if you perceive you’re slipping into old habits. You know what got you into this mess, there is no reason to beat yourself up over it. Keep your mind and your goals forward thinking and the sky will truly be the limit.

You have our best wishes as you embark on your journey. As you take on your debt we invite you to use Money Fit as a resource, regardless if you are a client or not. As a non profit with over 20 years of helping consumers live debt free, we’ve made it our mission to help each and every individual conquer their debt by providing educational resources and encouragement.

If the prospect of repaying your debt on your own is daunting and you’d like to be considered for inclusion in our debt management program we invite you to provide your information online so one of our certified credit counselors can get in touch, or you can call us toll free during normal business hours to schedule your free consultation.

Bankruptcy as a Last Resort

While we are addressing the topic of repaying your credit card debt we want to be sure to address filing for bankruptcy. Our goal is to help individuals overcome their financial woes by repaying their debt in full (which is why we don’t recommend debt settlement as an option) so that they can protect and build their credit score. Over the course of a persons life, a positive credit score can be extremely advantageous over a poor one.

That being said, there are reasons why bankruptcy is available. If you haven’t filed for bankruptcy in the last 8 or so years you’ll need to speak to a highly qualified and skilled bankruptcy attorney. While Money Fit provides bankruptcy counseling and debtor education, we aren’t attorneys and don’t dispense legal advice. All information is provided for consumers to use as research as they seek to learn how to manage their debt and shouldn’t be considered or construed as legal advice.