According to Bankrate, as of August 2024, 50% of Americans are carrying credit card debt and 3 in 5 are carrying it for more than a year. If you’re part of the half that has credit card debt, I have some tips for you to help get you out. I’m not saying it’s going to be easy, it wasn’t for me, and I think it rarely is for anyone since there’s usually a reason why we’re carrying it to begin with.
First, you need to figure out why you have the debt to begin with. The reason this is the most important step is because this step is what will help you create your plan for the rest. Without addressing the root cause, you’re not likely to be successful in the goal of being rid of this debt. In my case, I had two reasons for my early credit card debt: 1. I didn’t have any savings so any little unexpected surprise was charged on a card 2. I was spending a lot on unhealthy food that I didn’t even like.
Second, you need to come up with a plan to change whatever the root cause is. In my case, I had to start saving consistently for unexpected problems and I also had to start learning how to cook healthy meals at home. At this stage is when you should come up with a budget, if you don’t already have one, so that you know how much you can afford to put toward your goals. Your budget should include the minimum payments to each of your credit cards and have some funds that you can allocate towards making extra payments toward your credit cards. It doesn’t have to be a lot at this point, but it does have to be something.
Third, start implementing the plan you came up with. In my case, I gave myself a first goal to save $500 and to start cooking at home 3 days per week. I kept it simple because my main goal was to have a little wiggle room in case anything happened, I wouldn’t have to charge it again, and also so I could see myself making progress.
Fourth, now that you have a good plan and you are working on carrying it out, you’ll need to start increasing the amount that you are putting toward paying off the debt each month. This is where you find ways to make side income that are easy for you and preferably that you at least kind of enjoy.
Those are the main steps to paying off your debt. Now we do need to discuss how to decide where your payments go in order to make your debt payoff more effective.
Effectively Ending Your Debt
The two most well known ones are the debt snowball method and the debt avalanche method. Both methods require you to organize all of your credit card debt, but slightly differently.
Debt snowball method: This is where you focus on on paying off the smallest debt first and then move on to the next lowest one.
For example, let’s say these are your cards. You would line them up based on the smallest balance to the largest balance and you would pay the minimum payment on each card each month. Then you would use the amount you’ve set up in your budget as excess debt payment money, let’s say $50, and put it all toward Card 1. So you would be paying $100 each month to Card 1 until that card has a $0 balance. Once that one has been paid off, you would then take the excess funds, $50, plus the minimum payment from Card 1, $50, and put it all toward Card 2. So now you would be paying $220 each month for Card 2 until that one has been paid off. Then you would take those $220 and pay those, plus the minimum payment to Card 3 until that’s paid off.
- Card 1: $500, minimum payment: $50; interest rate: 21.2%
- Card 2: $1,200, minimum payment: $120; interest rate: 25.4%
- Card 3: $1,500, minimum payment: $150; interest rate: 29.9%
Pros: you feel good about paying off a card and then have a desire to continue paying off the next ones
Cons: you pay more in interest because you’re not taking those into account
Debt Avalanche method: This method has you organizing your cards by interest rate and NOT by balance so that you pay off the highest interest rate card first and thus pay less in interest.
Example: In this case the payment part would be the exact same as in the previous example, with the only difference being which card is paid first. In this case, Card 3 is the one with the highest interest rate so that one would get all the extra funds going toward it until it gets paid off and then you’d continue down the list.
- Card 3: $1,500, minimum payment: $150, interest rate: 29.9%
- Card 2: $1,200, minimum payment: $120, interest rate: 25.4%
- Card 1: $500, minimum payment: $50, interest rate: 21.2%
Pros: you pay less interest
Cons: you might see less of a noticeable achievement at the beginning
Tomorrow, I’ll go over a few more ways to help you get out from under the debt.
TLDR:
- Figure out the root cause.
- Create a plan to change the root cause and a budget
- Implement the budget/plan consistently
- Earn side income to pay as much as possible each month
Two Main Debt Repayment Methods
- Debt Snowball: Better if you’re more emotional and want to see faster wins
- Debt Avalanche: Better if you’re more logical and don’t want to pay extra $$ unnecessarily
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