Today someone posted a cry for help on Facebook. They were in credit card debt and didn’t know how to get out of it.
Boy, did they get some bad advice!
It is very easy to get into credit card debt. And, there are times in our lives when it makes sense to charge it. But what do we do when enough is enough and its time to say bye bye to finance charges.
First, Get a Budget
It is pointless to try getting out of debt if you haven’t gotten a handle on your spending. There are a lot of ways to do that. What has always worked for me is automating payment of my “have to’s” first, and then playing around with money left over for my “get to’s”. This ensures all my bills are paid before I blow it on something else.
Second, Line Up Your Debt
Crack open that excel spreadsheet and list out all your cards. Put the total balance, the APR, and the minimum payment due.
Choose Your Method
There are 2 ways to go about paying off debt that work. You can focus on the card that charges you the most interest (highest APR) or you can focus on the card with the lowest balance.
If you focus on the one with the highest APR first, you will pay less interest in the long run.
However, focusing on the one with the lowest balance will get you a quicker win. Sometimes that is the motivation we need to keep going.
Either of these is better than the shotgun approach I see people use. They randomly pay here and there with no real strategy. This keeps you running in place.
The Mechanics of Debt Payoff
Now that you have chose the best card to pay off first, follow these simple steps:
1. Pay the minimum balance on every card.
2. For the card you have chosen to focus on, pay as much extra towards that one card as you can.
Hurray, One Card Is Paid Off!
If you did steps 1 and 2, you should have will pay off one of your credit cards – hopefully relatively quickly since all your extra money has been directed at that balance. Here is what you do next:
1. Pick the next card to focus on.
2. Take the money you WERE spending on card #1 plus the money you were spending on your new focus card and apply it all to this balance.
You should make even faster progress on this card. You are still making the same total amount of debt payments each month, but now you are making it on fewer cards.
As you continue paying off cards and applying those payments to more cards you quickly pick up steam and can pay them off in no time!
What Not To Do
You will get a lot of bad advice on what you can do to get yourself out of debt. It is well intentioned, and likely makes logical sense. However, we know money ain’t logical – it’s emotional!
Should I Get a Consolidation Loan
Probably not. If your debt is due to spending more than you make, and you still spend more than you make then you will likely end up with just more debt.
Should I Get a Home Equity Loan
I hate to say never, but never take unsecured debt and turn it into secured debt. With credit card debt that goes bad you can be sued, and that is no fun. They can even garnish your wages or put a lien upon your house.
In many situations, borrowers will take out a line on their home or refinance to get the cash to pay off cards. If they have not addressed the financial behaviors that caused the debt in the first place they end up getting the cards back out and using them. Now, they have both higher mortgage debt and credit card debt. Not good.
Should I Work With a Third Party to Settle My Debt
Probably not, unless they are a reputable, free non-profit. There can be tax consequences to doing a debt settlement that might come around to bit you later. If you owe taxes, the IRS has quite a bit a power to collect what is owed.
What Else Can You Do
There are some simple things you can do to make paying off your debt easier.
For example, calling your creditors and asking for a lower rate often works. You can do that for yourself for free.
Also, some people struggle with the timing of when things are do. If all your payments are due around the same time, it is very easy to ask for a billing date change. Sometimes just spreading the payments out to align better with your paydays goes along way to making payoff easier.
If you are trying to payoff your debt and unsure of where to start. Hit me up. I would love to talk strategy with you!