How to Get Rid of Credit Card Debt
Credit card debt is all to common. Most than 45% of Americans carry a balance every month. This is even after knowing that this balance will eventually come back with a vengeance. A cardholder who owes $15,956 (the average debt per household) will need to pay $11,000 in interest if only the minimum due is paid each month. This is why it’s extremely financially savvy to get rid of credit card debt.
Life can throw many unexpected events. Some people get into debt after losing a job or getting very ill. Regardless of the cause, hopefully you are now in a place where you are ready to tackle ridding yourself of this financial burden. This will ultimately save thousands of dollars in interest fees. Here are the 5 steps to create a plan to get rid of credit card debt.
1. Budget your expenses and make sure you live within your means.
This is an obvious one, but it still is amazing the number of people that try to eliminate their credit card debt without having any accounting in place to figure out where their money goes versus how much they bring in.
By ensuring that this step is done, you are confident that you won’t increase your credit card debt month over month. If after this budget exercise, that’s the case, you’ll have to figure out how to decrease your costs. Whether it’s eating out less often or something more drastic like moving into a lower rent location, you will need to make these changes in your life before you can move forward with eliminating your credit card debt.
To learn more about budgeting, check out our guide on How to Budget Your Money.
2. Pay off one card at a time, from highest to lowest interest rate.
If you are having trouble paying off multiple cards, then rather than trying to pay them off evenly, you will pay less in interest if you try to tackle paying off the card with the highest interest rate first. And then move on to the next one from there.
A bonus of doing this approach is that you will feel the momentum at having paid off one card, then the next, and then the next. There will be a satisfaction at having a reduced number of cards carrying a balance month-over-month.
3. Ask if you can get a lower interest rate from your creditors.
It never hurts to ask. One phone call to your credit card issuer often allows you to have a lower interest rate. This typically works better if you have a good credit score already (730 or higher). It’s even better if you are also a long-term customer that typically makes payments on time. Still, it may be worth it to try even if you don’t meet these requirements. Even a decrease or a percentage point or two can add up to hundreds of dollars saved in interest per year.
4. Use a peer-to-peer lender.
Using a peer-to-peer lender means that you’ll borrow money from another service, such as LendingClub.com or Prosper.com. Then, use this borrowed money to pay off your credit cards and get rid of your credit card debt. Then, you’ll just have one loan with an interest rate that is typically around 20% to 30% lower than most credit cards. This can make it easier to track how much you need to pay off per month and also save on interest payments.
5. Make two minimum payments each month.
Maybe it’s easier for you to make the minimum payment on your cards after your paycheck arrives every other week. It’s far better to make two minimum payments each month as opposed to one. For example, if you charged $2,000 on a card with a 17% interest rate and only make the minimum monthly payment, it would take 21 years to pay off the entire balance. But if instead you made an additional minimum payment every month, it would only take 3 years. Every bit counts, even if it doesn’t seem like it. So, consider making payments not just once but twice a month to your credit cards.