To help consumers get rid of credit card debt we created a short checklist of things to consider.
On July 1, 1804, only ten days before his duel, Alexander Hamilton created a list of his debts in case, “an an accident should happen to me”.
Debt happens to the best of us and more than the money, there’s the daily stress of it. There are plenty of ways to get into debt, but of all the types, credit card debt is probably the worst.
- Super high interest rates
- Compounding APR
- Late fees and penalties
- Hits to your credit report
- Robot cell phone calls
- Letters in the mail
Below are 6 steps you can use to get rid of credit card debt.
#1. Calculate Disposable Income
i. Gather all your pay stubs.
ii. Examine your gross income (after all taxes and deductions).
iii. Get your monthly credit card statements.
iv. Carefully go through your expenses and highlight the absolute needs with a green marker (mortgage payment, cell phone bill, food, etc), highlight in yellow the non-essential purchases (online shopping, snack and drinks, restaurants, drinks with friends, etc.), and with a pink marker highlight the expenses that could go either way (new shoes, vacuum cleaner, $40 haircut).
v. Given your monthly income (after taxes and essentials), calculate your disposable income.
The highlights you made will help give you a visual of what you can afford (until you’re out of debt at least).
#2. Create a weekly, monthly, and annual budget.
i. Based on your disposable income, think of how you want to allocate your budget. For me it helps creating both a weekly and monthly budget.
ii. When you’ve finished your budget plan, multiply it for the entire year.
#3. Make your minimum payments.
i. If you have multiple credit card balances, make at least the minimum payment for each of your credit card statements. Late fees are added onto the total amount owed and will compound at the interest rate.
Even if you can't afford the minimum payment, it's better to pay something vs. nothing at all!
#4. Pay off your high interest debt first.
i. If you have multiple credit cards, student loans, a mortgage, car loan, or other form of debt, compile them into all into a list and rank them by the interest rate in descending order.
ii. Obviously you will want to prioritize the highest interest debt first.
This will likely be your credit card or charge card(s) which can have a 14.99% to 26.99% Variable APR (interest rate).
Credit cards have a 12.99% - 22.99% Variable APR.
iii. For mortgages and student loan debt, you might be eligible for a lower interest rate by refinancing.
iv. Examine your credit card debt and throw away the ones with the highest interest rates.
v. If you have a new card with 0% APR (typically offered for the first year), you can use it to pay off credit cards with the highest variable interest. Make sure to check if there’s a fee though. Sometimes cards will charge you 1-3% of the balance transfer total!
#5. Automate your payments online.
i. For charge card and credit card debt, missing a payment is the absolute worst thing you could do to yourself. As a backup plan you can go online and automate payment to each card using funds in your checking or savings account.
ii. Since credit card statements arrive every 30 days we suggest setting up calendar alerts.
#6. Call credit card companies to lower interest rate.
i. This step takes a bit more initiative on your part. Depending on your financial situation the credit card companies might be willing to negotiate a lower interest rate or put you on a repayment plan (at zero or low interest).
ii. Be honest with them about your income and difficulty in paying off your balance.
Believe it or not, credit card companies will make allowances for hardship cases and high debt-to-income ratios. Your creditors are in a position to lower your interest rate and if you catch them in a good mood, they might lower your interest a significant amount. They’d rather have you pay less vs. filing for bankruptcy or default on the entire payment.
Optional: Put your savings to use.
i. If you have a healthy savings account and still carry a fair amount of debt – consider using some of your savings to pay it down.Saving for a rainy day is a good thing, but if you’re paying 22.99% interest on $10,000 you’ll end up losing up to $2,500 per year (because interest is compounding). In any case it’s worth looking into!
Remember that paying off financial debt isn’t easy. It can take years to pay off sometimes – hopefully that won’t be the case for most, but it’s important to have an estimated timeline of when you’ll be solvent again.
Financial discipline is required to get rid of credit card debt fast!