If you are in over your head in credit card debt, you might feel like there’s no way out of it. Luckily, there are ways, even if you don’t have large sums of money to throw at the debt. The key, no matter which method you choose, is consistency. Don’t give up, even when you feel like you aren’t getting anywhere. Every step you take to get yourself out of credit card debt will be worth it in the end, but it won’t work without consistency!
The Snowball Effect
Do you know how much credit card debt you have? Do you know the interest rates on each credit card? This is information you should know, as it will help you win with the snowball effect. With this method, you choose the credit card with the lowest balance. You start making more than the minimum payments on this credit card. Once you pay it off, you put that credit card away and don’t use it! Now you make the same payment to the next credit card in line, plus the minimum required payment. Here’s an example:
Joe has 5 credit cards. The balances on the credit cards are $1,000, $1,500, $2,000, $2,500, and $3,000. Joe starts working on the $1,000 credit card since it has the lowest balance. Rather than the $25 minimum payment required, Joe pays $300 towards that credit card. At the same time, he continues making the minimum required payments on the remaining credit cards.
After the fourth month, Joe will have paid off the $1,000 credit card. He then moves onto the $1,500 credit card. This time he will pay the $300 plus the minimum required payment he was already making on this card. This will help pay the $1,500 credit card off even faster. Again, Joe continues making the minimum required payment on the other 3 credit cards. Joe continues this method until all credit cards are paid off in full.
The Avalanche Method
The avalanche method is when your interest rates become important. You order your credit cards in order of interest rates rather than balance. You then choose the credit card with the highest interest rate and start paying it down. You use the same method that you would use in the snowball method. You make a consistent lump sum payment to the same credit card each month. You then take that amount and add it to the minimum required payment on the next credit card with the highest interest rate.
Using this method helps to decrease the amount of interest you pay. You might not pay off the largest or smallest credit card first. What really matters is that you get rid of the debt that has the highest interest rate, as that credit card is costing you the most money in the end.
Make Multiple Payments Per Month
If you don’t have a lot of extra money to throw at a credit card, consider making two minimum monthly payments per month. For example, if your minimum monthly payment is $25, pay that amount every two weeks. This will lower the average daily balance of your credit card, therefore reducing the amount of interest you will pay in the end.
With this method, it helps to spread the payments out every two weeks, rather than making one large payment on the due date. If you wait, you keep the average daily balance higher than necessary. By making that extra payment mid-month, you keep the balance down and hopefully pay less interest in the end.
Transfer to a 0% Credit Card
While transferring debt certainly doesn’t mean getting out of debt, it’s a step in the right direction. If you are eligible for a 0% balance transfer credit card, take it. You can then transfer your debts to that card. Now you don’t accrue interest, which makes it easier to get ahead of your balance.
Keep in mind, you probably have a certain window of opportunity to pay your debt off before interest kicks in again. Don’t let that date get past you. Instead, try to pay the debt off in full before the interest kicks in, this way you are out of debt and it didn’t cost you a lot of extra money. You will likely have to pay a balance transfer fee between 3% and 5% of the balance, but that’s better than paying interest for the next 5 – 10 years.
Consolidate Your Debt
If you can’t get a 0% credit card, you may also consolidate your debt with your mortgage. Known as a cash-out refinance or debt consolidation loan, you can usually secure low interest rates on these types of loans.
In order to qualify, you will need adequate equity in your home. Most loan programs allow you to borrow up to 80% of your home’s value. If you owe say 70% on a mortgage, you still have another 10% of the equity that you can use to consolidate your debts.
If you choose this option, don’t make the mistake of racking up your credit cards after you use your home’s equity to pay them off. Put the credit cards in a safe or another place where they are out of the way, but can be used in the case of a serious emergency.
Now that the debt is wrapped up in your mortgage, you’ll pay on it for the next 15 – 30 years. So don’t think you are ‘debt free;’ you still owe it, just in a different way. Avoiding the use of your credit cards moving forward will help you get into a better position.
Paying off your credit card debt should be a goal, especially before you hit retirement. If you have too much debt to handle, consider choosing one of the above methods to start paying it off. Remember, consistency is the key. Don’t give up and eventually you’ll find yourself debt free.