Monday, May 7, 2018
10 Tips for Paying Down Credit Card Debt
Credit Card debt has become the bane of our generations existence. I remember my first credit card. I was 19 years old and the bank was more than happy to give me a card with a $1000 limit even though that was roughly my income every month. By the end of my first year of university, I had 4 credit cards and $3000 in credit card debt. A lot has changed since then, and I now fear going back to that time. Credit Card debt is crippling Canadians. Interest rates are borderline criminal with most being around 20% and some even as high as 29%. This makes getting out of the debt seem impossible. Today I am going to give you 10 tips to help you pay down your credit card debt. Once that debt is gone, you can focus on more productive things to do with your money, like saving for the future.
1) Stop using them
This seems pretty obvious, and yet I feel it is the number one reason people don’t get out of credit card debt. In order to get rid of the debt you have, you can’t rack up more debt. This means that you literally cannot use your credit cards at all if you are trying to pay them off. Again, that seems simple, but the meaning behind it is somewhat hidden. You must balance your budget every month. You cannot have more money being spent than being earned on a monthly basis if you wish to pay off debt. This means you need to implement a written budget. This will show you what you need to spend your money on every month and show the excess that is being wasted. This process was mentioned first for a reason. You cannot proceed with paying down debt without a written budget. It just doesn’t work.
2) Round up payments
Ever notice that your minimum monthly payments don’t really make a dent in your debts? That is because interest charges are eating away at your monthly payment. A good chunk of what you pay every month is going towards making the credit company a profit and not towards your principle. This is why in the top right corner of your bill it says it will take 175 months to pay off your balance if you only make the monthly minimums. To get rid of the debt you must pay more than that. Try rounding up your payments every month if you are struggling to come up with the extra money. If you are paying $130 for a minimum payment, try paying $150 or even $200. That extra $70 might seem impossible, but if you get rolling I promise you won’t even notice it.
3) Pick up extra shifts or a part-time job
There is absolutely no shame in picking up extra work to pay down debt. In fact, it might be the only way you can do it. One extra shift a week could mean $100 – $150 in extra money every week. That could mean $5,000 – $7,500 in extra money every year. That could be the ticket to wiping out your debt completely. It definitely won’t happen if you continue what you are doing. If your budget is super tight and you have no extra money to pay down debt, the answer is simple. You must make more money.
4) Balance protector insurance
I remember paying down a large debt that seemed almost impossible. During that time, I was putting an impressive $1500 a month towards it. I noticed that only about $900 of that money was actually going towards the principle. I found out that I was paying $150 a month in balance protector insurance to the bank on that credit card debt. This “insurance” paid my monthly minimums if I were to get hurt or sick and cannot work. While that sounds reasonable, it was also preventing me from paying back my debt sooner. I immediately took off that insurance and continued to pay back my debt. It shaved about a month and a half of my payment schedule. You can get personal forms of insurance that can accomplish the same task but much cheaper.
5) Ask for lower rates
Your credit card company will often lower your rates if you call and ask. One good way of getting lower rates is threatening to move your balance to a lower interest rate with a rival company. If you are paying 19% interest, it will take you a very long time to pay back a large amount of credit card debt. Paying half that amount of interest will allow you to pay back your debt sooner. You can always threaten to default on the debt as well. That may or may not work to get a lower rate, but it is worth a try.
6) Balance transfers
Many banks and credit card companies offer you a lower introductory rate if you transfer your credit card balance to them. If trying to get a lower rate from the company didn’t work, try moving your balance to another card. You can even get as low as 0% from some companies. Remember this, however: this should only be used if you are serious about paying down your debt. There is no point in getting a lower rate and continuing to rack up debt. Also understand that this low rate is often for a limited amount of time, such as 6 months. The rate will then jump back to normal. Use that time to pay down the debt as fast as you can. Have a strategy going into the process so you don’t waste time. This isn’t a way to solve your problems, but it will help you pay down the debt sooner.
7) Get rid of automatic payments
Many of us have recurring automatic payments coming out of our accounts on a monthly basis. These could include memberships, subscriptions, certain bills, and fees. Eliminating these auto payments from your credit cards can help you pay them down sooner. This is especially true if you are not using them for anything in particular, like unused gym memberships. When paying down debt, you must have an airtight budget. Any leakage will cause the whole plan to collapse so get vigilant with monthly withdrawals from your credit card or bank account.
8) Attack the higher interest debt first
The traditional method of paying down debt is to attack the highest interest debt first, then work your way to the lower interest ones. This method is effective because it is your higher interest debts that are hurting your cash flow the most. It is not uncommon for credit cards to have interest rates around 25%, usually from a department store. That is some serious interest that cripples your ability to pay the balance back. Getting rid of those balances and working your way down to the smaller interest debts will help you pay down the debt sooner. The key is to stay focused and determined.
9) Use the debt snowball
Another useful method for paying down debts is the debt snowball method, popularized by one of my favorite money gurus, Dave Ramsey. The debt snowball implies that you will pay down the smallest debt first, and then work your way to the larger ones. It is like a snowball rolling down a hill. It starts off small then picks up steam and gets bigger and bigger. The reason this method is popular is that paying off a debt gives you the sense of satisfaction that will keep you on track to become debt free. The feeling of excitement when a debt is paid off, even if it is a small one, will keep you pushing until they all are paid off. I personally like this method best. I feel that paying off debt is more about mentality than about the numbers themselves, in most cases of course. I feel that with the right mentality any debt can be paid off and the debt snowball allows you to have that mentality.
10) Refinance your mortgage
I am of the ilk where having a paid off mortgage is the ultimate goal. Despite this, I do advocate mortgage refinancing in some cases. If you have monthly debt payments that are causing you to not be able to pay your bills or eat or both, then there is a major problem. A dedicated budget needs to be implemented and the debt needs to be gotten rid of as soon as possible. Paying absurd interest rates does not allow you to do that, so using the equity in your home to get rid of debt is useful. I want to stress that this should not be the cure to your debt woes, only the tool. The cure is curbing your spending, making more money and saving for the future. If you refinance your home, be prepared to make a drastic change in your lifestyle so you never have to go back to that spot again. Again, I stress you have to use the refinance as a smart move based on interest rates, not as the cure-all to a reckless lifestyle. Draw a line in the sand and say no more, or else you could be faced with this problem in a few more years with no equity left in your home.
If you have credit card debt you should make it your top goal to get it paid down. Having it will hamper your ability to meet your monthly cash flow needs and save for the future. It also prevents you from taking advantage of opportunities like buying a home or starting your own business. Getting on track isn’t impossible, you just need the right plan along with dedication and determination.
“Some people are just stuck in their ways and have been brainwashed into believing that credit cards and debt are an unavoidable part of life.” – Dave Ramsey
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