(Tiny Tips) – Eliminating credit card debt can be a huge stress reliever. Carrying debt can be stressful, and high-interest loans can put a strain on your finances. But paying off your credit card debt is possible—you just need a solid plan.
To help you deal with your debt, we’ll walk you through how to lay the foundation you need to eliminate it and share some successful strategies you can use now. We also explain strategies that may work for those who feel financially strong, as well as some tips that may work for those who feel financially strapped. Let’s start.
Take Control of Your Budget
Basic financial stability is an important component of debt repayment. Achieving this goal is easier said than done, but creating an effective budget is a critical step. No matter what, you need to find a way to make sure your income exceeds your monthly expenses. When you find yourself in this position, you benefit in two ways:
- You can avoid adding to your debt.
- You can use this “extra” money to pay off your loan balance.
Notes
Essentially, you have two options for making more money than you need to spend: increase your income or decrease your monthly expenses.
Your income, expenses, and budget depend on a variety of factors, including your job, family situation and health. Creating a monthly budget that meets your needs is the first step to becoming debt-free.
Use the Debt Snowball or Debt Avalanche Method
When it comes to paying off debt, you can definitely hurry up—spending a little extra on your credit card bill is never a bad idea. But with a little planning, you can gain confidence while improving your chances of success. Two popular ways to pay off debt are:
- Debt snowball: Pay off the loan with the smallest balance first.
- Debt avalanche: Prioritize cards with the highest interest rates.
Debt Snowballs
The Debt Snowball is a strategy to help you build momentum as you pay off your credit card debt. To use this method:
- Make a list of all your credit card debt. Then sort by the balance size from small to large.
- Make the minimum required monthly payments on all credit cards.
- If you have funds left, pay them to the card with the lowest balance.
- Repeat this every month until the minimum balance is paid off. Celebrate this victory!
- Check out the new minimum ratio – this is your new goal. Add additional amounts to that balance, including amounts from your paid-off balance.
- Repeat if necessary.
Over time, the amount you pay for each balance increases based on the minimum payment you make plus any amounts you use on other cards. Your payments will “snowball” until you’re debt-free. Debt snowballing is a psychologically beneficial strategy because it boosts your confidence each time you pay off debt and can lead to a series of quick wins. And since you start with the smallest amount of debt, it shouldn’t take too long to get your first win.
Debt Avalanche
Debt Avalanche can help you minimize the total amount of interest you’ll pay when you pay off your debt. It differs from the debt snowball concept in that it’s less concerned with the psychology of small, quick wins and instead focuses primarily on minimizing the total amount of interest you’ll pay as you pay off your debt. You can achieve your goals faster this way because the overall cost of the same payment history is lower. Instead of prioritizing by balance, focus on interest rates:
- Make a list of all your credit card debt and organize it by interest rate. The card with the best interest rate should be at the top of your list.
- Continue to make the required minimum payment on each balance.
- If you have extra money, put it toward the balance with the highest interest rate.
- Repeat this every month until you pay off the high-interest card. Celebrate this victory!
- Focus on the balance with the next highest interest rate. Use the extra money to pay off those debts, including the balance you paid off that you just paid off.
- Repeat if necessary.
If you have a larger balance, the debt avalanche may not happen anytime soon. However, this approach should help you save a lifetime of interest costs by paying off your most expensive debt first.
Debt Snowball and Debt Avalanche
The biggest goal is to pay off debt. While it may make mathematical sense to take advantage of the debt avalanche, it doesn’t make sense unless you actually pay it off. If you get discouraged and lose motivation (or see this happening in the future), try a debt snowball.
If you want to see how either strategy affects your debt, crunch the numbers yourself. Creating a spreadsheet that shows how your credit card payments (and additional payments) work isn’t particularly difficult.
Consolidate To Lower Interest Rates
High interest rates make it difficult to get a foothold. Even if you work hard to make your payments, it can feel futile when you see monthly interest charges piling up on your balance. Minimizing these interest costs can help you save money in the long run and get out of debt faster.
0% balance transfer
Credit card issuers sometimes offer promotional balance transfers with a 0% annual percentage rate (APR). You can take advantage of these special offers to transfer your debt to a new card and avoid interest charges (temporarily). If you’re still using that balance, make sure you know what interest rate you’ll pay after the promotion ends. Additionally, be aware of any balance transfer fees that may affect your debt transfer benefits. For a list of the most competitive offers, see our roundup of the best balance transfer cards.
Debt consolidation loan
If you haven’t had much luck with 0% deals, a debt consolidation loan might help. Finding a personal loan with an interest rate lower than your credit card interest rate can save you money on interest each month.
Notes
Once you get a lower interest rate, don’t relax – it’s important to continue paying off the balance aggressively, which may mean paying more than the minimum on your new loan.
First, check out some of the best debt consolidation loan lenders.
Negotiate with lender
You may be able to get a lower interest rate without moving your balance. If you’re not sure whether you can get approved for a consolidation loan at an attractive interest rate, try negotiating with your current card issuer.
Contact your card issuer and ask them to lower your interest rate. To improve your chances, emphasize why the card issuer would benefit from working with you: your history of on-time payments, your long-term relationship, or your improved credit score. You can also mention any recent hardships, such as a job loss or unexpected medical bills.
This strategy can save you a lot of money in just one call. When you lower your credit card interest rate, more of your monthly payment goes towards reducing your balance. Paying off debt becomes easier when the balance is smaller (and growing at a slower rate).
Notes
Use the solutions above to make your debt repayment journey as complete as possible. The options listed below should only be used as a last resort, as they may make the situation worse. But sometimes desperate measures make sense.
Consider borrowing from your retirement account
Generally speaking, it’s not recommended to increase retirement savings to pay down debt. Retirement accounts are generally protected by creditors, so lenders generally can’t force you to withdraw those funds to pay off debt. Additionally, time is an important factor when it comes to saving for retirement. Taking out loans and withdrawals from your retirement plan can slow down your progress toward retirement or cause you to have to start from scratch.
However, if you have no other choice, it might make sense to use a loan from your retirement savings to pay off your credit card debt – if both of the following conditions are met:
- You pay extremely high interest rates on your debt.
- You have the confidence to repay the loan.
Unfortunately, it’s difficult to predict whether you’ll be able to repay your loan. Life is full of surprises, and if you quit your job before paying off your 401(k) loan, you may have to pay taxes and penalties. You may also have to repay the loan in full.
Not all retirement accounts offer loans. Employer-sponsored plans such as 401(k), 403(b), or 457(b) may have a loan feature, but your employer decides whether to include this option. Individual retirement accounts such as traditional or Roth IRAs do not offer loans. You can withdraw contributions from a Roth IRA, but if you are under age 59½, you will pay a 10% penalty.
Consider a HELOC
If you have a lot of equity in your home, you can consolidate your credit card debt with a home equity loan. However, canceling a home equity line of credit (HELOC) puts your home at risk.
Notes
In the worst-case scenario, failure to pay a credit card company could result in lawsuits and judgments against you. However, if you don’t make your HELOC payments on time, the bank may seize your home, force you to move out and sell the property to collect the amount you owe.
HELOCs can also end in a lump sum or “balloon payment,” which reduces the benefits of consolidation. Be sure to consider these costs when making your decision. 5
Use credit counseling
If you’d like to seek professional help, a nonprofit credit counseling service may be able to help you get your debt under control. These organizations provide advice and education. You can also arrange a debt management plan with monthly payments through credit counseling that applies to multiple debts. You may also benefit from lower rates or fee waivers.
Pros
- Lower monthly payments
- Help from a professional credit counselor
- Minimize damage to your credit score (if you keep up with payments)
- Single monthly payment
Cons
- Fees reduce cash flow toward your balances
- Potential for predatory or exploitative agencies
Ready to get started? Researchers at The Balance reviewed numerous services to identify some of the best credit counseling agencies.
Look at the debt settlement status
If there’s no realistic way to pay off your credit cards, you might consider debt settlement. You and your lender can agree to an amount that’s less than what you currently owe and that’s satisfactory to the lender. 6 As part of the agreement, your lender should not attempt to collect the debt or take legal action against you after you have paid. The agreed amount.
You can pay off your debt with a lump sum or multiple payments. Either way, make sure to get everything in writing so the agreement is clear. You can attempt debt settlement on your own, or hire a debt settlement company to guide you through the process and negotiate on your behalf.
- Notes
- Avoid debt settlement companies that charge upfront fees or make significant commitments. There’s no guarantee that your creditors will agree to your proposal, and it’s unlikely that you’ll settle for a low price.
Debt settlement is a cost-effective solution that can free you from the burden of debt and give you peace of mind that you won’t have to struggle forever. However, paying down debt can hurt your credit score. Additionally, if you stop paying your credit card balance while you’re paying down your debt, the balance may continue to grow due to late fees and interest charges.
In Conclusion, Pay Off Credit Card Debt
Credit card debt is toxic, and imagining paying off a large amount of debt can be overwhelming. But once you pay off your credit card, you can use all your money to do more important things. You can plan and save for future goals and reduce stress when your monthly bills come due. It may be a long journey, but it’s worth it.
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