Credit card debt is a national issue in the United States. In fact, according to the Federal Reserve Bank Of New York, household debt balances in the United States increased by $193 billion in the last quarter of 2019 and now are a whopping $14.15 trillion. One common source of household debt is credit cards.
But having significant amounts of debt can impact your credit score and might cramp your lifestyle.
Paying off credit card debt isn’t easy, but with a smart credit card debt elimination plan, you can start making a dent in your debt—without giving up everything in your life that brings you joy.
How Do You Determine Debt Level?
First things first: In order to pay off debt, it can be helpful to know actual numbers. One way to help get concrete numbers is to gather monthly credit card statements and start to add up total debts. While sitting down and adding up those numbers might seem scary, getting all the information can be a great first step to tackling credit card debt once and for all.
When adding up the amount of debt owed, it might also be helpful to take interest into account—thanks to high interest rates, some debts may actually be higher than the initial amount owed, even after making payments.
A credit card interest calculator can help determine the cost of debt once interest is factored in.
Accounting for Living Expenses
We all know that credit card payments aren’t the only expense in life, which means part of tackling credit card debt may require assessing the other expenses life brings.
A well-prepped budget might already list costs like rent or a mortgage, food costs, child care, and transportation. These costs can be important in determining how much money may be available for a credit card payoff project.
In lieu of a budget, a list of all of your monthly fixed expenses can help provide the information needed to determine living expenses. This list might include things like housing costs, child care, transportation, food, education costs, loan payments, and other expenses.
While it may seem difficult to gather all these numbers, the convenience of online banking and finance tracking makes it easier than ever to see what we are spending and where. Most of the information about expenses might be as easy to find as logging in to online banking and reviewing credit card or debit card transactions.
Those who prefer the analog to the digital might find the needed information in bank statements, loan paperwork, and receipts. Using these documents can help create a picture of general monthly spending.
However you do it, figuring out what you’re currently spending might help you find the best way to build a credit card payoff plan.
Recommended: Budgeting for Basic Living Expenses
Creating a Budget
After taking stock of financials like your monthly expenses, hunkering down and making a budget is the next logical step. Making a budget may help determine how much extra money there is in the budget to put towards paying off credit card debt.
Making a budget involves looking at your total income less your established expenses, as well as looking at where you’re spending money that could be rerouted towards loan payments. For example, discretionary income that is left over after expenses are covered could be used towards your debt elimination plan.
Recommended: How to Make a Monthly Budget
Establishing a Plan To Tackle Debt
Once you have an idea of your debt relative to your expenses and income, it’s time to determine the best strategy to pay off your debt. There is no one-size-fits-all plan for credit card debt elimination, so it is important to consider what type of payoff plan will work best for your specific circumstances.
One popular debt elimination plan is called the snowball method. It’s called this because much like building a snowball, you start with your smallest debt, and then roll on to the next highest debt, and so on.
So for example, if a borrower has three separate credit cards with balances of $1,000, $5,000, and $10,000, the snowball method would call for paying off the card with the $1,000 balance first by putting extra money towards that debt while paying on only the minimum balance on the cards with $5,000 and $10,000 balances.
Once the $1,000 debt is paid off, the borrower would then use the newly freed up money from the $1,000 debt payment to start making higher payments on the $5,000 debt and so on. This method is popular because paying off a small debt can help you gather momentum to keep paying off larger debts.
Another popular pay-off plan involves paying off the balance of the credit card with the higher interest rate first. In this scenario, a borrower who has three separate credit cards with interest rates of 17%, 20%, and 22% would focus on paying down the credit card with the 22% interest rate first.
Why focus on the credit card with the highest interest rate? Higher interest rates could equal more money paid overtime, which means that paying off the highest-interest-bearing card could cost more the longer it takes to pay off.
Consequently, paying off the card with the highest interest rate first could help you save money instead of allowing it to accrue more interest while you pay off other credit cards.
If the snowball method or the highest-interest-rate method aren’t quite right for you, you may want to consider credit card consolidation. Consolidating your credit card debt involves either transferring your debt to a new credit card with, ideally, a lower interest rate or taking out a personal loan with potentially more favorable terms to pay off existing credit card debt.
Why replace one type of debt with another type of debt? Some borrowers may qualify for a lower interest rate on a personal loan than the rate they are paying on their credit card debt. A lower interest rate offers the opportunity to get that debt paid off faster.
A personal loan also typically comes with a fixed interest rate and established repayment term. This means that the interest rate agreed to at the start of the loan stays the same throughout the length of the loan.
And unlike the revolving debt of credit cards, personal loans are known as installment loans because you pay them back in equal installments over a predetermined loan term. This means that you won’t accrue interest for an indeterminate time, as is possible with a credit card.
Consolidating debt could be one important tool in a debt payback plan by helping to save money over the life of a loan. These savings, combined with possibly more favorable repayment terms, could help make repayment easier. And easier repayment might help on the path to eliminating debt altogether.
Recommended: Credit Card Debt FAQs
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