Paying off credit card debt

How to pay off your credit card debt

We all have different life stories and our circumstances will have a tremendous impact on how we manage our credit card debt, and how long it would take to pay it off completely. With the right strategy (think military) you can fight and win. Let’s strategize!

First step: MEET YOUR ENEMY

First things first: Check your financial health. As with any problem, you have to figure out how serious it is. To see how you are doing you need to access all your credit card statements and write down the amount you owe on them, along with the current interest rate you are paying. Take a deep breath here. Tell yourself that the number you see does not scare you and you will get out of that fight as a winner! That’s right. Keep reading.

Second step: MEET YOUR SOLDIERS

How strong is your military? In preparation for finding out who/what are you going to fight with you need to create a budget and know exactly how much money you have to deploy to destroy your credit card debt. It can be a daunting task, but I assure you that it is a necessity.

Start with writing down how much money goes into your pockets every month. Money can come from various sources: salary, wages, dividends, freelancing, side jobs, alimony, etc. In a separate column write down all monthly expenses,  things that are absolutely necessary: mortgage/rent, student loan payments (if any), food, phone/Internet/utility bills, car payment, insurance, minimum payments for credit cards. Add those numbers. Don’t forget the interest you are paying for those cards, the banks surely won’t.

Where you are at this point:

  1. Income – expenses = If you are in plus, congrats! You make more than you need (at least on paper). This surplus is the money you should be VERY RESPONSIBLE WITH since you will use it for paying your credit cards.
  2. Income – expenses = If you are in deep red, don’t despair. There are a few things you could do to change your situation.

For now, we will focus on scenario number 1: You are making more than what your basic needs call for. Getting out of credit card debt surely is no fun, and it might seem like mission impossible at moments, but that is not true. Believe me, I’ve been there and I know that it can be done with little (or a lot) work and discipline.

Third step: PLAN FOR ATTACK

That extra money you have after paying all your bills is going to be our main point of focus. Think and write down where and how you spend your money. If you can’t remember, grab those statements again and remind yourself. Circle things you didn’t have to spend money on, or things that you might live without in the next few months (or years – brace yourself – no one said it would be easy, I said it could be done!)

I am not one of those people who will tell you now to stop drinking Starbucks latte. Frankly, I don’t think that you ended up with a huge credit card debt because you spend $100 a month on a fancy drink. And that’s only if you drink it 5 days a week, every week. The root of the problem lies somewhere else. Besides, if that little cup of joy makes you smile in the morning while you commute to your work that you might hate, so be it. Enjoy! Life is made up of little things. 🙂

I am talking here about being conscious of the decisions you make with every purchase, every day. This is where the pain comes from: you have to teach yourself to say NO to many things. Things that you want now.

No to 3 times dining out every week.

No to the 4th martini at the bar, when you can be equally happy with 3 or 2.

No to the 5th Uber ride when you could have walked 3 blocks (plus it’s healthier).

No to the new game you just bought knowing you have no time to play.

No to the new coffee table when your old one is still doing a good job.

No to the expensive watch you think it would be a perfect gift for your partner.

Sorry to break the news for you: but you, my friend, CAN NOT AFFORD these things. If you could you wouldn’t be paying it with borrowed money.

If you are genuinely committed to paying off your credit card debt, this step should be a wake-up call for your spending habits, and you should learn new ones. Your life needs adjustment. Again, I am not saying you should hide in your home and never spend a dime on anything fun, but you should spend less than you make and use some of that saved cash towards credit card payments. You can set aside some portion of that extra money for leisure activities but only after allocating a big chunk for credit card payments.

Fourth step: When you fight all of them at the same time – you lose

What I highly suggest is to take onto a card with the lowest balance and commit to paying that one in full while making minimum payments on all the other cards.

(Note: Another strategy is to pay off the one with the highest interest rate first. Although you can save some money on interest this way, it might take way longer to see some actual results – card completely paid off. People need immediate gratification, and the sooner we see results from our sacrifice the longer we will stay committed to the goal.)

Let me give you an example with simple random numbers:

This is a  balance on four credit cards I carry: Chase $1500, Discover $1000, Capital One $700, and Bank of America $200. The minimum payment is: $75, $60, $50 and $20, respectively. My budget allows me to put $300 towards my credit card debt every month. How do I do that?

As we said, the minimum payment on all these cards is mandatory, if you want to avoid the late fee, so there goes $205. That leaves me with only $95 extra. I would add this amount to the one with the lowest balance, which is Bank of America. The original balance was $200 but after both these payments (20+95), it will go down to $85.

Next month I do the same. I still have $300 available for making my payments. Let’s keep it simple, the minimum payments stay the same.  Again, I have $95 extra, meaning I have enough money this time to pay Bank of America card in full, plus $10 to add to some other card. Following my plan, naturally, that card would be Capital One.

Why is this strategy working?

The beauty of this approach is the feeling you get after paying one card in full! The happiness, excitement, and a sense of accomplishment are all priceless, and the best motivation boost you need! After that first milestone, you will believe that it’s possible to do this over and over until it becomes a distant past. (In case you didn’t truly believe in the first place).

In my third month of fighting debt, all things being equal, I will have more money available for Capital One card, $50 for minimum payment plus an additional $115.  (300-75-60-50). How lovely. With this rate, I will be able to pay off my second card in no time, most likely in 4-5 months.

Repeat until you have no outstanding balance on any of your credit cards. But, before:

Fifth step: Go over your strategy. Good generals recognize the need for a change in the middle of a war. The goal is still the same: winning it.

Things change. Life happens. As you go you might have to adjust your numbers, either put more money towards your card payments, if your income allows or less. But one thing should stay constant: your budget planning. You do this every month until you get to the point of knowing where every single dollar goes, and what that dollar does for you.

Also, the timeframe can be different from the original one. That’s fine. Just don’t give up, even if it gets a little harder. Stay disciplined and consistent, and I assure you: YOU CAN DO IT!

Sixth step: SPEND LESS THAN YOU MAKE, AND YOU WILL NEVER EVER  END UP WITH  CREDIT CARD DEBT

Your best friend for the rest of your life should be carefully created budget. Now that you have no credit card debt, you can enjoy some of the things you couldn’t in the previous months. After all, you deserve it!