Originally posted onto WalletPath.com 5/27/16.
If you have a credit card, then chances are that you have credit card debt. We all do or at least have had it at some point, and the question we had or have to face is “how on earth are we going to tackle this pile of ever growing payments?!”
Hopefully you were able to catch yourself from making your balance any bigger than it needed to be and were able to minimize the damage, but many cases are not that clean cut and easily stoppable. Some credit users are lucky enough to have a single credit debt owed to a single lender, but many others have multiple debts owed to several different credit card lenders, and the question that they now face is “Where do I start?!”
Below is list of possible starting points that you can use to begin your journey out of debt and on your way to turning around your credit score.
Understanding credit lenders.
Before we start handing out suggestions on how you can best un-bury yourself from your credit card debt, it’s good to know why exactly you are getting into such debt in the first place: the lenders.
Credit card companies get their money from you as the card holder from interest and annual fees. The annual fees, although they may look huge as they leave your wallet once every year, is only a slice of the gigantic pie. The real money lies in the interest payments that you pay every time you have another month go by that you do not pay back your credit card expenses in full or to their specified monthly minimums. This focus on interest rates and compounding debt amounts is what lenders are banking on you to provide to them as long as you keep your account with them. Its pure profit for them.
Interest rates are not something that you need to be inherently afraid of. For those who can be responsible with their cards, they won’t need to bother worrying about interest rates and compounding amounts as they go about their interactions with credit lenders. If you keep on top of your payments and continue to pay them on time and in full, then you will have no debt.
Sounds pretty easy, but as you know by now, staying on top of the ball for every expense that goes through you is no easy feat. Emergencies pop up that you cannot cover in their entirety and rather than taking out a loan from an outside source, you just swipe the plastic. This happens a few times and before you know it, you are $16,678 deep in credit card debt. Life happens and payments are due, but to quickly dig yourself out of any pits you may have fallen into, you should know the best methods.
It’s all about the interest rates, baby.
Let’s say that you have multiple credit cards that you have debt on. One card, “A” has a large amount of debt, but a very low interest rate, another, “B” has a small amount but a very high interest rate, and the last, “C” has a moderate sized debt with a moderate interest rate. Instinct may tell you that you need to take out the largest sized debt, “A” first, because it looks like it is the biggest. Right?
The interest rate is what is killing you and keeping you in debt. The best practice to start taking out that debt is to knock out the debt with the highest interest rate first, regardless of the current amount. Taking out these debts shortens the length of time that you are trying to pay off your total amount because your biggest amount with a very low interest rate (“A”) is not going to grow nearly as fast as debt “B”. “B” will grow like crazy and go from a small amount into one that is even bigger than “A” in less time than you think.
Going by interest rates rather than lump sums, rank your credit card debts in order of highest to lowest and use that order for which debts will be taken out first. Stick to this order and you will dig yourself out of debt much faster than you may have planned. So using the examples from above, pay them off in order of “B” then “C” and then “A”.
Don’t be afraid to move debts around.
If all of your cards but one have an astronomical interest or compounding rate, consider moving over all of your debts onto a single card, or set of cards with a single low interest rate. Move as much of your debt as your credit limit will allow. By doing so, you can eliminate the ability for your debt to continue growing out of your control.
Now before you dive for that phone to call up your lender to make a transfer, keep in mind that there is usually a debt transfer fee that is pretty up-there in cost, and it may wind up biting you back due to its own price tag. If the cost to move over your debt is worth the cost it is to make the transfer, make it happen, but evaluate if the cost is worth it first. This is not a one size fits all suggestion.
Equal installments as compared pinpoint payments.
Whenever you come across some surplus income and want to throw it at your credit card debt, a temptation may be to break it into even chunks and disperse it evenly across all of your debts. Remembering what we mentioned earlier about the weight of interest rates, focus the amount on a single debt rather than all of them. Spreading a single amount across differing debts of varying amounts and interest rates will just absorb your payment and end up not making a bit of difference in the overall debt.
Pinpoint the debt with the highest interest rate and throw what you can at that one debt until it is all gone, and then move to the next one. Keep doing this until they are all payed up.
Although you may want to attack the largest amounts of debt first, this is a practice that is best avoided as a first impulse. There is nothing inherently wrong with attempting to knock out the biggest amount first, because by being disciplined enough to tackle a pretty huge sum in its entirety, it can be a pretty huge confidence boost. To see a debt drop from over $16,000 to zero can be the mental boost needed to reaffirm your actions and keep you focused to keep pushing onward to paying off all of those debts. Use what methods are best for you that you can honestly stick to.
There is no cheat sheet or concrete answer key to paying off debt because everyone’s situation is different. There is no blanket answer because like a snowflake, no two credit situations are the same (pardon the elegant analogy). Hopefully the above tips and practices will help you discover how you can best chip away any debt of your own that you may be struggling with.
Have any tips that weren’t covered above that can help others? Comment and share below!