Being in credit card debt sucks — big time.
That’s why I created a step by step guide that walks you through how to get out of credit card debt.
So, let’s get started…
HOW TO GET OUT OF CREDIT CARD DEBT
There are several different ways to get out of credit card debt. You should explore all options and commit to a plan that works best for you.
Step 1: Get the lowest interest rate by doing a balance transfer / consolidating
Do whatever you can to make sure you’re paying a low interest rate (so your payments mostly go toward principal).
Even if you have low interest rates, call your credit card company and ask for a 0% interest rate. Or transfer your high interest rate cards to your low interest rate cards.
If you have a credit score of 760 or above and you pay more than 15% interest, call your credit card company and ask for a lower interest rate. If the company says no, do a balance transfer to a credit union credit card (they can’t charge more than 18% by law and with a good score, it’s usually much lower [7-8%]).
Step 2: Start paying off your credit card debt
After you’ve gotten the cards down to the lowest interest rates, do the following:
- Add up the minimum payments of all your cards.
- Calculate 25% of your minimum payment (if you can’t afford 25%, do 15-20%).
- Pay the minimum payment on all cards, except the highest interest rate card. Put the additional 25% toward the highest interest rate card.
- After the highest interest rate card is paid off, put the money that was going toward that payment toward the next highest card.
- Continue until you pay off all your credit cards.
Alternative Method: Debt management via a credit counseling agency
If you have a low credit score and high interest rate credit cards, you may need to use a credit counseling agency (NFCC.org or AICCCA.org) to get out of credit card debt. After going over your finances with a counselor, you will pay them and they will pay your credit cards for you (usually, over the course of 4-5 years) via your debt management plan. With the agency, your interest rates should go down, which will save you money. There will be a small fee, but sometimes this is waived. Your FICO score will not be affected by using a credit counseling agency; however, by closing cards, it may be affected.
- Note: Debt settlement is something different. A debt settlement company requires you to pay off 30-50% of your debt in a short period, which negatively affects your FICO score if you are current on your payments, not to mention you are negotiating with a settlement company – not a professional. This is very different than using a credit counseling agency.
Step 3: After your credit card debt is paid off
Once you’re out of credit card debt, you may be wondering whether to close your cards or keep them open. The answer is that it depends on your situation. If you are a spender and unable to keep them open without being tempted to use them, you should consider closing them.
If your credit card charges a fee to keep it open, you should consider closing it. There is no reason to pay a fee on a credit card.
If your credit card does not charge a fee, and you can control yourself, then keep the card open. The cards you have open give you a credit limit. About 30% of your FICO score is made up of what you owe to your credit limit ratio. If you close all your accounts, it could hurt your credit score. This is what Suze Orman recommends.
HOW TO STAY OUT OF CREDIT CARD DEBT
Once you are out of credit card debt, you need make sure you stay out of credit card debt.
Step 1: Examine why you got into debt in the first place
Ask yourself why you want “stuff”. Then tell yourself that you don’t need it because you are more than enough. Doing this over and over should help you start to question why you’re buying ANOTHER pair of shoes.
Explore your money blueprint and see if there are deeper reasons from your family history that explain your spending habits.
You need to know why you get into debt in the first place if you want there to be a change that lasts.
Step 2: Change your habits
If you’re used to spending and maintaining a credit card balance, your mindset is that this is acceptable. Remember, the goal is to get you standing on a strong financial foundation. To do this, you need to start to think differently and create new habits that help you move toward financial success.
Step 3: Be a transactor, not a revolver
If you continue to use a credit card after you’re out of debt, make sure you are a transactor, not a revolver. A transactor pays off her credit card in full every month. A revolver keeps a balance on her card, paying only the minimum. Credit agencies view transactors as creditworthy.
Step 4: Reevaluate rewards programs (think differently)
Your credit card perks may seem great, but if they are keeping you in debt, how great are they really? Not to mention, companies can change their reward programs whenever they want. Think about the fact that by using a credit card you are much more likely to spend more than you would if you used cash. So, are those extra perks really worth risking your financial future?
Step 5: Be intentional
Be smart about using credit cards. Really ask yourself if credit cards are right for you. If you are a spender and cannot commit to paying off your cards every month, then credit cards are not for you. Only you know this about yourself.
If you are in credit card debt, you are allowing a roadblock to stand in the way of building a strong financial foundation. Are those “things” really worth it?