Paying off credit card debt can be dreadful… No one wants to get into credit card debt, and no one likes paying it off either. Usually, our first and only thought is to just pay it off – get out at all costs! – send every last penny to that debt!
This feeling is a good thing, we should focus on paying off our debts and living free of this oppression… But before jumping ahead to pay off your debt with every last cent, I recommend doing a few things first.
These 5 important steps are not a requirement, per se, but they will make you more successful in sticking to your payoff plan and destroying that debt nightmare you are experiencing. These steps should also save you money overall and at the same time keep your future goals secure.
1. Create an Emergency Savings
Before taking any steps to pay more than your minimum balance and essentially pay off your credit card debt – I recommend saving first. This may sound as crazy to you as it did to me the first time I heard it, but it is very sound advice. I’m not recommending a large savings account with enough to purchase a new van but something completely different.
I’m talking about an emergency savings account… an account that has about 1-2 thousand dollars in it and is used for emergencies only.
What are emergencies? Emergences are expenses that are not in your normal budget that in the past you would use credit cards for. Examples include a fix to your car, an emergency need for a plumber, or that last minute plane ticket you need to purchase.
The goal here is to do what you can to not use your credit cards at all, but instead use all your available cash in paying off your debt. The emergency savings will be used to keep you on track with your debt payoff plan and continue to motivate you throughout the process, so that you are not racking up more debt when emergencies happen.
2. Don’t Miss Out on Free Money in your 401k
This item will probably be the most debatable of the five. There are many experts that disagree with my advice to continue investing in your 401k at a minimum during your debt payoff period. Their reasoning is always around ‘focus’. They believe that by stopping your investment in your 401k, it will keep you focused on one goal and one goal only – paying off your debt. It will also allow you to pay off your debt faster, so there is merit in this advice.
That being said, I respectfully disagree with this advice, but believe you should still continue investing in your 401k at a minimum. The minimum being around the amount your employer gives you free money by offering a ‘match’. Matches usually work like this… If you put 4% into your 401k, your employer will give you 1% match – thus an additional contribution to your investment income.
If you work in an environment that offers such a deal, what you are being offered is free money in your 401k. (...or over 20% return on your base investment with no risk) I personally don’t believe you should pass this opportunity up (as well as the compound interest you will receive on this investment in the future). Invest the amount needed to receive this match, and focus the rest on paying off your credit card debt.
3. Cut Unnecessary Expenses
In many ways this advice is a no-brainer, but it’s worth mentioning as it will greatly increase your chances of success. It’s important to parse through your budget and identify expenses you can cut. Examples of these items could include the following: eating out, workout memberships, cable tv, home telephone, travel, clothing budget, etc.
Before you freak out, it is important to understand that these cuts are temporary. Once your debt is resolved, you can add back the items you miss and desire back. If you ever desire to have them back.
The point here is to focus on getting out of debt. By cutting expenses that you can live without – you greatly increase your ability to pay off your debt by reducing the time required.
4. Lower your Interest Rate & Consolidate if Possible
One step not talked about very often when selecting a debt payoff plan is to consolidate and lower your interest rate on your debt first. This item is risky due to the number of hidden fees that can attack you when lowering your interest rate and consolidating, but is worth the time and energy because it could save you hundreds of dollars in interest during the life of your debt payback plan.
Need an example? The easiest example I can give you is to make a phone call to your creditors. In the past I have lowered my interest rate on my credit cards by just making a simple phone call and asking about it. In one instance I lowered my rate by 10% by just asking, so it is very easy and possible – I assure you.
Another example is 0% balance transfer. If you have good credit you can many times roll your debt over to a 0% card for 1-2 years. Say you have a 2 year debt payoff plan and want to be paying principle only. Do some research into this area and see what you can find – but be careful, always read the fine print and understand your transfer charges which typically run 3-5% on the balance of the rollover amount. (10,000 in debt would be $300 at 3%).
5. Use a Debt Payoff Plan and Execute
To achieve something great in life, all experts would agree that a solid plan is important. Take football for example… Every great coach is a great game planner. They spend endless hours creating a plan to defeat the other team, and then during the game they execute that plan in order to win.
The same is true in personal finance. If you desire to get out of debt, you need a plan to make it happen. The steps above could be apart of your debt payoff plan, but will not be the foundation of the plan. The foundation is the steps you’re using to make payments on your debt and pay it down month after month.
I recommend using the debt snowball or debt snowball plus as the foundational piece of your plan. These plans work by attacking your lowest debt balance first and moving through your debt by paying off your lowest balance to highest balance. The key of the debt snowball is to ‘maintain motivation’ and help you continue making payments. What will happen is that you will see your debt amount go down month after month, and this success will keep you hungry for more!
Final Thoughts
Credit card debt is stressful, and the thought of sacrificing to pay it off can cause many people to shy away from digging in and making it happen. I’m here to tell you it’s worth it.
You do have the ability and drive to pay it off and with a plan can reach your goals… Yes, the sacrifice will be tough – but remember that the sacrifice is temporary – with determination you can pay off your debt and experience real financial peace.
Have additional thoughts on paying off credit card debt? Share them below…