How to Pay Off Your Credit Card Debt

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Debt

For many out there, debt is a massive concern. Unfortunately, in our consumer-centric society, many of us have succumb to the temptation of buying things now and paying for them later. The predictable result is that many adults are up to their eyeballs in debt.

What is worse is that some types of debts have ballooned in recent years, particularly student debt and credit card debt. It is high time that people take matters into their own hands and face their demons, and in this article, we will discuss how to so.

Reduce Expenses

When in debt, many adults opt for austerity in how to pay off debt. Any money freed up from reduced expenses can then be redirected towards debt relief. The first step in this method would be for you to compile a full list of any and all expenses you have made in the past three months.

You must go through your checking account and credit card history and pull out every charge made in the past 90 days.

After jotting everything down, categorize your expenses into essentials and non-essentials. For example, rent/mortgage payments, utilities, and groceries are essential and cannot be changed much, whereas non-essentials such as eating out, vacations, and luxury purchases are more flexible and should be put in a separate column.

After this, it is then a matter of determining how much needs to be reduced from expenses in order to start paying off your credit card debt and reducing your non-essential expenses accordingly.

When figuring out how to pay off debt, one thing that needs to be kept in mind is discipline. This is because you are not reducing expenses for just a month, but consistently for months and even years until you pay off your debt.

Increase Income

The mirror of reducing expenses is to increase your income. This can be done in a number of ways, from getting another job to creating a side business, to even just asking for a raise or changing jobs. What you end up choosing depends on what fits your situation best.

If you are looking to add a job to your schedule, it is recommended that you jot down on a planner how you normally spend your time. Try writing down all the activities you engaged in during the past month, and take a look at what you have.

Then it is simply a matter of allocating more time towards income generation. There can be no sacred cows if you truly wish to repay your credit card debt. Sometimes it might make sense to get a part time job, and other times it might make sense for you to get into the gig economy with the likes of Uber or Grubhub for instance.

It is important to make sure that these changes are ones that you are able to stick with for as long as you are figuring out how to pay off debt. If you can only sustain these changes for a few months, you will be right back where you started.

Methods to Reduce Interest Rates

Reducing interest rates is an excellent way of paying back your credit card debt. This will direct more of your debt payments towards actual debt relief instead of paying interest, and it shortens the amount of time taken on paying off your debts. We have listed a few of the most popular methods to reduce interest rates.

Avalanche Method

The Avalanche Method is a common method of debt relief whereby the focus is on paying debts with the highest interest rates off first. Your debts are listed down in order of highest interest rate to lowest. The minimum payments are applied to each debt, and all the extra payment amounts are to be directed to the debt with the highest interest rate.

You then apply all the money you are putting towards the first debt to your second debt. This process keeps repeating itself until you have paid off all your debts. This lowers your overall interest rate.

The disadvantage however is that this method might take some time to bear fruit. This means you will have to keep at it for a while before you can see a noticeable benefit.

Snowball Method

The Snowball Method focuses in the debts with the lowest balances in order to pay off debt. As with the Avalanche Method, you will list down your debts, but this time in order of balance amount instead of interest rate and make the minimum payments on all of them.

After this, take all the extra money you were devoting to your debts and focus it on the one with the smallest balance. After that debt has been eliminated, simply apply all the money previously used on that debt to pay off the next smallest debt.

Balance Transfer

The Balance Transfer Method is where you move your credit card debt from a card with a high interest rate to one with a lower interest rate. This will have the effect of reducing the amount of debt installments going to interest and increasing efforts towards debt relief.

This can complement the Avalanche Method very well, as it takes away the account with the highest interest away, therefore streamlining the avalanche process. It will be up to each individual to determine which transfer card works best for them.

This is a good method for those with a certain credit rating who can obtain cards with lower interest rates where this method would then make sense. There are even cards that offer very low or a zero percent introductory rate.

However, it must be noted that these types of transfers usually carry a transfer fee with them. This means you will have to determine if the transfer fee outweighs the benefits of reduced interest.

Debt Consolidation Via Loan

Some people might be best off taking out a personal loan. What this does is it pays off the previous accounts by having all the balances transfer to a single account tied to a personal loan. You then focus on servicing that single loan.

A big benefit of this method is that you usually avail a lower interest rate with the personal loan than the credit card debts. This will enable you to devote more money towards debt relief instead of interest. You also make fewer payments every month, which makes life less complicated.

Another benefit to a personal loan, compared to credit card debt, is that personal loans count as installment loans, which means the balance will not affect your credit score the way it would on a credit card. This will in turn have positive effects on the rest of your financial life.

Debt Settlement

In some cases, debt settlement might be the way to go. This is where you sit down with creditors and negotiate a settlement, whereby you pay off a partial amount of your debts. You will need to be in a situation of hardship in order to be considered for this.

Situations like loss of employment or medical emergency might qualify for settlement. Another requirement that usually comes with this method is a large one-time initial payment. So, if you do have this ability, you should consider this tactic.

When looking for assistance in this matter, it is important that you do not get caught in a scam where you are charged excessive service fees. It is therefore advised that you consult the FTC Consumer Information website in order to obtain more information to prevent falling into a financial trap.

Another thing to keep in mind is that if you are successful at reducing your debt balance, you might be required to pay taxes on the amount reduced. This catches many people off guard, so it is important that you make sure you are financially able to take that hit before going through with a settlement plan.

Bankruptcy: The Last Resort

If you have attempted all the above methods, and you are still not getting ahead of your debt, you may have to consider filing for bankruptcy. Before you consider going forward with a bankruptcy filing, you should make absolutely sure that you have considered every other alternative, because this is a very serious issue.

There are two types of personal bankruptcy that you can opt for. The first one is Chapter 7, where you will usually end up giving up some, if not all your property holdings as a condition. Another type is Chapter 13, where you are not required to give up any property.

Keep in mind that bankruptcy filing is almost always a long and expensive process by virtue of the seriousness of the situation. The bulk of the cost usually comes from court filing fees as well as legal fees. You will also be asked to seek credit counseling prior to initiating the filing process.

Of course, this will have a very negative affect on your credit score. However, it is to be noted that the drop in credit score might not be as severe as expected, simply because the financial situation that precedes a bankruptcy filing has usually done most of the damage.

After the process is complete, the bankruptcy will remain on your credit record for ten years, even though the items wiped away by the bankruptcy go away after seven years at most. This is why filing for bankruptcy is a very last resort and should never be taken lightly.

Debt is something most of us would like to be without. People need to take charge of their situation and stop being a helpless bystander in life.

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