A Fail Safe Way to Reduce Credit Card Debt

If you have credit card debt (and are struggling to keep it under control) you're not alone. Americans now have more than one trillion dollars of credit card debt, according to a recent study. The average household has credit card debt of almost $8,000. If you find yourself working towards taming your debt with less than satisfactory results, not all hope is lost.

You can reduce your credit card debt (not overnight, of course) with a plan that involves exploring all your options. From talking to your lenders directly to creating a budget and sticking to it, credit card debt reduction can be in your near future.

Create a plan (that actually makes sense)

In order to reduce your credit card debt as quickly and cost-effectively as possible, you need a debt payoff plan. It’s not the best idea to throw extra money you have at the end of the month at your debts with the hope of making a dent in the balance.

Instead, try focusing on paying off one debt at a time. The two most effective ways to pay off debt are the snowball method and the stacking method.

Use the debt-snowball method

The snowball method involves listing each of your debts in order of lowest dollar amount owed to the highest and then paying the maximum on the lowest and the minimum on the rest of the debts, until one debt is completely eliminated. Say what?

Here’s how it works:

  • Step 1: Make a list of all the debts you have and arrange them from the smallest debt owed to the largest. The smallest debt balance should be at the top, while the largest debt should be placed at the bottom of the list.
  • Step 2: Dedicate as much of your monthly budget to the smallest debt first. (You’ll have to determine how much of your monthly income you can allocate to debt reduction first).
  • Step 3: Make the minimum payments on all the other debts, excluding the debt at the top of the list.
  • Step 4: Make the maximum amount possible on your low-balance debt on the top of your list. Continue to do this until that balance is eliminated.

Once you pay off that low balance debt on the top of your list, you’ve just eliminated a debt. Then, the second debt on your list, which you were paying the minimums on before, moves to the top of your list and now you begin paying the maximum amount possible on that debt.

Again, the snowball method doesn’t happen overnight. It takes proper planning to determine what is feasible for you to contribute each month.

Consider the stacking-method

The stacking method of debt repayment is similar to the snowball method with one important difference: rather than listing the debts in order of lowest to highest dollar amount, you list them from the debt with the highest interest rate to the lowest, without regard for the dollar amounts owed.

You follow the same procedure used for snowballing, you pay every penny you can to the debt with the highest interest rate while paying only the minimums on the rest. Once you pay off the first debt, you take that money and use it to pay down the next on the list and so on until all the debts are paid.

Which Method is Better?

Well, it's usually the interest on credit card debt that makes it so difficult to see a decrease in the amount owed. By paying off the card with the highest interest rate you will save the most money. In that light, the stacking-method may be your best option.

Alternatively, snowballing your debt can provide a big psychological boost. You see those smaller debts fall one by one and that can provide the motivation you need to keep going and work even harder to pay off your debt.

The real answer: the best method of debt repayment is the one you will actually stick with.

Understand interest

If you dutifully pay your credit card bills every month and have never missed a payment, but the balances never seem to get any smaller -- it’s not your imagination. The average rate on a credit card is just over 15% but some cards charge an interest rate closer to 20%.

When you only pay the minimums on your cards, you aren’t making much progress on the balances because of those high interest rates. The fastest way to pay off credit cards is to pay less interest. There are a few ways you can lower the interest rates on your credit cards.

Consider Debt Consolidation

One of the best ways to get out from under credit card debt is by taking out a debt consolidation loan. The loan allows you to effectively reduce or eliminate your credit card debt, have one monthly payment with a lower your interest rate and ultimately make a smaller monthly payment. You can use this free calculator to see how much lower your monthly payments can be.

Credit Card Balance Transfer

We know what you’re thinking. You have a significant amount of credit card debt already, so why would you want to take out another credit card?

However, a balance transfer credit card has an introductory period, some as long as 21 months, with a 0% interest rate if you have good to great credit. You can transfer the balance on your high interest cards to the 0% interest card so that you are only paying on the principle of your debt.

Beware: you must be sure to pay off the entire balance before the introductory period ends. Any remaining balance will be subject to the new interest rate which could be higher than you were paying on the old cards.

Talk to your lenders

There is so much competition between various credit cards, all of them vying for a place in your wallet. You can use this to your advantage. If you want to pay your cards off faster, call up your current card companies and ask them to lower your interest rate.

Don’t speak to the first person you get on the phone. Credit card companies have entire departments dedicated to customer retention so it doesn’t hurt to speak to someone in that department.

If you have credit card debt but pay your minimums every month, you are actually a much more valuable customer than those who pay the whole balance each month. The credit card companies make more money on those who carry balances because they are making money through the interest those customers pay.

If your account is in good standing, it’s in their interest (pun intended) to keep you as a customer. Tell them that you’re struggling with the interest and considering closing this card and opening another (don’t really do this; it will hurt your credit score). Ask if they are willing to lower your interest rate. Some will say yes and some will say no but you have nothing to lose by asking.

Create a budget you can stick to

If you’re struggling with credit card debt, part of the problem may be your lack of budgeting. A budget shows you how much money is coming in, how much is going out, and where it’s going every month.

We mentioned earlier in this article, that in order for the snowball or stacking method to work, you have to figure out how much you can allot to your debt each month. In order to do that, you have to create a budget.

Try the 50/30/20 Rule

There are many free resources online that you can use to set up a budget but you can take a more traditional approach and make a note of all of your income and transactions in a spreadsheet or on a sheet of paper. There are a million ways to budget but the 50/30/20 method is one of the simplest.

Here’s how it works:

  • Budget 50% of your net income for essential expenses like rent or mortgage, car payments, utilities, and food.
  • Budget 30% for spending on items that are largely discretionary: cell phone bills, cable, entertainment, and clothing expenses. These are things you could cut out (or at least cut down) if you had to.
  • The remaining 20% is for debt repayment and savings. The savings may go toward your emergency fund, your retirement accounts or your savings account.

Once you have your budget set up, go through it and see where you can make cuts. Food is always a good place to start as most of us spend a lot more in this category than we have to.

Cable and cell phones are other good areas to cut. More and more people are becoming “cord cutters,” getting rid of expensive cable packages in favor of much cheaper internet streaming services like Hulu and Netflix.

Every dollar you can cut out of your budget is another dollar you can use to reduce your credit card debt.

Apply found money to credit card debt

It can be tempting to use that extra money, from a raise bonus or generous great aunt from overseas for a nice vacation or non-essential item you’ve been eyeing. While we do live in the age of the, “treat yourself”, don’t do it (at least not yet).

This money isn’t factored into your budget because it’s unpredictable and that’s a good thing. Apply it towards your debt repayment, on top of what you would normally pay, not as a substitute.

If you normally pay $1,000 a month in credit card debt payments and you come across an extra $500 in found money, pay $1250 of it towards that balance. (The extra $250 wouldn’t hurt to go towards an emergency fund or college saving plan).

Understand, not all hope is lost

Having credit card debt can be demoralizing but once you take control of it, you take control of your life. If you are ready to tackle your credit card debt once and for all, here at Eloan we have personal loans that may fit your needs for debt consolidation.

Try our free loan calculator to see what we may be able to do for you!

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* Please consult with your attorney, financial consultant/planner, accountant, and/or tax advisor for advice concerning your particular circumstances. The information contained herein is for general informational and educational purposes only and should not be construed as professional, tax, financial or legal advice or a legal opinion on specific facts or circumstances. The information or opinions contained herein should not be construed by any consumer and/or prospective client as an offer to sell or the solicitation of an offer to buy any particular product or service.

The information contained herein was prepared for general information and educational purposes only and should not be construed as professional, tax, financial or legal advice or a legal opinion on specific facts or circumstances. Eloan a Division of Banco Popular de Puerto Rico, its subsidiaries and/or affiliates are not engaged in rendering legal, accounting or tax advice. Please consult with your attorney, financial consultant/planner, accountant, and/or tax advisor for advice concerning your particular circumstances.