Being in debt is painful, stressful, and takes a toll on every aspect of your life. According to a new CardHub study, The av
erage American owes over $8,500 on their credit cards. If you have a spouse, it’s entirely likely you owe almost $20,000 at an average interest rate of 18.9%. You’re spending hundreds of dollars a month just to stop the interest from growing, often with little or none of your payment going towards your principal. How can you dig yourself out of the hole? You need a plan.
Step One: Stop the bleeding
The first thing you need to do is introduce a moratorium on all credit card spending. Just stop. It’s tempting to pay a few hundred dollars above your minimum payment and then charge it right back up again as soon as you notice you’re running low on money. Don’t do it. Your primary objective has to be to pay down your debt.
Through some joke of the universe, as soon as most people start to pay down their debt, an emergency comes up that requires a significant outlay of cash. It seems like the only way to get the car fixed is to put the bill on your credit card. Find another way. Imagine the credit card never existed – you’d find a way to pay your mechanic. This is the time to start getting creative and finding different ways to pay for things.
Step Two: Start paying
Figure out what you can afford to pay each month towards your debt. Once you’ve done that, there are two commonly accepted ways to pay down credit card debt. Choose the one you feel most comfortable with.
The first is to organize your debts by interest rate, disregarding their balances. Make the minimum payment on each debt except the one with the highest interest rate. Take all of the rest of the money you’ve allotted and apply it to the highest interest rate card. Keep doing that every month until the highest interest rate card is paid off. When that happens, do the same again, using the new highest rate card as your priority. This is the cheapest way to pay down your debt, because you will eliminate your high interest rates first and are left paying debts with lower ones.
The second way to pay down your debts is to organize them by balance. In this case, instead of putting the majority of your money towards the high interest rate card, you put it towards the card with the lowest balance. Many people prefer this option because it offers the psychological benefits of seeing cards get paid off quickly. If you only have a $500 balance on one of your cards, you get the satisfaction of seeing one whole debt paid off quickly, even if another card has a higher balance at a higher APR.
Do not spend a lot of time thinking about which way to go. Pick the one that seems best to you and start.
Step Three: If all else fails
Sometimes your debt is unmanageable. If your spouse is sick and you just lost your job and you’re having a hard time paying for groceries, finding several hundred dollars a month to pay down your credit cards is not reasonable. If this is the case and you’ve tried to make payments but can’t do it, speak to a professional credit counselor or debt consolidator as soon as you know there’s a problem. The sooner you start getting your debts taken care of, the sooner you can get on with the rest of your life.
Step Four: Start thinking
The statistics for second bankruptcies in this country are mind-blowing. Common sense would indicate that once someone had been in a financial situation so hopeless that their only remaining option was bankruptcy, they’d do anything they could to avoid it again in the future. Unfortunately, this is often not the case.
Even if you don’t end up declaring bankruptcy, this is the time to seriously think about what got you into an unmanageable debt situation in the first place. Sometimes it really wasn’t your fault – medical bills, divorce, and job loss are often the catalysts that create financial hardship. If the issues were rooted in poor self-discipline, bad spending habits, or an inadequate budget, spend some time soul searching to realize what happened and how you can avoid it in the future.
This article by Steven Millstein first appeared on CreditRepairExpert.org and was distributed by the Personal Finance Syndication Network.