Welcome to part II of our Get Out of Credit Card Debt series. In Part I we explained how you can lower your interest rates to shorten your payback period. Now we will discuss how to actually pay down your existing credit cards in the shortest amount of time.
We don’t know what you spent your money on, maybe it was the 113 goats we talked about in Part 1, or maybe you blew it all on designer socks. What we do know, is that you’re the only person that can help you with your debt problems. The “YOU” that exists two years from now, really wants the “YOU” that exists now,,, to do the right thing.
Why paying extra matters,,, a lot.
If you have $10,000 in credit card debt and are paying $200 a month, assuming those cards are at 20%APR, then it will take about 9 years to pay off! If you double up your payment with an extra $200, it drops to about 2 1/2 years.
The important thing to realize here is that credit card debt isn’t linear. In our example doubling up on your payments doesn’t mean you pay it off in half the time,,, it means you pay it off in a quarter the time!
You can’t afford not to pay extra?
Continuing to pay what you’ve always paid, is going to get you where you’ve always gotten. That’s buried in debt you big goof.
We need to figure out exactly what you are going to be paying extra every month. This is where we see what you’re made of; this is where you dig down deep and decide to change your life for the better.
Examine Your Expenses.
The first thing you will want to do is take a look at your monthly expenses. Where can you make cuts that can be applied towards your credit cards. We recommend downloading your bank statement and sorting everything by category to find out where all your money goes.
Often the easiest place to find extra money is in your entertainment and food expenses. People are often shocked at how much eating out is costing them. Packing your lunch may very well save you a couple hundred a month. Cutting your cable bill and using Netflix, Amazon Prime, or Hulu could save you a couple hundred more. The key is to figure out where YOUR money is going and see if you can re-purpose that money to get out of debt.
Putting it all together.
Info you will need:
- What you can pay towards your cards each month. (push yourself)
- What each card’s minimum payment is.
- What each card’s current balance is.
The Snowball System
This is where we make the minimum payment on all of our credit cards except the one with the smallest balance. We think this is the best system psychologically because we pay off cards faster.
If you had 3 credit cards with balances of $1,000, $5,000, and $10,000, you would make the minimum on the two larger ones and put all of your money toward the $1,000 until it is paid off, then move on to the next.
The Avalanche System
The avalanche system is where you make the minimum payment on all of the lower interest credit cards except the one with the highest interest rate. This is “technically” better than the snowball system because you are paying off higher interest credit cards.
So to be clear, with the snowball method you will pay off the lowest balance first, and with the avalanche method you will pay off the highest interest card first. You might want to play around with the numbers a little to see if their is any significant difference between the two methods in your situation.
If you had those same 3 credit cards with balances of $1,000, $5,000, and $10,000, you would ignore the amounts and make the minimum on the two with the lower interest rate. Putting all your extra money towards the card with the highest interest rate.
Doing the calculations:
When my wife and I did this in the past we used an incredibly complicated Excel spreadsheet. Thankfully there are free apps that will do this for you now. We like the app from undebt.it because it is super simple to use and it’s free.
The easy how:
| Go to undebt.it, and look for the Free Debt Snowball Calculator, enter your monthly budget, all your card info, and hit GO!
| Boom… it spits out all your planned payment information. (That was easy)
| It then compares what you plan to pay vs. just making your minimum payments. Our favorite part is watching the, “Years until debt free” number get smaller.
You did it.
You just learned the entire process for properly getting out of credit card debt, and now you simply have to act on it. It may take a while to get to the other side… but that future version of yourself is going to be really happy you started today.
Congratulations,,, you made it all the way to the end. Reward yourself with one more wonderful reason to save money.
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C.J. is the blogger behind the Vow of Practicality. “Let’s grow your wealth, increase your productivity, and maximize your happiness.”