$15,216. That number reflects the average US household credit card debt among indebted households. That’s a scary number, and it means that for every household with $1,000 in debt, there’s another household with over $30,000 in debt.
Why is credit card debt so high? After dramatically reining in credit card issuance during the recession, some banks have started to loosen things up a bit. In fact, nearly 30% of cards issued in Q4 2012 went to subprime borrowers.
If you’re one of the many households struggling with credit card debt, you need to know you’re not alone. Credit card debt is a slippery slope, and it’s easier than it should be to get caught up in late fees, interest rates, and mounting bills. Before you know it, what felt like perfectly reasonable purchases turn into looming debts. It’s intimidating, and it can feel like there’s no way out.
This is an all-too common scenario, but it doesn’t have to be. You and your family can rise above this.
This article will serve as a comprehensive guide for getting out of credit card debt. We’ll break things down into two sections: a) steps you can take today and b) steps you must take in the long term to reverse your current predicament.
Steps You Can Take Right Away
Believe it or not, you can start turning things around today – right now, in fact. It’s critical you take action to slow or halt the accumulation of debt immediately, before things continue to progress in the wrong direction. The following list consists of one-time, decisive actions you should consider.
- Take an honest look at your balances, interest rates, and fees.
- Many people have piles of unopened credit card statements. If you don’t have a clear grasp of your situation, you can’t fix it. So open those statements. Make note of balances. Determine which of your cards has the highest interest rates, and which (if any) have lower interest rates. Make sure you understand how to read your credit card statement.
- If possible, transfer your balance.
- If you currently have multiple accounts, consider transferring the balance from a higher-interest card to a lower-interest card. Make sure to consider transfer fees! Balance transfers are NOT always free, and it’s only worthwhile if the benefits you obtain from loading your debt onto a lower interest card exceeds the fees you will incur. Check out The Simple Dollar’s review of the best balance transfer credit cards for 2017 to get started.
- Cut all unnecessary expenses.
- This is a tough one, but it must be done. Unnecessary expenses include the obvious superfluous items such as dinners out, nights at the bar, and clothes you don’t need.
- You should also examine the spending on “luxury” items, such as television and high-speed Internet. You may feel these are necessities, but unless you absolutely need them for work, they’re unnecessary.
- Use the savings to pay off the highest interest credit card first.
- Consolidate your debt.
- Consolidation isn’t for everyone, but it’s something to explore. Credit card debt consolidation essentially means compiling all of your debt from various cards into a singular payment.
- You’ve probably seen a lot of ads for debt consolidation companies. It’s important to select a reputable company if you choose to go through a consolidation company, because many of these companies charge exorbitant rates and end up costing even more money in the long run. Do not be tricked by debt repair companies.
- Essentially, credit card consolidation is only worthwhile if your interest rates will be lower (and the fees you will incur do not end up being higher) than they are in your current scenario. Unfortunately, there are a lot of debt consolidation scams out there. Don’t fall victim.
- Call your credit card company and ask for a lower rate.
- This sounds simple, and it is. Use the phone number on the back of your credit card. Be polite and reasonable, and request a lower interest rate. Many people don’t even realize this is an option. If you are told “no,” politely ask to speak with a supervisor. If you’re still told “no,” try again later.
- Declare Bankruptcy.
- It’s important to note this is a last resort and should only be used in a worst-case scenario. There are three different types of bankruptcy: Chapter 7, Chapter 11, and Chapter 13. Filing bankruptcy impacts your credit and your assets, and can have a resonating impact. If you are considering filing for bankruptcy, find a reputable bankruptcy lawyer who will provide a free initial, no-obligation consultation so you can truly understand your rights and options.
Long-Term Steps You Must Take
The previous section introduced one-time actions to help curtail your debt. In order to get on the right track, you need to overhaul your entire lifestyle and the way you approach finances.
Everything on the list below describes habits you’ll need to adopt in order to make a lasting, positive change to your financial situation. Unfortunately, the short-term steps we walked through are useless if you continue with the behaviors that landed you and your family in debt in the first place.
Unlike the previous list, none of these are “optional” if you want to be successful.
- Start paying off debt.
- We know, we know: this suggestion falls under the “duh” category. But there’s a strategy to it. Begin by paying the minimum balance on all of your cards — except the one with the highest interest rate. For that card, you should pay as much as you can on that one until it’s paid off. That means going above and beyond the minimum payment if at all possible.
- Stop using your credit cards!
- Credit cards have been scientifically proven to loosen people’s pocketbooks. There’s something about paying with cash that makes people more conservative with spending, and that’s important for you. Cash is your new payment of choice. If you don’t have any cash available, you can’t spend it.
We’re not recommending that you not have a credit card at all — you gain very little from closing accounts, and you can’t close them with outstanding balances anyway. It’s always important to have one credit card available for emergencies, but you truly need to use them for emergencies only. That means broken legs, not sales.
- Do not seek cash advances.
- Cash advances are incredibly dangerous. We’ve already advised that you stop using your credit cards, and that advice goes doubly so for cash advances.
- Create a strict budget.
“Strict” doesn’t have to mean “unrealistic.” You don’t even have to purchase fancy budgeting software. A simple spreadsheet — or even a piece of paper — can do the trick. Start by listing bills that are absolutely necessary (credit card minimum balance payments, rent, utilities, and basic groceries). If there’s anything left over, put it towards higher payments on your credit card(s) with the highest interest rate.
- Stick to that budget.
- This is the hard part. You may be so accustomed to shopping or dining out that it’ll feel like you can’t handle going without, but that’s the reality of your situation right now.
This isn’t a life sentence. Once you’re out of debt, you can re-evaluate your budget and determine if there’s room for “fun” spending. In the meantime, rediscover your library. Go for walks with friends. Learn to cook.
If you’re tempted to spend money on extras, remind yourself you’re doing so at the expense of your family and your future — and you don’t want to end up in a scenario where trying a restaurant means you can’t afford rent. (While we’re on the subject of rent, if you’re “house poor,” you might consider downsizing.)
- Track spending.
- This dovetails with the budget advice. Once you’ve gone through the trouble of creating a budget, it’s critical you write down the money you do spend. That means every penny. You need to be honest with yourself in order to discover where innocent-seeming expenditures add up and threaten your progress.
- Find new ways to save money
- Head to your local library and use their computers to look up budget-friendly ideas. There are countless blogs out there with savvy tips. A few examples:
- Set up a carpool for work.
- Cut your heating and electric bills
- Turn off the lights
- Get used to being a little warmer in the summer and a little cooler in the winter. Our bodies — and clothes — were designed to accommodate seasonal changes!
- Shop second-hand.
- Most clothing expenditures are luxuries, but you also can’t exactly go to work naked. When you do need to purchase clothes, look for second-hand items. Thrift shopping has never been trendier! The same goes for all other purchases.
- Boost your income with a second part-time job
- There are two ways to impact your debt: one way is to reduce debt, and the other way is to increase income. If you do both, you’ll be back on top twice as quickly. Consider using all that time you previously spent watching fancy cable channels (which you have undoubtedly scaled down on) to pick up a new part-time job.
The Bottom Line
Unfortunately, there is no “quick fix” for credit card debt. It took time to get into debt, and it will take time to get out of it. And if someone is offering you a quick fix, it’s probably a scam.
Still, these tips will help you to pay off debt as quickly and responsibly as possible. This is critically important, because the faster you are able to pay off credit card debt, the less you end up paying overall.
Now is the time to live within your means and free yourself from the shackles of debt. Some of these steps will be uncomfortable, even unpleasant. Still, they are all vast improvements over the alternative, which is continuing to spiral into debt. Living debt-free is possible, and the freedom of a debt-free life is, well, priceless.