Credit card debt affects millions of people and robs them of their financial futures. A lot of the blame can be placed on the credit card issuers who make it as easy as possible to apply for a credit card.
Attractive discounts, coupons, perks, etc. are given to hook potential customers. Once these folks have their credit cards, they go wild forgetting that they’ll need to pay back the credit used.
They assume that they can just pay off the minimums and they’ll slowly settle the outstanding balance. What many people don’t factor in is the interest rate that comes along with these credit cards.
You could pay your minimum amount and interest on your credit card for years and not make a dent on the amount of credit you used. Should you miss a payment, you’ll need to pay late payment fees. Over and above that, there may be higher interest charged too.
The banks know exactly what they’re doing and will do whatever it takes to keep you spiralling deeper into debt – paying more and more in interest and fees. You’ll be in financial servitude to these financial institutions for years but ONLY if you let them get away with it.
Put an end to credit card debt
If you’re sick and tired of the never-ending bills and calls from the banks, it’s time to be proactive and take a stand.
Get a piece of paper and write down the outstanding balances on all the credit cards you have. Write down the interest rates charged for each card too.
Now, you need to adopt 1 of 2 methods to pay off the credit card debt. If you only have one credit card, you don’t need the methods below. Just pay your bill on time and always pay MORE than the minimum sum.
Even $50-$100 more makes a difference and you’ll reduce the amount you’re paying towards interest and also help to diminish your outstanding balance.
Method #1 – The debt snowball method
The debt snowball method will require you to pay the minimum sum on all your accounts EXCEPT the smallest loan. You’ll pay more for this loan. For example, if you have 3 credit cards and you owe $2,000, $1,000 and $700 to each card respectively…
You’d pay the minimums for the first 2 cards. However, for the 3rd card which has an outstanding balance of $700, you’ll pay more than the minimum. In fact, you’ll try to pay as much as possible. Your goal will be to settle off this $700 outstanding balance FIRST… because it’s the smallest amount.
Once this $700 is paid up, you’ll carry on paying the minimum for the $2000 balance… BUT now, you’ll use the extra money you have (from not having to pay for the 3rd card) to pay off the $1000 balance.
So now, your goal will be to pay as much as you can towards the $1,000 balance and eliminate it. Once that’s done, you’ll move on to the final $2K balance. This is why it’s called a ‘snowball’. You’re rolling your way towards the biggest debt.
There are a few pros and cons with the debt snowball method. The biggest advantage it has is that it motivates people. You feel inspired when you clear off the smaller debts. You can see the debt diminishing.
However, your debt elimination plan can take years, especially if the biggest outstanding balance you have is formidable. You’ll also end up paying more in interest!
Which is why, the second method is recommended…
Method #2 – The debt avalanche method (RECOMMENDED)
With the debt avalanche method, you’ll order your credit cards by their interest rates… and focus on eliminating the debt which has the highest INTEREST rate first. The focus here is on the interest and not the outstanding balance.
For example, if you owe $500 on one card with a 9% interest rate, but you owe $2,000 on another card with a 16% interest rate, you will focus on paying the $2,000 balance first.
It doesn’t matter if it’s easier to pay off $500. You’ll still focus on the $2,000 because you’ll be saving money when you clear off the debt with higher interest.
This will mean that while on the surface, you can’t feel good about quickly paying off a small debt, in the long run, you’ll pay off all your outstanding debt much faster. So here is how it works…
You’ll pay the minimum on all your balances EXCEPT the one with the HIGHEST interest rate. You’ll pay as much as you can for this card until it’s paid up. Then you’ll move on to the card with the next highest interest rate and so on.
The advantage of the debt avalanche method is that you’ll save a lot more money (from paying less interest) and be able to pay off your debt even quicker.
The downside is that you’ll need discipline because this method will not motivate you, especially if the outstanding balance is huge for the high interest card and it seems to be taking ages to settle it.
However, once you pay off the huge debt, and start using the excess money you have to pay off the next one, you’ll see how AMAZING this method is. The magic comes later, but when it does, you’ll be blown away.
You’ll settle the second card faster… and the third one even faster. That’s why it’s called an avalanche. You gain momentum with time. This method of debt repayment is highly recommended.
Decide which method will work well for you and use it to reduce your debt. The sooner you start, the better.
“Better to go to bed hungry than to wake up in debt.”Proverb