by Christy Bieber | March 27, 2019
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When you owe money on your credit cards, becoming debt free can seem like an impossible goal. After all, a good chunk of your monthly payment will likely be eaten up by interest each month. And, if you're making only minimum payments, it could take you years to climb out of debt.
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If you want to get out of debt, the first step is to stop getting further into it. This means committing not to charge any more on your cards until you've paid off what you owe. You'll need to live within your means to avoid turning to your credit cards to cover the shortfall, and you'll need to save up a little bit of cash to cover surprise emergency expenses so they don't have to go on your card.
To make sure you're not spending so much that you're forced to turn to credit, make a detailed budget with spending that doesn't exceed your income. Consider prioritizing saving up an emergency fund of around $500 to $1,000 before making extra payments on your credit cards.
While it may seem counterintuitive to stick money in a savings account when you're trying to get out of debt, having this fund is crucial to avoid a situation where you have to charge more on your cards while you're working on your debt payoff plan. Avoiding this is essential to maintain your momentum and avoid getting stuck in a cycle where you constantly pay down your cards only to charge them back up again at the first emergency.
One big reason it can be hard to pay off debt is because so much of your monthly payment goes to interest. But, this doesn't have to continue if you can find a way to refinance your debt to a loan charging a lower interest rate.
You can often drop your interest rate substantially by using a balance transfer credit card. This is a card offering a special promotional 0% APR, which allows you to pay no interest on a transferred balance for a set period of time. Usually, you can pay no interest on transferred balances for anywhere from six months to 15 months. While some balance transfer cards charge a small fee of around 3% to 4% of the transferred balance, it's possible to find some that charge no fee, so lowering your interest rate will cost you nothing.
You could also consider taking out a personal loan to pay off one or more credit cards. Personal loans usually have lower interest rates than credit cards, and also have fixed repayment periods so you'll know exactly when you'll be debt free if you can make payments on time.
By using a balance transfer or personal loan to pay off several existing credit cards, you might be able to not just lower your rate but also make the repayment process easier since you'll have only one loan or card to pay instead of several different lenders.
Whether you'll be working on paying off your existing credit card debt or paying down your new balance transfer card or personal loan, you need to have a plan for payoff. Ideally, this plan will involve sending more than the minimum payment to your credit card or lender each month. If you can pay more than the minimum, you'll reduce your total interest cost and can become debt free much more quickly.
To make a debt payoff plan, see how much wiggle room you can find in your budget to pay extra toward your debt. And, commit to sending windfalls -- like a bonus at work or a cash gift -- to your creditors to get your debt paid down. Then, decide where those extra payments will go.
If you've used a balance transfer or personal loan to pay off existing debt, you may have just one loan to pay. But, if you owe multiple lenders, you could adopt a debt snowball or debt avalanche method. Both involve making minimum payments on all but one of your loans and sending extra cash to that one. Once the loan you're paying extra on is paid in full, take the money you were sending to that creditor and apply it to the next loan you're working on repaying.
The big difference between the debt snowball and debt avalanche centers around which debt you pay off first. With the debt snowball, you concentrate on your debt with the lowest balance so you can score quick wins and stay motivated. With the debt avalanche, you pay off your highest interest debt first because that debt is the costliest. By retiring it ASAP, you can pay the minimum in total interest over time.
You'll need to decide which approach works for you -- but make sure you commit to one and start making extra payments soon if you hope to become free of credit card debt in 2019.
Finally, once you've got your payoff plan in place and you start making extra payments, it's helpful to track your progress. Check your credit card statement each month to see the balance decline and make sure your payments are applied properly -- and check your credit score too, as your score should increase as you start to pay down debt.
For some people, it's easier to stay motivated if you do more than just check in with your credit card statement monthly. You could make a visual representation of how much you owe, such as a big thermometer showing your outstanding debt balance. Color in your thermometer as you make each payment until you've achieved your goal of becoming totally debt free.
It may seem like a big hassle to live on a tight budget and make extra payments on credit cards. But, when you're debt free and able to keep all that extra money you were wasting on interest, you'll be in a much better financial position. You can use that cash to accomplish big goals and will be glad you made the effort to retire your credit card debt forever.
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