This post is part of a series on credit cards. Read about credit card rewards here and the pros & cons of getting your teen a credit card here.
Dave Ramsey is (kinda) right
I’ve written before about how some of Dave Ramsey’s advice is wrong (for instance, here is where I write about getting your teen his or her first credit card) but he’s got something mostly right.
Credit card debt is bad.
Kudos to Dave Ramsey for educating many people about finances and help people get out of massive debt. And what he says about the perils of credit card debt is generally sensible. If you get into even a small amount of credit card debt, the negative power of compound interest can really wreak havoc on a person’s money life.
Is this post for you?
So, are you a good candidate for this?
You are if:
- you want to learn about using credit cards responsibly.
- you have one or more credit cards with a balance(s) that you don’t pay in full every month.
- you want to figure out the best way to pay them off.
- you want to use credit cards responsibly going forward.
Let me just start off by saying that this is a judgment free zone. If Dave Ramsey is the mean, Jillian Michaels of personal finance, I’m the Planet Fitness (I just discovered that The Judgment Free Zone® is a Planet Fitness trademark, so I really am the Planet Fitness of personal finance).
No lunks allowed, and that includes you. No feeling terrible terrible about what you’ve done in the past with money.
Remember, you’re doing well with your money, and you can do better. Reading this article is how you’e doing well, and getting ready to take action is how you’re doing better.
So, no to shame. But also no to magical thinking. This would be thinking along the lines of “If I don’t figure out how much I owe, or open my credit card statements, the debt doesn’t exist.” Or “I’m going to win the lottery, and therefore all of my money troubles will magically disappear.”
Credit card use is one of those. Responsible credit card use can build a good credit score, which can save a person thousands of dollars in interest and other fees, since those with the highest credit scores get the best rates for things like mortgages. Credit cards can also be convenient and helpful in tracking spending, and offer protections (and sometimes insurance) that debit cards and cash do not.
Step One: Get Your Numbers Straight
So, let’s get started. It’s time to gather all the information that you have on your credit cards.
It’s likely that you get and view your credit card bills online. (If not, please consider doing so–it’s such an easy way to keep track of and pay your bills). Gather the last statement(s) of each credit card.
Here is the relevant information that you need for each one:
full balance
APR (interest rate on card)
minimum monthly payment
In all of this a spreadsheet can be your friend. For clients, I put together a spreadsheet with this information. If you have a simple spreadsheet, you can see the payoff over time, and see how quickly you are paying off the credit cards.
Here is probably the most important part of this: once you are committed to pay off your credit card debt, you should resolve to use only one credit card for the time being, and that one you will pay off in full and on time every month.
That way, at the same time that you pay off the debt, you are practicing the quality that is most important in credit card use: paying your credit card bills in full and on time every month.
Once you can do that easily, and you have no credit card debt, you can take advantage of other benefits that credit cards can offer, such as cash back, free travel, and other perks. More on that in another post.
Step Two: Choose Your Poison (your Debt Payoff Method)
For the other credit cards, you should next figure out which one you want to pay off. Here are, briefly summarized, the four strategies that are good for this.
The “debt snowball method”
— this is the very helpful method used by Dave Ramsey.
He tells you to rank the debts in order of smallest to biggest balance, disregarding the interest rate on any of them.
Each month, pay the minimum balance on all the cards that are not the lowest balance, and throw all your extra money at that small debt. Once it’s paid off, you can put all of that money towards the next biggest debt, and minimum payments on that one.
Repeat until all of your debts are paid off. The benefit of this method is you have quick “wins” and this often leads to success and momentum.
The “debt avalanche” method
The “debt avalance” method was popularized by another personal finance guru, Suze Orman. She recommends listing your debts, but in the order of highest interest rate to lowest interest rate. Pay off the highest interest rate debt first, and then repeat with each debt (highest to lowest interest rate) until it is all paid off.
The upside of this method is that it mathematically makes more sense than the “debt snowball” method. The downside if you have a big debt with a high interest rate, it may take so long to pay off that you lose momentum.
Credit counseling/credit consolidation
The third method of paying off debt is to consolidate your credit card debt into one personal loan.
The benefit of this is that you would likely have a lower interest rate and a smaller monthly payment to pay off the loans. However, there are serious disadvantages of this, especially if you have not resolved to not get into credit card debt again.
I do not recommend this as a strategy–I think there are better ways to tackle credit card debt than this.
“Your” debt payoff strategy
The final method is “your” debt payoff strategy. You will take the best features of each of these methods of debt payoff and tailor it to your situation and what works best for you. This will help you have the greatest shot at success. You can combine these methods to craft a plan that will be successful for you.
This is one of the ways that I help my clients, and the accountability that I provide helps them keep at it, but you can work through this yourself, and indeed, you are always the person who is responsible for your financial decisions.
For this method, you’ll first rank the debts as most important for you to pay off.
Perhaps there is one debt that has a lot of bad associations for you—it’s a credit card that you used a lot when you were dating someone who you no longer date, or your spending on this card was associated with something negative for you. Unless it’s significantly higher than the other balances, I want you to consider paying off that one first.
Then rank the rest of your credit card debts that way. If you really don’t have any strong negative emotions associated with the rest (or even any of yours), you rank them in the way that seems to make the most sense for you. For many people, it’s the Dave Ramsey debt snowball, so it would be smallest to largest.
Now, we have a test period. For 3-5 months, set aside an amount to go towards credit card debt payoff, and divide it up the following way:
*assign a little more (say, $5-10) more than the minimum payment on all the credit card debts.
*Next, assign the remaining amount of the debt payoff money that you can towards the most important to pay off for you. Soon, you’ll have that one paid off, and you can move on to the others.
Step Three: Once You’re Successfully Underway, Consider a Balance Transfer Credit Card
Now, you can try some of the advanced ways of accelerating your debt pay off. This involves various strategies to reduce or eliminate the interest on this debt.
Ask to have your interest rate reduced
First, call each of the credit card companies and ask if you can have your interest rate reduced. This is very common, and while you can feel nervous, it’s a great step that can help you immensely.
I walk my clients through this, but here are some brief tips on how to do this:
*be much nicer than you feel (smiling helps),
*discuss how you’ve been a good customer, and
*be persistent.
Just know that it’s not unheard of to ask for this, and you will often, if not almost always, get a reduction in rate. If not, you can always try again later, even right after you first try.
Hopefully, you’ve had your interest rate reduced, so that you will be able to pay off the debts that much more quickly.
Explore balance transfer credit cards for 0 interest payback time.
Second, if you have an amount that you can easily pay off in less than a year, and you’ve demonstrated that you can comfortably pay that amount each month, consider a balance transfer credit card.
These are credit cards that offer a 0 percent interest rate for a certain amount of time–between 12 and 18 months. If you can pay off the debt in that time, you can put all of the money towards the debt, instead of growing interest payments.
The one fee charged by many of these credit cards is a fee to transfer over the balance–usually between 3 to 5 percent of the total. So, for instance, on $1,000 of credit card debt, the fee would be $50 if the transfer fee were 5 percent. Not bad for the ability to pay it off much sooner.
But some credit cards (Chase Slate is one, for instance) charge nothing at all to transfer money (in the first few weeks of opening the card), and it’s worth seeking those cards out.
I don’t recommend getting a balance transfer card until you can pay off the loan WELL AHEAD of the grace period time. So, if it’s a 15-month grace period, you should be able to pay off within 12 months. And if it’s an 18-month grace period, you should be able to pay it off easily within 14-15 months.
This provides you with some margin, or wiggle room, for potential issues or expenses that might creep up.
Now, pay off those cards in your time period, as quickly as possible (while still paying extra on your other credit card debts).
Now, repeat this for each of the remaining credit card debts.
Congratulations, you’re out of credit card debt.
Objections to Opening a New Credit Card
There are a number of objections to opening a new credit card, as described above, to pay off credit card debt. Let’s consider those.
*opening new credit cards will hurt my credit score.
Not necessarily. It might have a quick hit on your credit score, but over time it will not hurt, and can even improve your credit score.
And if you are concerned about taking out a mortgage or other loan in the near future (what your credit score can affect), it’s probably best to pay off this debt first. That margin is so important. By the time you are taking out that mortgage, any ding on your credit card will be long in the past.
*I might run up the spending on this card, as I have done on others.
If this is the case, this objection is valid. If this is true for you, you DEFINITELY DO NOT WANT TO OPEN A NEW CREDIT CARD.
You should have a track record of whittling down your credit card debt before you consider this strategy of debt pay-off. Be clear about that.
*credit cards are evil.
If you feel this way about credit cards, akin to Dave Ramsey, then maybe this approach is not for you. That’s okay!
There are innumerable ways to tackle credit card debt. I hope you’ve found some of my ideas helpful, or something to consider as you work out what makes the most sense for you related to credit card debt.
Key Takeaways:
*No shame, and no magical thinking. Get your numbers straight to know what you’re up against, and know you can tackle and conquer this.
*get your numbers straight so you know exactly what you’re up against. You can tackle and conquer credit card debt, but knowing your situation in valuable in crafting your best payoff strategy.
*resolve to use only one credit card until this process is completed, and pay that off in full every month. Everything else can go to pay off the credit cards.
*choose your debt pay-off strategy. My suggestion: a combination of what works best for you.
*consider a balance-transfer credit card once you are well underway in paying off credit card debt to speed up the process.
I hope you found this guide helpful in considering some of your options when it comes to credit card debt and getting it behind you. Credit cards, when used responsibly, can have many benefits.
Next, I plan to cover some of those benefits of using credit cards well. Stay tuned!
Remember, you’re doing well with your money, and you can do better.
(This post is not sponsored by any credit card company, but I do talk about my positive experience with Discover Card, especially as a first credit card. If you use the links in this post to sign up for a Discover card (like this one, we will each get a $50 credit). See my complete disclaimer policy here.)
(you can watch the video version of this post here.)
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