How to Get Out of Credit Card Debt, and Stay Out
Over the years I’ve spent a lot of time in and around debt. My first professional job was in a customer service call center answering inquiries from credit card customers. From there I bounced around to different areas within the company including fraud, new credit, and then on to software development. Of those experiences, answering the telephones provided the best education on what works and what doesn’t in terms of getting out of debt.
Unfortunately, many of the hundred plus callers I talked to each day were deep in debt, but a few managed their accounts quite well. It was those few who often shared with me their tips for becoming debt free and staying that way. So if you find yourself in credit card debt, consider the following tips for getting out of debt, and staying out.
- Stop charging. This one seems so obvious I almost didn’t include it. Unfortunately, it is the one people usually fail to do with any conviction. The first step out of any hole is to stop digging. Only then can you begin to devise a plan to crawl out. This step may require you chopping up your cards with a pair of scissors (keep one for emergencies), or at a minimum taking them out of your wallet and leaving them in a sock drawer at home. Whatever you have to do, stop making new charges.
- Pay debts off smallest to largest, regardless of interest rate. Make minimum payments on all but the smallest one, and throw everything you can at the smallest one. The psychological advantage of scoring one or two quick wins bringing balances down to zero is worth the difference in interest charges. This is the snowball method of debt repayment made popular by Dave Ramsey in The Total Money Makeover, but many argue against the mathematics behind it. Like Ramsey says, “If you were good at math you wouldn’t have credit card debt!”
- Divide credit card minimum payments in half and pay that amount twice a month. Interest is calculated based on the average daily balance of your account for the entire month. By making a payment every couple weeks you are reducing that average balance and therefore reducing the finance charges assessed, as opposed to waiting until the end of the month to make a single payment. As an added benefit, splitting your payment into two separate payments helps smooth out the monthly budget as you will not have to come up with an entire payment once during the month, rather half that amount twice during the month (aim for around the time you receive your paycheck).
- Make micro payments (commonly referred to as snowflakes) any time you receive extra money. Send proceeds from eBay sales, garage sales, and any earnings from overtime or part time work directly to your credit card as soon as they are received. It may not seem like much, but it adds up. Besides, if you deposit the money in your primary checking account you are more likely to spend it than to use it later in the month towards repaying outstanding debt.
- Don’t waste time with balance transfers, unless you owe more than $10k. With anything less than $10k the interest saved just isn’t worth the hassle factor. If you are within $10k of becoming debt free you can get there through finding additional sources of income and cutting household expenses to make significant monthly payments. If you owe more than $10k in credit card debt, consider consolidating as much of it as you can on cards with the lowest interest rates, and get rid of the high-rate cards. You’ll have less payments to manage and your total interest charges will decrease.
- Find part-time work. Sometimes this is the only option to generate cash flow over and above your normal monthly budget. I use this as a last resort, especially for families, because it often requires a parent being away from their family for long periods of time each day. Working a full-time job and then leaving for your part-time job makes for a long day. However, it also gives you more snow for that snowball, helping you become debt free even faster! Many times you can earn more than minimum wage retail jobs by doing something on your own. In the past I have mowed lawns, submitted articles to paying article directories, and volunteered for overtime to come up with extra debt snowball payments.
- Close out your newest accounts. As balances are paid off, close out all but your oldest one or two credit cards. One of the components of FICO score calculations is length of credit history, which is negatively affected each time you open a new account. By closing these newer cards you are effectively making the average age of your credit history older. If you are not confident in your ability to manage credit cards going forward, consider cutting up all of your cards and living on a cash basis, but only after you have a fully-funded emergency fund in place of at least five or six months of expenses.
By following the above tips you should be able to make progress towards debt freedom, however there is one key ingredient missing from the list. Anger. You have to get mad about being in debt to get out of it. You have to make it a priority. You have to be willing to sacrifice all other financial goals for a period of time to put every extra penny you can scrape together on debt. As long as you are complacent about debts they will continue to hang around forever. If you find yourself deep in credit card debt I strongly urge you to find the proper motivation and start a debt snowball plan today. Tomorrow is just an excuse away.
*This article was featured in the Carnival of Debt Reduction.
I’m interested to hear your best tips for paying off credit card. Please share your tip in the comments section below.
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Great Tips!
I second using the emotion of anger to help you get out of debt. That and being “fed up” are what’s helped me pay off $12,000 in credit card debt since January!
I know that you’ve talked about this many times before, but I think it is worth mentioning again here. In order to get out and stay out of credit card or any other kind of debt, you have to get yourself on a written budget. If you don’t, then it is very unlikely that you will be able to effectively control your spending to stop charging.
Great tips! I think the last point of getting angry was the most important for me! Getting out of debit is like anything else - you have to want it bad enough that it hurts!
Side Note - on the side jobs, do you have a list of preferred companies for paying articles? I’ve seen people write about this before but never really considered it until I read it here. TIA!
We just paid off all of my credit cards, and boy, is it ever a good feeling! I wish I’d had this list two years ago!
Great list and great article! These were all so true for me, especially the anger. Jeff’s point above about a WRITTEN budget (even if written on the computer) is SO true. I think seeing it and watching it go down is so awesome. I just switched to a mortgage company that is the same as my savings and checking and now my mortgage shows up on my online screen when I view checking and savings and that is such an inspiration to send them extra cash every chance I get (I no longer have CC debt or any other debt) and it is so pleasurable to watch that balance go down. It is better than a latte or new blouse any day!
I did the debt snowball repayment thing before the “snowball” concept was out there or maybe the author that I read stole it from Ramsey but it was exactly the same concept and I will tell you that was the only way to pay off debt for a person like me, seeing each bill disappear kept me motivated and the whole interest thing kept hanging me up before I started snowballing and snowflaking….
Congratulations on being debt free but the house! With your enthusiasm you’ll have that mortgage knocked out in no time.
Great list. Thankfully I’ve been very blessed and have found my way out of credit card debt already, but I know this will be helpful to so many others. In fact, I decided to share it with my readers at http://lifeofaninvestor.com/saving-money/get-out-of-credit-card-debt/
#2, paying off debts from smallest to largest was something I did waayyy before I heard of Dave Ramsey. I knew it didn’t make sense mathematically but there was something about crossing off my list of debts that was highly motivating. Great tips!
Great list - definitely agree with the “get angry” part. I refer to that point for me as “hitting my financial bottom”: I hit the point where I just could not keep living, one more day, the way I’d been living. And that is what started me on a completely new way of thinking about money. Agree with the budget creation point too: there’s no way I could live within my means without one!
My suggestion is related: spend a month tracking your spending so you know what you’re spending where. Only then can you figure out where your money is going and where you should make changes.
I also advocate allotting a small amount of cash each month for fun and recreation: it doesn’t have to be a lot, but enough to do something nice for yourself, and remind yourself that you aren’t on earth for the sole purpose of paying your creditors. I find that when I’m totally rigid with myself I end up rebelling and busting my budget, so allocating a bit to fun/self care actually saves me money in the long run.
I think working your way up from smallest to largest credit card debt is a great idea. My husband and I’s biggest financial mistake was thinking we needed a bigger car and house in order to have a baby. It would have been a lot less stressful the first couple years if we had not listened to those around us who felt we needed these things. Even now when I mention having a third baby people ask me if I am buying a bigger house. I tell them I still don’t own the one I have.
I think #9 should be to build (or add more to) an emergency fund. I know you talk about that all the time in other areas of your blog, but ending on a way to “stay out” seemed good here.
Thanks for this, and all your other, great posts.
I had seen all points in some form somewhere else but the last: Getting mad about being in debt. This is great advice. I am fortunate to never have been deep in debt, but the dollars and cents paid in interest surely did and do make me angry - I have much better use for them.
When I decided to finally get rid of credit card debt once and for all it wasn’t because I got mad. I realized in a few years I would need money for a newer car, dental visits, and at the time I really wanted a nice garden and I didn’t have money for those things. I realized that if I didn’t have my credit card payments (which at the time, I hadn’t charge on them in over 2 years) I would be able to use that money to save for these things I wanted. It was shocking to find out I had $750 a month that I was sending to credit cards and not saving for the things I needed in the future. I’ve been working on this for one year and I have another year to go! I’m well on my way.
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biggest problem I’ve run into in trying to get debt free is Murphy. Seems just as your getting ahead he comes along and wipes you out. Takes only a few trips to the dentist till the CC is maxed out again.
That’s the main reason why I’m switching my focus from debt snowball to savings.
Part of it is also we have only one CC left the rest are loans which run out next year, so even if I do nothing at all I’ll be debt free next year.
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Credit card debt is on its all time high with today’s economy. Hopefully people can obtain the help they need to get out of debt. Thanks for the article!
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I think having a little backup in case of emergencies is key to getting gout of debt. If you can’t cover a $400 car repair, it is going on the card and you can’t accomplish step one.
Nice list Frugal Dad.
Your first tip is definitely the most important - no matter how hard it is, you’ve got to stop using the plastic to make any progress getting out of debt. Definitely easier said that done, but if you have any hope of getting out of debt, that’s tip #1.
Thanks Frugal Dad, this is great post. I’m especially a fan of #3 and will test it out to see if I notice a difference in my interest charges. Splitting the minimum payments into two per month is definitely easier than paying a large payment at one time. Thanks for opening up my mind to new possibilities!
http://pushingthirtymydebtdeadline.blogspot.com/
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