Getting Out Of Credit Card Debt – Ultimate Guide
Are you tired of being stuck in credit card debt?
Welcome to a club that a significant portion of the population is currently in.
Let’s explore the true secret to getting out of credit card debt.
Debt can be a symptom of any number of problems and life circumstances. However, it is important to understand that YOU ARE NOT YOUR DEBT.
At Halifax Debt Freedom, we'd love to discuss how we can help you become debt free.
Getting out of credit card debt can be extremely difficult. Especially if you are carrying a larger balance. The average credit card has an interest rate of 19.99%. While we know this is high most of us don’t even blink when spending money on cards. The most frightening thing is how much this actually costs out of pocket if we carry a balance.
A $10,000 balance would cost $2000 (actually $1999 but I am rounding) or $166p/m in interest-only payments. This is before you even pay down the debt at all. This is very scary. In our article where we discussed how much debt is too much debt, we discovered that the average Nova Scotia resident has approximately $22,600 of debt. If all of this were credit card debt the minimum interest-only payments would be $376.48 per month. If you wanted to pay this debt off in 5 years you would need to pay a whopping $598.76 per month toward this debt.
While this might not seem like a massive amount to some people it equals out to be more than 10% of the average after-tax income.
Knowing how to get out of debt fast, efficiently, and without sacrificing your entire life is the goal.
We will, of course, cover the Secret to getting out of credit card debt at the end of the article. Every step is important though. So grab a coffee and a notebook and start reading!
Evaluate & modify your habits
While most experts would suggest beginning by making a budget we do not. Our process first involves evaluating your own habits. Think about when you spend money. What causes you to spend money? What are your triggers? Why do you spend money? These are all very important questions to ask yourself.
The truth is that without modifying your behaviours and habits you will be doomed to repeat history….. meaning you will most likely end up in debt again and getting out of credit card debt will be near impossible. Obviously this isn’t the goal so take this step seriously.
What we recommend you do is to start with one habit that you know you spend too much money on. For some this may be smoking, daily coffees, eating out, buying video games, or even a shopping addiction. Whatever your bad habit is you will:
a. want to list of why you do the bad habit,
b. come up with compromises that are not perfect but better than you were doing
To give you an example – someone who drinks daily coffees may have a list as such:
a. Why – Takes too long to brew a cup. I like specific companies’ coffee. It is fast. I don’t have time.
b. Compromises – Buying a used Tassimo/Keurig (Not perfect as it still costs a lot of $ but much cheaper than buying daily coffees at a shop). Perhaps a compromise could be to simply buy a smaller sized coffee. Again – not perfect but cheaper/better than the day before.
You want to constantly work at these to always improve.
The reason we ask people to start with their bad habits is they are usually the easiest to fix. If you start with a habit that simply costs a lot but you actually like you may not have the motivation to reduce your spending.
Determine what is important to you
We all know what needs vs wants are. It is not a challenge to classify those. What we want you to do in this step is to prioritize your ‘wants’. This includes your intangible wants. What I mean by this is you also want to include non-material items you want. For example – wanting to be debt free or sleeping a full night be on your list. Obviously these things don’t cost money but they might outweigh an item that does.
It is recommended that you simply write everything out without worrying about the order at first. Once you have done this then go ahead and number them by order of importance. You might have to re-order the list a few times before it is perfect.
What is critical is that you outline a true list that you can worth with in the next step.
Make a spending plan…. not a budget
Budgets, for most people, are very restrictive and limit people. This isn’t because they are designed this way but because of the perception that people have of them. So we are going to flip that upside down. Instead of thinking of a budget as a restrictive. Think of it instead of a plan… a spending plan. That is, a plan that outlines how you are going to spend your money based upon your priorities. The list you created in step 2 is what you will be using here.
We recommend you make this spending plan as simple as possible. Get a pen and paper and write down four columns.
- Date, and
- Actual Spend.
You will want a couple of scrap pages, especially for the first spending plan you create. It is OK to make mistakes. What is important is to actually do it.
This step is actually very easy. Start first with your ‘needs’. While we didn’t cover this in the step above everyone knows what their needs are. Food, shelter, transportation, childcare, etc. Once those are plugged into your spending plan you will then want to go through your priority list and add those items into your spending plan. You will repeat this process until the total cost of your plan exceeds what you make.
It is that easy. Once you run out of money you simply stop. The cool part about this, if you did step 2 correctly is that you won’t feel bad because you have your needs, and the most important wants on your list.
You may be wondering… ‘Well, what about those non-material wants? ‘. This is a great question. You essentially want to assign a value or an activity to those priorities. For example – getting a full night’s sleep might involve you including the time to read a book before bed. Or to take a walk or get some exercise. Anything to improve your quality of sleep. This is, of course, a little easier said than done. But because every priority is unique it is hard to cover them all.
Use steps 1-3 to save money
If it isn’t obvious by now, steps 1-3 are designed to help you understand where you are at, determine what is important to you, and plan out how to want to spend your money. The coolest part about these steps is that they are repeatable. Just because you make what you believe to be the perfect spending plan doesn’t mean it will be that way forever. While you don’t need to completely re-do every step you may want to revisit what habit you wish to tackle every few months. Or maybe your priority list will change.
What we find really neat is that the more effort people put into their plans the better results they obtain.
Knowing what to pay off first
Up to this point, you haven’t touched your debt. Outside of making the minimum payments, we hope! You really need to know what debts to target first.
The two most common methods utilized to pay off debt are either choosing the debt with the lowest balance OR the highest interest rate. We actually recommend you also look at a third potential method when deciding which debt to pay off first. That is how much the debt actually costs you compared to the balance. While this is less important when getting out of credit card debt it still is something to consider as not every card is made the same.
Let’s consider a general situation.
A person has 3 debt products. Three credit cards.
Debt 1 – $10,000 Card – minimum payment $250 – 19.99%
Debt 2 – $2,000 Card – Minimum payment $50 – 12.99%
Debt 3 – $3,000 Card – Payment plan set up with the company to pay $200 per month until paid. – 10.99%
While traditional wisdom would recommend paying off either the $10,000 card or the $2,000 card first we would actually suggest paying off the $3,000 card first. The reason is, compared to the balance it has the highest monthly payment. What this means is that if you pay it off, it will have the highest impact on your cash flow compared to how much effort it will take to pay it off.
In our opinion, freeing up your cash flow is what you should prioritize above all else. Now of course – if the debt load were $30,000 and fixed we may not recommend the same thing. As the time it would take to clear off a $30,000 account for most people would take a tremendous amount of time.
If all things were equal – we do suggest you start with the lowest balance when getting out of credit card debt. There have been several studies that have shown most people like to obtain mini ‘wins’. Basically – people want to feel accomplished. Targeting the highest interest rate first will mathematically save you the most amount of money but will be harder to stick to.
Finally – The ‘Secret’ – How to supercharge getting out of credit card debt.
I am going to be honest – there is no real ‘Secret’ to getting out of credit card debt. Sorry for leading you on. It ultimately comes down to hard work and committing to a plan. The biggest issue we see with people trying to rid themselves of credit card debt is that they don’t actually commit to a plan. The expression ‘Easier said than done’ is 100% true in these instances. That is why we like to break down our plans in bite-sized bits.
Start with your habits,
Determine what is important to you,
and make a spending plan.
By actually doing these three simply said steps you will see that your balances will quickly decrease.
While not a secret, the most powerful way to begin getting out of credit card debt quickly is to simply stop using credit cards entirely. Cut them up. Shred them. Burn them. Whatever it takes. There is very little in life that requires a credit card. Sure – some say to book a hotel, rent a car, etc. But these things occur, for the average person, maybe once or twice a year? Funny thing – we have a few clients who do not want to get a credit card again after restructuring their debts and they never have a problem travelling. We believe this concern is unwarranted.
Knowing when to reach out for professional debt help
Have you tried all you can when getting out of credit card debt but are still not getting the result you desire? You may want to reach out for help. We wrote a great article that outlined some questions you can ask yourself to determine if you need professional help or not. The reality is simple: If you have debt and it is causing you to stress out, keeps you up at night, prevents you from buying necessities of life, and/or is not reducing as quickly as you want you may want to consider reaching out.
We would of course love for that resource to be us. We believe we have the highest success rates and the lowest default rates with the plans we help create and implement. In saying that – all we ask is that if you see someone else you give us the opportunity to give you a second opinion.
This article was written by David Moffatt, a Debt Relief Expert. He has helped assist in creating plans that have helped save Nova Scotia residents over $30 million dollars of consumer and tax debt since 2015. We believe that no consumer should have to struggle with the stress of overwhelming debt. Our debt restructuring strategies can help you cut your debt by up to 80%.
If you are struggling with debt please reach out. It hurts to continue to suffer financially. Halifax Debt Freedom services Halifax, Dartmouth, Bedford, Sackville the entirety of HRM, and all of Nova Scotia.