Getting into credit card debt is easy. For some, it’s a one-time emergency that lands them in the hole by several thousand dollars. For others, poor spending habits that slowly add up over time are to blame for their high credit card balance.
Getting out of debt is anything but easy. In fact, we know that the average American household has $7,996 in credit card debt alone, according to WalletHub. When you consider that most American’s are also carrying student loans and car loans, it’s no wonder so many young adults feel like they’ll never get out from under their debt.
It isn’t impossible, however. In fact, getting out of debt is essential to moving toward financial success. Without the pressure of payment due dates around every corner, debt-free living provides the opportunity to save for the future and take advantage of investing.
Of course, when you’re staring at a mountain of debt, getting started can be intimidating. There is endless advice out there promising to be the key to quick debt pay-off, but which of these strategies actually work?
We checked in with two experts in reaching financial goals, certified financial planners Ryan McPherson, managing member of Intelligent Worth, and Ogechi Igbokwe, the founder of One Savvy Dollar. Here’s what they had to say about getting out of debt and moving on to a thriving life.
Stop the Debt Cycle
Before you start tackling your debt, you have to stop the debt cycle. Who cares if you're rapidly paying off high-interest credit cards if you're running the balance back up every six months?
“You need to understand what caused your credit card debt in order to pay it off and then use your cards responsibly,” explains McPherson. “Without understanding the source, you're likely to get right back in a bad situation with credit cards.”
Spend some time in self-reflection, asking yourself tough questions about the circumstances that led to your current financial situations. Be honest! Do you have credit card debt because you have poor spending habits, you spend impulsively, or don’t plan ahead? Or are you typically responsible, but caught off guard by a catastrophic event of some kind?
Knowing the answer to these questions will give you a pretty good indication of how to move forward. If you're typically a very responsible spender, focusing on debt payoff is probably the best plan. However, if you are prone to excessive spending, you've got to address those habits first, according to McPherson. Perhaps you simply need to get on a budget, or maybe you need accountability in the form of a close friend, counselor, or financial advisor. Creating a plan for bringing your debt cycle to a screeching halt must be your first victory in your journey towards a debt-free lifestyle.
Being unorganized can cost you money. Without a budget that clearly outlines each and every expense you have, spending money you don’t have is easy. When an unplanned expense arises, credit cards quickly become the fall back to cover those purchases.
Before beginning your debt payoff strategy, take some time getting a clear picture of your finances. Outline your basic expenses, like rent and groceries, in a budget. Write out every cent of debt you have along with the interest that is charged on each card. Once you've accounted for your living expenses and the minimum payments on all of your debt, whatever you have leftover will be a part of your debt payoff strategy.
The Best Strategy for Debt Pay-Off
The best strategy for paying off debt is the one that works for you. Once you’ve found that method, getting organized and sticking with it will be what consistently moves you towards your financial goals. Not sure where to start? Here are some of the strongest debt payoff methods and the benefits of each choice.
The Debt Swap Out: Depending on your exact circumstances, a debt swap out might be the best strategy for you. The idea behind this strategy is to swap out your high-interest credit card debt for a lower interest, personal loan, according to McPherson. Using the loan, pay off all of your credit card debt and then make one, large payment toward your personal loan every month. Of course, this strategy isn’t for everyone. Consider both your financial situation and your spending habits before making the leap.
“If you're disciplined, understand the source of your credit card debt, and are committed to remedying the underlying debt-building behavior, swapping your credit card debt for lower interest debt may work well,” says McPherson. “However, if you're still regularly overspending, fix that issue first and then consider a debt swap. Otherwise, you'll likely swap your debt and then run up balances on your credit cards again.”
This strategy will save you a lot on interest, but it only works for some. Having a good cash flow that will allow you to make large payments on your personal loan is especially helpful if this is the plan you choose for paying off debt.
The Snowball Method: According to McPherson, this method is all about the way you think about your debt. Once you have a clear picture of what you owe, an exact number on each credit card and their interest rates, you pay off the card with the lowest balance. The downside of this method is that it is actually not the fastest way to get out debt. This is because you will end up paying more interest in the long term. However, the upside is that this strategy allows you to experience quick wins, which means you will be motivated to stick with your debt payoff journey for the long-term.
“Successfully paying down credit card debt is as much psychology as it is finance,” explains McPherson. “This method usually helps a lot if you're feeling overwhelmed and are unsure about how you'll be able to pay down so much.”
The Avalanche Method: If you’re not struggling to find motivation and simply want to get out from under debt as quickly as possible, this might be the best strategy for you. The Avalanche Method of paying off debt is the fastest route to debt freedom because it means spending less on interest. Take a look at your credit card debt—which card has the highest interest rate? That is the first card you should aggressively pay off first.
“This method saves money on interest and allows you to pay off your debts faster than with the Snowball Method,” says McPherson.
Picking Up Speed
Once you have chosen the best strategy for paying off debt, there are other tricks you can employ to pick up speed. These tips aren’t meant to distract you from your original plan, they’re simply added efforts that can help you make progress more quickly.
Lowering Your Interest Rates: If you've chosen to go with the Snowball or Avalanche methods of debt payoff instead of consolidating, you may be able to cut back on what you're spending on interest each month. Call your credit card companies and ask them to reduce your interest rate, suggests Igbokwe, who used this approach to pay off his own debt quickly.
“Your credit is a variable rate ‘loan’ he explains. “The same way the bank can increase your interest rate if you're late is the same way you can call and request a rate reduction if you're in good standing.”
Make Early Payments: Instead of waiting for the due date, make your payments as soon as the new billing cycle begins. This saves you money on interest because interest continues to accrue each day after the billing cycle has closed, according to Igbokwe. When you make an early payment, your balance shrinks, which means the interest being tacked on is less since it accrues based on your balance.
Pay More: Of course, this may seem obvious, but that doesn’t mean it isn’t worth noting. The very best strategy for getting out of debt is to make larger payments! If you’re only paying the minimum due, you can plan on being in debt for years since much of your payment will be going towards the new interest accrued each month. Comparatively, larger payments mean you will chip away at the balance more quickly and spend less on interest over the long haul, explains Igbokwe.
Utilize Unexpected Money: There's nothing quite like a little-unexpected money. Although it might be tempting to use a work bonus, tax refund, or inheritance for fun, it is best to use unexpected money as a tool for gaining momentum while paying off debt. When applied toward the balance of a credit card, unplanned money can result in a big debt payoff victory, helping you reach your goal much faster than you anticipated.
“Set aside a few dollars to purchase or do something meaningful,” suggests McPherson. “Put the rest (the majority) toward your debt.”
And, if you are fortunate enough to be awarded a raise or promotion, don’t adjust your lifestyle. Instead, McPherson advises that you make a plan in advance for how you will use that money so that the extra income doesn’t get lost in your bank account.
The Truth About Debt Consolidation
Curious about those debt consolidation programs promising to help you get out of debt quickly? This might be the right choice for you, but you certainly need to understand exactly how these programs work. Like any other strategy for paying off debt, you really need to be certain you have addressed any underlying spending issues that got you into debt in the first place.
“If you've addressed your underlying debt-building behavior, have a pretty good credit score, and have the income to actually make payments, debt consolidation may make a lot of sense,” says McPherson. “Otherwise, consolidating your debts will merely be a financial bandage and will fail to help you long term.”
Additionally, it is important to understand that many of these programs require you to close down your credit cards completely. This might not be a problem, but it may hurt your credit score to close all of your old accounts, according to Igbokwe, so evaluate how important a high credit score is for you.
“The reason the card is closed is so you don't ball back into the temptation of racking up debt again,” he explains.
And, when it comes to choosing a debt consolidation program, make sure it is actually going to benefit you by saving you money. The interest being charged on your debt needs to be much lower than the interest you are paying on credit cards in order for the program to be beneficial to your debt payoff strategy. Additionally, be certain you are able to make the payments each month. There may be additional fees associated with being unable to stick with the payment terms you agreed to when you opted into the debt consolidation program.
Choosing a Debt-Free Lifestyle
Getting out of debt quickly will almost certainly require you to make adjustments to your lifestyle. You can’t continue to spend your extra money on unbudgeted expenses if you plan to make larger payments on your credit card each month.
Although many proponents of fast debt payoff suggest a lifestyle of “beans and rice” until you are completely debt free, this drastic approach may not be the right choice for some. While it might work well for those who feel confident they can pay off their debt quickly, if you have a large amount of debt, you may be setting yourself up for burnout.
“Paying off debt is a marathon. Unless you’re on the cusp of bankruptcy and tremendous changes are needed, extreme spending cuts may do more harm than good,” warns McPherson.
Instead, plan to make reasonable changes to your lifestyle that won’t leave you feeling like you’re never having fun. You can thrive financially and enjoy your life! Sure, it may take longer to get out of debt, but McPherson believes it is more important to enjoy the process than to get out of debt more quickly. This might look different from person to person. Take a close look at your budget and consider what matters most to you and what you feel OK with giving up for the next few years. Here are a few suggestions that might work well for you.
- If date nights with your significant other are non-negotiables, give up lunch out with coworkers instead.
- If an incredible cup of coffee is essential to starting your day, consider enrolling in a discounted subscription with a local roaster. It might seem like a frivolous expense on paper, but if it keeps from hitting the drive-thru each morning, it is certain to save you money.
- If a little binge-watching is your favorite way to spend a weeknight, don’t give up your streaming services completely. Instead, pick one and unsubscribe from the rest.
Create Alternative Streams of Income
If cutting back on your spending isn’t getting you where you want to be fast enough, consider creating an alternative stream of income. A part-time job or freelance side-hustle could bring in enough money to drastically speed up your journey to freedom from debt.
Any specialized skill you have could be a means of making extra money for paying off debt. Here are a few examples that have worked well for others:
- Become a driver for Uber, PostMates, or Lyft. You can work whenever your schedule allows, take time off when you’re too busy, or work every night if that is what you desire.
- Offer graphic design services to small, local businesses who may not be able to afford the steep budget of large marketing agencies.
- Become a social media manager. Work as little as an hour a week scheduling posts for small businesses, internet personalities, or other freelancers.
- Play an instrument? Consider offering beginning lessons to families in your community.
Staying on Track
Unless you anticipate paying off debt within a few months, you should expect that your motivation is going to ebb and flow as time passes. Staying on track for the long term isn’t easy, but it is certainly possible.
Make sure you are staying focused. Don’t get distracted from the debt payoff strategy you have chosen, staying on track is crucial to your success.
“Regardless of your chosen method, concentrate on paying off one card at a time. Continue to pay the minimums on your other cards,” adds McPherson. “Spreading money around will delay your progress and fatigue you.”
Of course, don’t forget to celebrate the progress you are making! Getting out of debt is a huge accomplishment.
“Celebrate, reasonably, when you've dropped a card below a major number like $1,000, $5,000, or $10,000,” encourages McPherson. “And of course, celebrate when you've paid off a card in full.”
Smaller celebrations could include going out for drinks after paying off a card, seeing your favorite band live, or reinstating the gym membership you suspended to free up extra cash. And when you finally pay off all those credit cards for good, don’t be afraid to treat yourself to something extra awesome like a weekend away or finally upgrading your outdated smartphone.