Few things can financially drown someone faster than credit card debt. And with today’s record inflation, it’s even easier to overextend yourself. A study from the Federal Reserve Bank of New York found that 15% more people were in credit card debt in the third quarter of 2022 compared to the third quarter of 2021. With the Fed’s December announcement that interest rates would be increasing again, this doesn’t show signs of slowing down.
But getting out of credit card debt can happen. It isn’t an easy task, but there are a number of steps you can take to get out of your current financial woes.
Here are four ways you can pay off credit card debt.
Use the Avalanche Method
The avalanche method is one of the most popular–and quickest–ways to get out of credit card debt. You start by making a list of all of your debts and organize them by interest rates, with the highest rates on top and the lowest on the bottom. Every month you pay the minimum on all of your accounts, and put all of your extra money towards the top debt (the one with the highest APR). Once that debt is paid off, you allocate your extra money to the loan with the second highest APR.
This method is widely used as it will save you the most amount of money in interest by prioritizing your debts in this way. This also means that you can pay off your debt in less time.
Use the Snowball Method
Another popular method for getting out of debt is called the snowball method. This method calls for you to list your debts and organize them by their size. The smallest amounts are at the top of the list, and the highest amounts are at the bottom of the list. Again, you will make the minimum payment on all accounts and then allocate all of your remaining money to the smallest debt at the top of the list). When that is paid off you move on to the next smallest debt, and so on and so forth.
This is an excellent method for people who are motivated by small successes and can find extra motivation in paying off some of the easier debts first. It will not save you quite as much money as the avalanche method, but if you feel overwhelmed by the sheer volume of accounts you have, this may be a great motivator for you and relieve some of the added pressure.
Create a Solid Budget
It is incredibly difficult to pay off debt if you do not have a plan in place. A monthly budget is a great way to get a firm hold on your expenses and find where you can make adjustments to your financial way of life.
Start your budget by creating a list of all of your expenses, both variable and invariable. Account for everything that you pay for over the course of one month. Variable costs may include:
- Electric Bill
- Parking Fees
- Dining Out
- Entertainment/ Attractions
- Home Maintenance and Repairs
For these costs that change every month, try to calculate a few months totals and average them out. Your invariable costs do not change from month to month and can include:
- Rent or Mortgage
- Car Payment
- Cable Bill
- Insurance Premium
- Trash Collection
- Phone Bill
- Property Taxes
- Childcare Expenses
- Student Loan Payments
- Streaming Services (Netflix, Hulu, Amazon, Etc)
Now list all of your income in one month. Your paycheck (the take home total, not your salaried amount), rental incomes, dividends–anything that makes you money.
Comparing your incoming with your outgoing will give you a sense of how healthy your budget is. Where are you overspending? Where can you cut back? Making changes to your monthly budget can result in a lot of extra cash in your pocket, and that’s cash that can be going directly to your credit card debt. Here are some of our favorite ways to save money on monthly expenses:
- Switch to generic groceries. Brand name groceries are significantly more expensive, so consider buying the store brand to save some extra money.
- Cut down your streaming services. Do you really need all of the services that you are signed up for? Think about canceling one or two (or splitting the cost with friends)
- Refinance your car loan. You can save a lot of money every month by refinancing to a lower car loan APR. You can also change your repayment period when you refinance, and lengthening your repayment period can lower your monthly payments significantly.
- Refinance your mortgage. If you own a home, refinancing your mortgage can cut down your monthly payments.
- Evaluate your insurance. Look at your car insurance policy and see if you qualify for any savings programs. Dropping to a different tier of coverage can also save you a significant amount of money every month.
Cutting your expenses here and there can add up to a lot over the course of a month, and that can really help you get out of the debt you are in (and help you avoid getting into more debt).
If you have multiple lines of credit with high interest rates, debt consolidation may be your best bet to get out from under it. You can DIY your consolidation if you have good credit and qualify for a 0% APR balance transfer credit card. You can then use this card to pay off all of your other debts so that all of your debt is housed under one credit card. So long as you pay off this balance before the promotional 0% APR expires (typically 12-18 months), you will save yourself a lot of money.
If your credit is less than stellar, a 0% APR balance transfer credit card is probably not in the cards. But there are other options. You can take out a home equity line of credit and transfer your debt there (so long as the APR is lower than your credit cards). You can also take out a debt consolidation loan designed for these situations.
If you have multiple accounts that you struggle to keep up with, debt consolidation is an excellent option to save you money and make your life a little easier.
That’s how you can get out of credit card debt in 2023.
While it can feel overwhelming, credit card debt isn’t an uncommon situation. Makes 2023 the year of financial freedom by following our steps to getting out of credit card debt. Refinancing your car loan is a great way to free up some money every month, so call Auto Approve today to see how we can help you!