Do you feel like your credit card debt is suffocating you? Are high interest fees taking a huge bite out of your hard-earned money every month? Are you tired of your credit scores being hurt by high credit card utilization rates? If so, the time for action is now.
Once you acknowledge that your credit card debt has gotten out of control, it is time to step back, assess the damage, and come up with a plan of action to fix the problem before it gets any worse.
Step One: Face the Facts
Now that you are ready to begin tackling your credit card debt problem, the first step is to figure out how much debt you actually have. Make a list of your credit card debt, from the card with the highest balance at the top of the list down to the card with the lowest balance at the bottom. Here is an example:
1. Capital One - $5,000
2. Chase - $3,500
3. Citibank - $2,800
4. Discover - $1,200
Step Two: Figure out How Much You Can Afford to Pay
You will still need to maintain at least the monthly minimum payment on each of your credit cards in order to do the bare minimum to protect your credit scores. However, paying the minimum payment isn’t nearly enough. If the minimum payment is all that you pay, you can count on being stuck underneath a pile of credit card debt for a long time – potentially decades!
A good place to start your debt-slashing strategy is to give your budget a good ol’ honest check up. The goal of this checkup is to find out where you may be overspending each month.
Once you have updated your monthly budget (and hopefully decided to weed out some unnecessary spending), you will be able to determine how much “extra” income you can afford to pay toward your credit card debt each month.
Oh yeah, don't forget to shelve your credit card usage so that your balances don't continue to climb during this time. Just don't close the accounts, whatever you do. That can be a big no-no for your credit scores.
Step Three: The Snowball
One option for paying off your credit card debt is the “snowball effect.” Here is how it works.
Begin by paying the minimum payment on all of the credit cards on your list, with the exception of the card with the lowest balance (#4 – Discover in the example above). For the card with the lowest balance you will want to use all of your additional funds and pay the largest payment possible.
Your goal should be to completely pay off the card with the lowest balance first. Next, move up the list to the next card with the lowest remaining balance. Rinse and repeat until every account on your list has been paid in full.
Step Four: Determine If a Consolidation Loan Is Right for You
If you find yourself in a situation where it is going to take a while to pay off your credit card debt, even using the snowball method, it may be time to consider a debt consolidation loan. Here are two great reasons why you might want to use a debt consolidation loan to help tackle credit card debt.
1. First, when you consolidate your revolving credit card accounts into an installment loan, your credit scores will likely increase.
The reason a score increase is likely is because credit scoring models, like FICO and VantageScore, do not treat installment debt the same way they treat revolving debt. A credit card with an outstanding balance has a great potential to harm your credit scores. An installment loan (like a personal loan or a vehicle loan) does not have the same negative effect.
2. The second benefit that comes along with a consolidation loan is that it has the potential to save you money.
Credit card debt is among the most expensive debt most people will ever pay. Interest rates are notoriously high compared with other loans, especially for subprime credit cards. Most debt consolidation loans have a much lower interest rate than your credit card accounts.
Step Five: Do’s and Don’t of Using Consolidation Loans
If you’ve decided that a consolidation loan is right for you, it’s also a good idea to follow these rules of thumb once you’ve decided to pull the trigger and apply for a loan of your own.
1. Don’t charge your credit cards back up once they have been paid off.
You have to determine ahead of time that you will not even allow it to be an option for you to charge up new balances on your credit cards again. This has to be non-negotiable. In fact, it would probably be a good idea for you to lock your credit cards up in a safe place and only use them about once a quarter (in order to maintain some activity on the accounts) until you have thoroughly broken the overspending habit.
2. You should still try to pay off your consolidation loan early.
Just because you consolidate your credit card payments into an installment account does not mean that you should not try to pay the loan off early. Paying extra money onto the principle balance of your consolidation loan each month is still a wise financial strategy to follow.
Michelle Black, Founder of CreditWriter.com and HerCreditMatters.com, is a leading credit expert, author, writer, and speaker with over a decade and a half of experience in the credit industry. She is an expert on credit reporting, credit scoring, identity theft, budgeting, and debt eradication. She is featured monthly at credit seminars, podcasts, and in print. You can connect with Michelle on Twitter (@MichelleLBlack) and Instagram (@CreditWriter).