How To Eliminate Credit Card Debt On Your Own

By Pinyo, on May 9, 2009

Being in debt is not fun. Unfortunately, many people do find themselves in debt and carry balances on multiple credit cards. This article will show you how to eliminate credit card debt on your own without using credit card debt consolidation services. Personally, I think these credit card debt consolidation companies could be helpful to some, but for the most part, they are charging you money for something that you could do on your own.

Here is the 7 steps debt reduction strategy in a nutshell:

The following steps bear some similarity to the Debt Snowball debt reduction method , however there are some practical tips added to make your debt reduction program more effective.

1. Make a list of your credit card debt

Gather all of your credit cards and make a list. On the list write down the name of the card, what you owe, the current interest rate, and the phone number for each card. Here’s a sample debt reduction spreadsheet that you can use.

Note: In the illustration, the 1st number is the balance, 2nd number is the credit limit, and 3rd number is the interest rate

2. Call your card issuers, and ask for a lower interest rate and check their balance transfer offer

Call each company and ask for a lower interest rate; also check what they can offer you as far as balance transfer goes. If the first rep is not helpful, either (1) ask to speak with a supervisor, or (2) hang up and call again. There are good reps and bad reps, you don’t want to waste time with the bad ones.

If a company gives you a better offer, feel free to share that information with the others — it might motivate them to be more generous.

Tips:

Don’t limit yourself to credit card companies, seek out other lenders who might offer you a better deal — i.e., credit union, bank loan, social lending networks, etc.
If can get a good deal from your existing credit card companies, you might try applying for a new credit card that offers 0% APR balance transfer.
If the rep won’t budge, you can also ask to speak to the supervisor. They are usually more accommodating (see ChristianPF’s comment below)

Note: This step might be harder now that we are in an economic recession

3. Sort the cards from the highest to the lowest interest rate

In our example, card A gave us the magical “no fee 0% APR” transfer, card B and C gave us a courtesy interest rate reduction, and card D won’t budge.

Update your list with the new interest rates, and sort them in order from highest to the lowest interest rate.

4. Transfer balances from the highest interest cards to the lowest

This is the quickest way to save money, transfer balances from high interest cards to the lowest interest card(s)*. For example:

Transfer $300 from card D to card A (now that you paid it off, put it away)
Transfer $500 from card B to card A (maxing it out)

* Assuming there is no transfer fee. If there’s a fee, you will have to do some calculation.

There are also a few things you can try:

Ask card A to increase your credit limit, so you can transfer even more to them
Ask card D and card B to reconsider…now that you’ve shown them who’s the boss

5. Pay as much as you can off the highest interest rate card

Pay the minimum balance on card C and A, and concentrate on paying the most you can on card B. Let’s assume you pay:

$100 on card B
$20 on card C
$20 on card A

If a card offers “no payment” grace period, then don’t pay anything and use that money to pay the highest interest rate card. However, you have to be careful and keep track of when the first payment becomes due — many card with no payment period retroactively charge you interest for the entire period (i.e., from day 1).

6. Snowball your debt

Once card B is paid off, snowball that monthly payment to card C. For instance:

$120 on card C ($100 from card B and $20 from card C)
$20 on card A

7. Keep your debt snowball going until you finish paying off everything

Once the card is paid off, snowball that monthly payment to the next card — so you’ll be paying $140 per month on card A.

More about debt reduction:

Listen To The Dave Ramsey Show For Free at The Happy Rock
Exactly HOW I Pay Off Debt, Mortgages And Credit Cards Early at No Credit Needed
10 Small Ways To Make A Big Dent In Debt at I’ve Paid For This Twice Already…
The Financial Battlefield at Poorer Than You

Debt Snowball Software

In addition to learning about various debt reduction processes, you could also look into software that can help you organize and follow through these steps. For example, You Need A Budget, or YNAB, is a high quality budgeting software that you can try free for 60 days. Beside for being an excellent budgeting software, it also comes with a Debt Snowball spreadsheet. This spreadsheet will guide you step-by-step in the process of getting yourself out of debt as quickly as possible — i.e., list all of your debts, decide which debt to pay first, how much to pay, and how long it will take for you to get out of debt.

This article was featured in the Carnival of Debt Reduction #116 hosted by Blogging Away Debt.

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Pinyo is the brain behind Moolanomy personal finance blog and a few other web sites. If you like this article, please subscribe for free daily email updates.

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26 Comments

Pinyo
November 28, 2007, 8:50

@Jen – welcome to Moolanomy.

APR stands for Annual Percentage Rate, or the effective interest rate that the borrower will pay on a loan taking into account any fee.
paidtwice
November 28, 2007, 7:42

Thanks for the link!

You’ve got to pay off card A before you do the transfer. No way are they going to lower your existing balance to 0%.

Otherwise though, nice illustration
Pinyo
November 28, 2007, 7:50

Thank you for the correction. That’s what happen when I post outside of my comfort zone.

When I call my credit card companies, they always offer the “no fee 0% APR” transfer, and I don’t even ask for it. May be it’s because I pay off every month and have good credit score?

I can see how they may be a little more hesitant with folks who owe balance from month to month. In this case, another option is to get a new card that offers “no fee 0% APR” transfer.
Jen / domestika
November 28, 2007, 8:41

Good explanation – those pictures sure make this process easy for anyone to follow. But, er, I do have just one (stupid) question… what is this ‘APR’ of which you speak?
Jen / domestika
November 28, 2007, 8:55

Ah. See, I *knew* it was a dumb question! Thanks!
Jules
November 28, 2007, 10:38

Most of this, I agree with.

But you might not want to max out the balance transfer. Maxing it out is going to increase your usage, and usage has a serious effect on your FICO score.

Ref: http://www.commonwealth.com/Re.....scores.htm (not my site) – “it is better to maintain a card at 20-30% capacity than max it out”
Matt Wolfe
November 28, 2007, 10:38

Thanks for this post. I’m actually going to apply a little of this method to my own life. I actually have a credit card right now that has a balance of a little under $12,000 on it. The card rate is 18%. I know that it’s crazy but I never really thought of transferring the balance down to lower rate credit cards. I feel silly that I haven’t done this already.

I run a personal finance site because I want to learn about these things, not because I already know it all. This is great advice.
paidtwice
November 28, 2007, 10:58

My credit cards offer me 0% transfer offers too. They want to get your money so you can mess up with them and not pay it off all on time and they get some interest. I do have a good credit score too though

I am not saying the card you owe $200 on won’t offer you a 0% transfer – they just aren’t going to reduce your current balance to 0% as well. So the stuff you have on there already will stay at 12% and the new stuff goes to 0%

Which is why you need to pay off that $200 first . then do the transfer.
Mrs. Micah
November 28, 2007, 11:05

I really liked the illustrations on this, make it much more user friendly and helped keep the cards straight.

Fortunately we were able to pay off our credit card in one fell swoop.
ChristianPF
November 28, 2007, 11:25

@Pinyo
In regards to your step #1, I have had the best luck asking for the rep’s supervisor. I normally find that they are much more open (or able) to negotiate.
Pinyo
November 28, 2007, 11:42

@Jen – there’s no such thing as a dumb question here. I am learning too.

@Matt – thank you. When you ask for transfer, be sure there is no transfer fee; otherwise, you have to do some calculation to see if it’s worth it.

@Paidtwice – thank you for the clarification. I know what you mean now. Usually, the payments also apply toward the lowest interest rate balance first, so you ended up paying the $200 @ 12% last.

@Mrs. Micah – thank you.

@ChristianPF – good add. I added your comment to the post.
The Digerati Life
November 28, 2007, 13:03

Great job on the illustrations! I enjoyed this post. Very good way of showing how to get rid of your debt . Now there’s no excuse!
Pinyo
November 28, 2007, 17:31

@Digerati – hey, thanks! That means a lot coming from you.
glblguy
November 30, 2007, 5:45

Great post Pinyo! There is another option, and one that I prefer…pay them off in order of balance, lowest to highest rather than by interest rate. Sure, mathematically paying off my interest rate makes more sense, but frankly if you have this kind of balance on high interest rate cards your not a pro at math anyway (this includes me).

Paying off by lowest to highest balance is a psychological win. It makes your debt seem to go away faster and gives you that feeling of progress. I think personal finance is about 10% math and 90% psychology.

One other note, it used to be you could transfer to a low rate card for free. Most offers now have a 3% or more balance transfer fee, so be aware of that. Now granted, that’s probably still cheaper than the higher rate, but something to consider.
Pinyo
November 30, 2007, 6:51

@glblguy – That’s a great add. I have seen the “10% math and 90% psychology” discussed before and as a logical person, I was against it at first. However, when I reflect further on this, I really support the argument at this point; that is, the mathematically best option may not be the best for everyone.
KCLau
December 1, 2007, 2:20

Very nice illustration and clear explanation.
Good work!
JvW
December 2, 2007, 20:59

I love the illustrated step-by-step instructions! Great post!
Pinyo
December 3, 2007, 9:59

@KCLau – Thank you!

@JvW – Welcome to Moolanomy and thank you for the compliment!
Kevin
December 11, 2007, 8:42

Its actually more effective to sort the cards in order of lowest balance to highest balance, regardless of the interest rate.

Personal finance is more about behavior than math. People are less likely to stay on track when tackling large balances rather than small balances. It also gets your snowball moving much faster to go from smallest balance to largest balance.

The point that people need to realize is that the interest rate isn’t the problem. The out of control spending and use of the cards altogether is the problem.
Pinyo
December 11, 2007, 21:40

@Kevin – welcome to Moolanomy. Either method works for me. I prefer the mathematically better approach, but I am sure many people will be more comfortable with the psychologically better approach.

Great point in the closing paragraph.
Make Friends, Earn Money
February 16, 2008, 7:50

What a great post, Loved the illustrations as well, it makes it much easier to follow.
Andy
March 31, 2009, 19:09

That’s a good common sense plan on how to attack your debt problem, getting rid of your worst problems first. But I would have to agree that personal finance is more about finance than about math.

If you have a ton of credit card debt like over $10000, and are in dire straits, meaning you are overwhelmed, I recommend going through a debt settlement company where they allow you to stop paying all your credit card bills immediately in order to offer the CC companies a settlement. It’s risky since you could go into default on your current accounts but if you are nearing bankruptcy anyway it could be a lifeline.
DDFD
June 1, 2009, 7:12

Nice post to reprint– I love DIY projects!
Sam
June 13, 2009, 23:59

No Debt is not fun, and using other credit cards pay one another is not good, but does help, sometimes gets you indeep in debts, so watch your spending and have an alternative plan to kicks in once plan “A” does not work,
fassd.com
July 26, 2009, 5:42

Most high interest credit cards are usually easy to get and really the interest rate only matters if you roll over your balances from month to month. People that have had bankruptcies, judgments or just have a bad credit rating, for what ever reason are the most common applicants for high interest credit cards.
credit card debt elimination
October 10, 2009, 8:23

With debt elimination plans, you can get rid of your monthly bills and avoid harassment by creditors and collection agencies. All you require to do is, create a realistic budget, choose the right program and make payments on time. You can thus get out of debt and have better control over your money.

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