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 a debt consolidation service. Personally, I think these 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.
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.
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
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 customer service representative 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:
Note: This step might be harder now that we are in an economic recession
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.
* As pointed out below, you’ll probably have to pay off a card before it will offer you a 0% balance transfer, so your other option is too apply for a new card then do the transfer.
Update your list with the new interest rates, and sort them in order from highest to the lowest interest rate.
This is the quickest way to save money, transfer balances from high interest cards to the lowest interest card(s)*. For example:
* Assuming there is no transfer fee. If there’s a fee, you will have to do some calculation.
Also, take a look at this article: Should You Transfer Your Credit Card Balance?
There are also a few things you can try:
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:
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).
Once card B is paid off, snowball that monthly payment to card C. For instance:
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.
If you still need help to create your debt repayment plan, there is a free tool from Ready for Zero that will help create a customized plan similar to the one above for you.
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.
Thank you for the correction.
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.
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.
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.
@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.
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 – APR stands for Annual Percentage Rate, or the effective interest rate that the borrower will pay on a loan taking into account any fee.
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”
Not really. Your % usage is calculated not by card but by credit type. So all your revolving credit is in one basket. It makes no difference whether you have $5000 on one card, maxed out, with five cards and a combined credit limit of $25k or whether you have $1000 on each card. Read your own link–they’re suggesting that your total revolving credit needs to be higher, but they aren’t saying that spreading your debt across multiple cards inherently helps scores.
We’ve always been near the max of our Discover card because I got it in college and had a limit of $1000. For some reason, Discover is VERY reluctant to raise credit limits–at the same time other companies were giving me $15k-$30k credit limits PER CARD, Discover wouldn’t bump our limit from $1.5k to $2k until we maxed it out (and paid it off) every month for a YEAR. (As an FYI: We put EVERYTHING on that card, even charitable donations, for the cash back. We even put parts of car and furniture purchases on the card briefly. Remodeling expenses and water heaters–on the card!) Despite this, our credit score hovers somewhere above 800 most of the time–I have about $80k of revolving credit available, of which we’ve never used 10%, even during a big remodel.
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.
@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.
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!
@Digerati – hey, thanks! That means a lot coming from you.
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.
@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.
Very nice illustration and clear explanation.
Good work!
I love the illustrated step-by-step instructions! Great post!
@KCLau – Thank you!
@JvW – Welcome to Moolanomy and thank you for the compliment!
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.
@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.
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.
One advice that I got from another blog is that if we have multiple credit cards we should eliminate first those credit cards that has the lowest amount of debt, then to the highest debt.
I tried calling my card company to attempt to negotiate a better rate but they wouldn’t budge. They were in fact quite disrespectful to me. My credit rating is not great and they obviously know that. As such they seem to think it’s fine to talk to me almost as if I’m a criminal! I just wanted a little extra finance to help fund my wedding guitarist business and they were wholly unhelpful.
@Pat – Have you tried getting a loan from peer-to-peer lending network to pay off your credit card debt?
@ Pinyo : yes I did try one p2p lending network but they also did a credit check on me and they said they couldn’t help. I suppose I should try to repair my credit rating first.
@Pat – You might want to look into ways to cut your expenses, check out this article: The Frugalist Expense Reduction Guide. As you cut your expenses to free up some cash, use the Debt Snowball to pay down your debt faster.
This is a very useful article! I really appreciate the tips. Do you think that automatic saving is a good method for paying off credit card debt as well?