Being in debt is not fun. Unfortunately, many people do find themselves in debt, carrying a balance on multiple credit cards and loans. Even if you have a debt problem that seems insurmountable, you can eliminate credit card debt on your own without using a debt consolidation service. While I think the debt consolidation company route could be helpful to some, they are, for the most part, charging you money for something that you could do on your own.
7 Step Debt Reduction Strategy
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. Before you start this process, I recommend that you read 12 Steps to Financial Freedom and Personal Finance Success so that you can build the foundation for this process.
1. Make a List of Your Credit Cards
Gather all of your credit cards and any other loans. Make a list on a piece of paper (or you can use index cards or Post-It notes). Next, write down the name of the credit card or loan, 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. Negotiate with Card Issuers and Lenders
Call each company and ask for a lower interest rate; also check what they can offer you in terms of balance transfer deals. 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 reps.
Don’t be afraid to pit them against each other. Say something along the line of ABC lender is giving me this deal, could you beat their offer?
- Don’t limit yourself to your existing credit card companies and lenders. Seek out other lenders who might offer you a better deal. You might try credit unions, bank loans, or social lending networks.
- Don’t be afraid to apply 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. Supervisors are usually more accommodating.
3. Update and Sort the Cards
Once you have negotiated your rates with your credit card companies and lenders, update the interest rates and order the cards from highest interest rate to lowest. In our example:
- Card A offered no fee 0% APR transfer if you open a new card or pay down the balance first.
- Card B and C provides a courtesy interest rate reduction, and
- Card D won’t budge.
4. Transfer Balances from the Highest Interest Cards to the Lowest
The quickest way to save money is transfer your balance from high interest cards to lower 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 include the balance transfer fee in your calculation.
Also, take a look at the article Should You Transfer Your Credit Card Balance?
There are also a few things you can try:
- Ask Card A to increase your credit limit, so you can transfer even more to that card.
- Ask Card D and Card B to reconsider, now that you’ve shown them who’s boss
5. Pay Off the Highest Interest Card First
Here, you want to use the Debt Avalanche Method. To do this, you pay the minimum amount due on card C and A, and put the rest of your budget to pay down the highest interest card. Let’s assume you pay:
- Card D – paid off via transfer
- Card B – pay $100
- Card C – pay $20
- Card A – pay $20
Note: If a card offers a “no payment” grace period, don’t pay anything and put that money toward the highest interest rate card. However, you have to be careful and keep track of when the first payment becomes due; many cards with a no payment period retroactively charge you interest for the entire period (from day 1) if you are late.
6. Snowball Your Debt
Once card B is paid off, snowball that monthly payment to card C — which basically means use the money that was for card B on the next debt. For instance:
- Card D – paid off via transfer
- Card B – paid off
- Card C – pay $120 ($100 from Card B and $20 from Card C)
- Card A – pay $20
7. Repeat Until All Your Debts are Paid
Once the card is paid off, snowball that monthly payment to the next card so that you’ll be paying $140 per month on card A.
- Negotiate with your current credit card companies and lenders.
- Don’t be afraid to add new lender(s) if they offer a better deal or a 0% no fee balance transfer.
- Move your debt from highest interest to lowest interest loan.
- Pay off your most expensive (highest interest) loan first and snow ball your way down to the next one.
Pinyo Bhulipongsanon is the owner of Moolanomy Personal Finance and a Realtor® licensed in Virginia and Maryland. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, financial literacy author, and Realtor®.