3 Budget Tips for Paying Off Credit Card Debt
Paying off your credit card debt starts with not charging any more expenses.
If you have credit card debt you're trying to pay off, you're not alone. As of the start of 2013, Bankrate.com reports that Americans had more than $600 million of credit card debt. "Paying off debt can be a long, tedious process and leave you feeling a bit deprived and sometimes like it will never be over," says Erin Baehr, a certified financial planner practicing in Stroudsburg, Pennsylvania, and Randolph, New Jersey, but a few tips can assist you on the road to financial freedom.
Tip #1: Address the Causes of Credit Card Debt
Before you can start paying off your credit card debt, you need to look at what caused the problem in the first place. "The very first thing to do is to stop using the cards," advises Baehr. "Paying off credit card debt while still charging on them is like bailing out a bathtub with the water running--a lot of effort but not a lot of progress." Baehr cites two common causes: emergency expenses, such as medical bills or unexpected job loss, and using the credit cards to fund a gap between income and spending. "If the latter, naturally spending must be reduced or income increased to close that gap without relying on credit cards."
Tip #2: Build an Emergency Fund
As you're paying down your credit card debt, start building an emergency fund so that you're prepared for future unexpected expenses. "Most commonly, folks run up credit card debt because they're not prepared for the big ticket expenses that pop up when we least expect it, like needing a new transmission, or even the ones that come when we are expecting them but not prepared, like holiday gifts or vacations," notes Baehr. "In those circumstances, it is important to first build up a cushion of savings before aggressively tackling debt." That way, she says, you can be prepared when the car does break down or the roof springs a leak and use your emergency fund, rather than slipping back into the habit of using your credit cards.
Tip #3: Pay the Smallest Balance First
Write out each of your debts in order from smallest to largest. Baehr suggests "paying at least the minimum on each, and if there is excess that can be applied, to put that toward the smallest balance first and then when that one is paid off, to roll that entire payment into the payment on the next smallest balance." Though it may seem counterintuitive not to order them based on interest, there's a psychological boost from being able to cross creditors off the list rather than just getting to write down small debts. "Creating psychological rewards to keep you going is important," says Baehr. "Paying off the smallest balance first can do that for you." The satisfaction of seeing that first balance go to zero gives you the encouragement to keep going.
Bonus Tip: Consider a Balance Transfer
A balance transfer might help you consolidate your debt into one payment and lower your interest rate, but these plans aren't foolproof. "I have seen too many folks consolidate their credit card debt into home equity loans or paid off with refinancing, only to run the cards right up again to recommend that plan," says Baehr. "A personal loan may be worth it (if you can get one) if the interest rate is reasonable, but before even considering a consolidation, the issues that led to the debt accrual must be addressed. Otherwise the situation is just compounded when the debt creeps up again."