Why your credit card debt is killing your ability to build wealth, and 5 ways to pay it off.

The average American household has a roughly $9,333 in credit card with an average interest rate of 19.24%. Yikes! If you were to pay $170 a month every month it would take you 134 month or just over 11 YEARS to pay off that debt. Households with a negative net worth or net worth of 0 have an average of over $10,300 in credit card debt. What I am trying to tell you here is that credit card debt is a drain and a killer for anyone looking to build wealth. So, what can you do about it? Today we are going to talk about 5 ways to help you eliminate your credit card debt and to keep from adding to it. It is not very helpful to keep paying your credit card bill every month to just keep using it during that same time, you will get nowhere and most likely get discouraged very easily because instead of seeing your balances go down every month they stay the same, or worse get higher. Here are 5 ways to help you eliminate your credit card debt.

1. Plan and stick to a budget

I know this first step does not necessarily help pay off your credit card debt, but it is by far the best way to keep you from adding to that debt and making it that much harder to get out of. Determine what your fixed costs are every month. That’s things like your mortgage or rent, car insurance, credit and loan payments etc. You might not spend the same amount each month on things like groceries and gas, but you should be able to do a good enough job of estimating these costs based on your spending habits. Once you have your fixed costs, subtract that from your monthly income. This is the amount of discretionary funds you have remaining. Things like fancy dinners, that new pair of $200 jeans or whatever you buy on Amazon should all be budgeted so that you can pay off this debt. Maybe that means going out to dinner once per month instead of every week or holding off on that wardrobe update a little while longer. These are sacrifices that need to be made now to get out of credit card debt and to begin to start building real wealth. Using your budget correctly will allow you to free up money that would have otherwise been spent frivolously and apply it to paying down your debt. Which leads me to #2 on this list.

2. Pay more than the minimum payment

If you take the same scenario from above and pay just $50 more per month, you can have that debt paid off in 72 months vs 134 months. That’s more than 5 years sooner and will save you $6,914 in interest alone. Maybe you can’t pay an extra $50 per month, pay an extra $40, $30 or $25. The bottom line is put what extra you can towards the payments and be consistent with it. Once you start paying off your credit cards start applying the payments you were making to the now paid off cards to a card that still has a balance to really jump start your credit card debt elimination plan. Dave Ramsey has been a proponent of the debt snowball, which involves paying the minimum amount on all your credit cards and starting with the smallest balance. Pay off the smallest balance card first as quickly as possible, then apply what you were paying towards that card and apply it to the next lowest card and repeat until all your credit card debt is paid off. The debt avalanche is similar to the snowball concept but involves paying the highest interest rate card first rather then the one with the smallest balance. You can find an explanation of the differences between the two here. I am fond of the avalanche method myself and we will explore that next.

3. Pay off the highest interest rate cards first

Let’s say you have 2 credit cards, one with a $2,500 balance at 10.99% and another with a $4,000 balance with a rate of 23.99%. Both have a minimum payment amount of $100 each or $200 total a month, but you have $300 available to pay this debt down faster. The question is which one do you apply the extra money to, or do you just divide it up evenly? It’s simple really, add the extra to the highest interest cards first even though it has a higher balance. Here’s why. Paying the $100 extra to card A with $2,500 and an interest rate of 10.99% would lead to paying the card off in 14 months while paying $167 in interest vs paying off in 29 months with $359 going towards interest. Card B would be paid in 26 months with $1,159 going to interest with that extra $100 vs 82 months and $4,123 in interest. By paying the extra $100 per month to the card with the higher interest rate, even though the balance is higher realized an interest savings of $2,772. Obviously you will have to do your own numbers and determine which course of action is best for you, but as long as you commit to paying off your credit card debt whether you choose to pay the highest interest cards off first or pay off the smaller balances fast to snowball your savings you are heading in the right direction.

4. Be disciplined and use your tax refund to pay down your debt

The average federal tax return in 2018 $3,169. Most people went out and purchased a new sofa or car. Not those who have chosen to build their wealth. You don’t necessarily have to use your entire refund either. You can still indulge and pay yourself first (This is another strategy we will discuss at another time) but make sure you are disciplined enough to take a sizable chunk out of your debt. Don’t limit this to just your tax returns either. If you receive a nice bonus at work, earn a larger then expected commission, get a raise or even if  Uncle Joe decides to be extra generous around the holidays be disciplined enough to understand it is not about the know and what can you do with the extra cash you have. It is about making a choice to become debt free and stop worrying about your credit cards and other debts that are seriously hindering your ability to grow wealth.  

5. Consolidate, Consolidate, Consolidate

Using a personal loan, HELOC (Home Equity Line of credit) or HELOAN (Home Equity Loan) to consolidate your credit card debt can be a great tool if used correctly. You can bunch all your cards into one easy payment at an interest rate typically lower than 10%. The other advantage to this method is that you now have a finite period that you know when your debt will be paid off, such as 12 or 24 months. Where people get into trouble with method is once they transfer all that debt to the personal loan or home equity loan they are now sitting with sometimes as many as 10 or more credit cards with a zero balance. This can be tempting for some people and eventually end up in the same situation as before except now they have the added expense of a personal loan to pay as well as the credit card. Once those cards are at 0 get rid of them. Don’t temp yourself or think that you will just keep this around for an emergency, because guess what, all of a sudden everything will seem like an emergency to you and you will convince yourself that it is ok to use a credit card again because it was an “emergency”.

There you have it. Five easy yet powerful tips for eliminating your credit card debt. Now it’s up to you to make the choice to eliminate your credit card debt and to start building real wealth.

Joe Pietrzak is the writer of this article. Feel free to email me at joepietrzakproperties@gmail.com with any questions or comments.

Disclaimer: I’m not a lawyer or accountant, and this is not legal or accounting advice. This information is based solely on my own personal opinions.