Is credit card debt causing you sleepless nights, stress, and constant arguments with your partner over money? Are you constantly worrying about how to get out of debt, or feel little hope that you can achieve financial stability?
If yes, it’s time to take action. Credit card debt is the worst type of debt.
The average APR (annual percentage rate of charge) on a credit card is 15%, but it can go as high as 29.99% if you have bad credit.
With such high-interest rates, it can take you years to pay off even a small balance on your card.
In addition, credit card debt generates no return, unlike student or mortgage loans where an education or a house may pay dividends later.
With so much advice out there, it can be difficult to really know how to get out of debt.
If you are neck deep in credit card debt, follow the seven steps below and you will eventually become debt-free, and can be well on your way to financial freedom.
(if you are looking for a faster way to get out of debt then you may want to consider debt settlement).
Here is how to get out of debt, in a step-by-step format:
Step 1: Find out how much you owe
Step 2: Quit Using your Credit Cards
Step 3: Make a Budget
Step 4: Make More Money
Step 5: Pick a Payment Strategy
Step 6: Get Help
Step 7: Change your Financial Habits
How to Get Out of Debt: Step-by-Step
Step 1: Find Out How Much You Owe
Chances are, you may have your head in the sand blindly paying off bills with no strategy.
We do this because denial protects us from the guilt and fear that comes with debt.
But avoidance only makes things worse, and your creditors are counting on you to avoid your growing debt so you spend more.
Knowing how much you owe is the first step to crushing debt. The number may be large but rest assured that people have paid off the same or a higher amount.
Take out all your credit cards, call the number at the back (customer service) and ask for your total balance, the APR on each card, and the monthly minimum payments.
Once you know your total balance you can start making a plan, which is essential to getting out of debt.
The uncertainty that comes from not knowing how much a bill is and when it will come will only add to your anxiety and sleepless nights.
Having a clear picture and a plan for moving forward will help you stay calm and relax.
More: The Debt Settlement Guide: Settle Your Debt for Less Than What You Owe
Step 2: Quit Using Your Credit Cards
When you actively use a card that carries a balance, you are racking up interest charges, and when you’re trying to pay off a card the last thing that you need is to increase the balance.
The greatest benefit of a credit card is the grace period.
This is the time (usually 21 days) you have to pay your balance in full without interest charges.
If you can’t pay your bill in full within the grace period–which is usually the case–the balance is carried over to the next billing cycle.
And you lose the benefit of the grace period.
As a result, any new charge you make to the card is immediately subject to interest.
So the $50 pizza you just charged to a card with a $1500 balance is already collecting interest before you put a slice in your mouth.
You can end up paying double what you charge to your credit card on interest fees.
That’s why you should quit using your credit card while you try to pay off the balance. It’s hard to stop, however.
So don’t simply make an internal resolve.
Lock your credit cards away in a safe, or give them to someone you trust to hold for the time being.
Some people freeze their cards in a block of ice so that they can only use them once the ice has thawed out—helping to avoid impulse purchases.
And if none of those options work, get out the scissors.
Rearrange your finances so you spend cash more or get a debit card.
More: How to Settle Credit Card Debt
Step 3: Make a Budget
The secret to staying out of debt is spending on a budget.
A budget is the most basic and effective tool to manage money.
Having no budget or a poor budget is the reason you can’t account for most of your money.
Mindless spending—even just eating out for lunch every day, or stopping at the gas station for a soda on your way to work—will slowly chip away at your well-laid financial plans.
Try to look at all expenses in the long term: a $2 Big Gulp at 7-11, every day for a year, is $730!
That’s multiple car payments, or student loan payments, or credit card bills!
And it’s all disappearing because of a tiny little purchase repeated over a long period.
It’s easy to make a budget. We have an entire article discussing how to budget, but here’s a primer.
Set Your Goals:
Setting goals is important as you budget because you need to know what you’re trying to accomplish.
Want to get out of debt? Allocate extra money to that.
Want to save for your kids’ college fund? Do that.
Want to travel more? There’s a place in the budget for that.
Once you know your ultimate goals, you can know how much you need to save and how much you can spend.
Calculate Your Expenses:
When making a budget, you need to know where your money is going, both so you can see where your priorities are and also so you can make wise decisions about where you need to cut.
Add up all your expenses and don’t skimp.
Again, a little expense that recurs every day, be it coffee or fast food or cigarettes, can add up to big money over a year.
As you calculate your expenses, be realistic: you may think that you can live on a certain amount of groceries every week, but you know you’ve been spending more than that for years.
While it’s good to frugal, it’s also good to be honest.
A false budget is a useless budget.
Calculate Income:
Your income is the amount you bring home after taxes.
It would be wise to even take automatic deductions out of the equation, such as insurance and 401k, and move them to expenses.
This will give you a clear look at exactly how much you’re earning and exactly where your money is going.
You may find that you’re not putting as much into retirement as you should, or that your insurance plans are too high.
Design Your Budget:
Once you have a crystal clear look at expenses and income, you can make the important decisions about where you can spend and where you need to cut.
It is wise at this point to differentiate between fixed expenses and discretionary expenses.
Fixed expenses are things that must be paid: car payment, mortgage/rent, insurance.
Discretionary expenses are things you pay for that you don’t necessarily need: dining out, Netflix, or that new pair of shoes.
Then when you have your budget, assuming that all goes well, you should find that your income outpaces your expenses.
This is where your goals come in: where does that extra money go?
Saving for a house? Paying down debt? Investments?
Look to the Future:
Come back at the end of the month to compare your actual expenses with your budget.
This is the only way to know if you are sticking to the budget–which is the hard part.
Step 4: Make More Money
So what happens if you make your budget and you find that your expenses outpace your income?
Don’t worry—we’ve all been there at some point.
And when you’re trying to pay off credit card debt it’s easy to get overwhelmed with expenses you can’t pay.
So, having made a budget and cutting all discretionary expenses you can, now comes the time to make more money.
With more money, you can pay above the minimum amount which reduces your interests and pays off your balance sooner.
Here are five ways you can free up some cash:
Trim expenses:
Cut your discretionary expenses to the bone.
Cook more instead of dining out.