5 Steps to Paying off your Credit Cards

claudiaBlog, Debt Management, Personal FinanceLeave a Comment

debt ladder

Today’s the day!

You decided you are done with your credit card debt. You may have over enjoyed yourself in the past, but today’s a new day and you are ready to take control.

Awesome! Time to get to work…

1. Get your documents together

Collect your last statements from all of your existing credit cards that have an outstanding balance.

You need to have all the information in front of you to create your pay down strategy.

Note: When you pay off a credit card that charges you 18% in annual interest, it’s just like getting a 18% guaranteed annual return on your money after-taxes. You are unlikely to consistently get that kind of return in another type of investment vehicle.

Depending on the amount of credit card debt you have, it may make more sense to focus on paying down your revolving credit card debt than to invest in the stock market or even your 401k in this situation.

EXAMPLE: You have 4 credit cards…

Credit Card Outstanding Balance Minimum Payment APR (interest rate)
Card 1 500 18 18%
Card 2 1500 55 18%
Card 3 700 23 25%
Card 4 900 29 14%

2. Stop using these cards!

Put them away.

Hide them from yourself so that you are less tempted to use them.

This is an ideal time to start using cash for all the rest of your expenses because you don’t want to keep adding to your current outstanding balances.

3. Figure out how much you can apply to paying down the cards

You want to pay down your debt but there’s a limited amount of funds you can apply to doing that. You need to find out exactly how much you have available to pay off these cards.

EXAMPLE:
Pay day comes. Your after tax income is $1600.

Your critical bills sum to $1300 (rent/mortgage, car note, gas, utilities, insurance, etc).

The money that you have left to pay down debt is $300.

women with cards

4. Make a plan for how you are going to use the $300

There are two distinct strategies:

  1. Focus on paying down the card with the highest interest rate
  2. Pay down the card with the lowest outstanding balance

Strategy 1: Highest rate
In our example, Card 3 has the highest rate. So we are going to focus on this one.

You still need to pay the minimum on the other 3 cards. So, $18+$55+$29 = $102 is gone to stay on top of the other required payments.

That leaves you with $192 of the original $300. So you can put all of this towards your balance on card 3. Instead of just the $23 that your card company states as the minimum.

Strategy 2: Lowest Balance
In this scenario, we’d start by focusing on card 1 with the $500 balance.

By focusing on cards with the lowest balance, you can quickly pay off the balance on at least one card.

The benefit of this strategy is that you will end up with less credit cards to keep track of when making timely payments. You may prefer this strategy because you get the mental win of physically having less accounts and card companies that you owe.

Just like in strategy 1, you still are obligated to pay the minimum balance on the other 3 cards. $55+ $23+ $29 = $107. That leaves a balance of $193.

Each month, you will pay $193 towards the card 1 balance.

Using this strategy, you will have card 1, paid off in 2.5 months (500 / 193)

Once that first card is paid off… then you would move on to the paying off card 3, which has the next lowest balance. The great part is at this point, you only have 2 minimum payments $55 + $29 = 84. You now have $216 left to pay down card 3 each month.

5. Rinse and repeat until you are debt free!

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