Credit cards can be a powerful tool, but when spending gets out of control, they can quickly become an overwhelming source of stress and conflict. For many people facing large debts, the hardest step to getting out of debt is coming up with a plan. Here are seven questions that many people ask:
How do I reduce my debt as quickly as possible?
The fastest way is to pay as much as possible on the debt with the largest interest while still making minimum payments on any other debts. When the highest interest card is paid off, move on to the next one.
What about paying off the smaller debts first, so they are eliminated quickly?
Mathematically, this will not be as efficient as focusing on the card with the highest rate; however, many people find it helpful to reduce the number of creditors they have first. This process, often referred to as “the snowball method,” is usually much more encouraging than prioritizing by interest rate. Being able to eliminate an entire payment quickly feels good and provides encouragement to continue debt elimination. Either method can work; it just depends on the debtor.
Should I get a second job to pay off my debt?
This will certainly provide you with increased income, but having a second job is not always a good idea. While the work will provide you with additional cash, it will also increase your expenses and, depending on the work, make you less successful at your first job. If your regular work simply is not enough to make payments on your debt, you may need a second job, but cutbacks to your lifestyle are usually a better place to start. Working 70-plus hours a week can easily become even more stressful than credit card debt.
What about consolidating to a single credit card?
Consolidation can work for some people, but it largely comes down to the math. Many people get new credit cards with attractive rates to pay off their old cards, but these kinds of transfers can have extra fees or higher costs once the introductory rate ends. Thoroughly research a credit card before trying a balance transfer. If you can manage to get balances shifted to a card with an extremely low introductory rate, try to pay as much as you can while the interest is low to prevent future costs.
I have both student and credit card debt—which should I pay off first?
Ninety-nine percent of the time you should target credit card debt before student debt. Credit debt is usually at a higher interest rate and is easier to eliminate. Credit card debt also tends to influence your credit score more than student debt.
Can I just declare bankruptcy to eliminate my debt?
You can declare bankruptcy, but it should be reserved as a last resort. Bankruptcy does terrific damage to your credit score and will remain as a mark on your credit history for 10 years. Additionally, declaring bankruptcy could potentially affect your chances of getting future loans and even a job if, for instance, the work is involved with financial processing.
I don’t think I could stay on a restrictive budget for the years it might take to pay off my debt. What can I do to make it easier?
It isn’t always possible to make the transition to serious repayment easy, but it will get easier over time. As you grow accustomed to your budget, limited spending habits will become routine and making payments a major goal of life. As your debt shrinks, money that went to interest payments will slowly disappear, allowing you to accelerate your repayment. Once you’re done paying off your credit cards, your budget will have a sudden surplus and you can begin saving for the future.
Getting out of credit card debt is possible with discipline and a solid repayment plan. If not tackled systematically, debt can hang around for ages, discouraging progress and making repayment more difficult. Once a detailed, goal-orientated plan is in place, you can track financial success and take pride in every step made toward financial freedom.