I have a couple of friends who live by their credit cards. Unfortunately, they both have lower income jobs and live in survival mode, while continuing to participate in one financially detrimental pastime -- which is to shop without remorse. They've been enjoying the good life on a very modest income and consequently, are now swimming in credit card debt with balances in the 5 figures.
I've gently reminded them over the years that they need to clamp down on their shopping activities and instead focus on more affordable ways to spend their time. But they complain about how tough it is to drop a "bad" habit. I personally feel that it's harder to drop pounds than it is to drop a spending habit and to cut costs, but in both situations -- whether you aim to lose weight or to reduce your debt -- you'd want an action plan to succeed.
So how about we go through some suggestions on how to escape the clutches of credit card debt?
How To Wipe Out Your Credit Card Balance
1. Get a lower interest rate.
If you've got a sky-high interest rate on your credit cards, think of ways to work out a lower rate. Perhaps you're a loyal credit cardholder: is there some room to negotiate with your credit card company? It doesn't hurt to ask if they can work out a better rate for you. I'd try this first before looking into a few more schemes, such as considering balance transfer credit cards, or moving your balance to a card with a lower rate. If you don't have the money to pay down your loan aggressively, you may want to consider borrowing it elsewhere at lower rates and using that money to apply to your card balance.
Tip: Have you considered turning to friends, family or even a peer to peer lending network for liquidity? You can check out our Lending Club review for a discussion on peer to peer lending. Becoming a member of a social lending network may give you access to loans with better terms, provided that you have good credit.
2. Track your expenses.
My friends in debt had one common problem -- they had no knowledge about how much they were spending and had no idea how deep in the hole they really were. So it's imperative for anyone who has a debt load to be aware of their expenses. The basic advice works: it will serve us well to make a budget, to use a budgeting program (check out our reviews of YNAB and Quicken software) or to try out free expense tracking tools like Mint and Wesabe. Finding out exactly what your outgo is vs your income will give you a snapshot of your situation and will allow you to map out a debt reduction plan.
Tip: You can carry around a notebook where you write down all your expenses during the day. This way, nothing slips through the cracks! It may take discipline to start doing this, but hopefully, it becomes a habit over time.
3. Spend less.
So how do you control your spending? You might say it's easier said than done. I agree that it involves some will power, but I personally base my strategies for spending less on 5 principles:
- I prioritize where my money goes.
- I defer unnecessary expenses to a later time.
- I abstain from spending by just saying "NO" to my shopping impulses. I actually use what is called my "3 day rule" to wait before I decide to buy something.
- I substitute. That is, I purchase and use more affordable items instead of the more expensive alternatives. Make sure you use coupons and that you comparison shop as much as you can!
- And finally, I delegate -- which means that whenever I get a chance, I find out ways to share the expenses I face. One example is car pooling: why not share commute costs with someone else to trim your gas budget?
Tip: Another great way to force yourself to save and spend less? Automate your savings, for the easiest way to save.
4. Prioritize your payments.
If you've got a lot of bills piling up and find yourself with a limited budget to pay off credit card debt, then prioritize your payments. This will help you make the biggest dent on your debt right off the bat. In our case, we focus on taking care of our necessities first, after which we put as much as we can afford towards our most expensive loans. Our strategy has always been to be as aggressive as possible towards paying down debt. If this is something you find difficult to manage, then try to focus on applying more than the minimum towards your credit card balance anytime you get the chance. Any windfall you receive (tax refund, inheritance, unexpected savings, cash gift, lottery win) should go towards debt repayment in most cases.
Tip: One caveat: Suze Orman suggests that you pay the minimum on your cards while you focus on building an emergency fund if you haven't built enough of a cushion yet. According to Suze, our new financial environment dictates that greater financial risks spell the need for us to prioritize on short term savings first.
5. Earn more money.
Spending less is just half of the equation in order to pare down debt. The other half is to earn more. There's no secret here: you can increase your income through entrepreneurial endeavors or by getting a second job somewhere. Another idea would be to increase your hours of work at your place of employment if you are paid hourly. Maybe it's time to talk to your employer? In our household, we've been able to bump up our income using this tactic: while my spouse and I run a business, we also try to ramp up our consulting gigs and external projects when we encounter slower months in our business cycle. These days, you'll find that freelancing and job hunting are made easier with job sites like eLance, Guru.com, Craigslist and other online job boards. We also use LinkedIn to stay connected with colleagues on a professional level, and through networking, we're able to secure job leads.
Tip: Create a professional online profile for yourself via a web site, Facebook or LinkedIn to raise your visibility to potential employers or clients.
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