A recent study done by NerdWallet found that 70% of Americans think there is more of a negative stigma towards credit card debt than any other type of debt. Check out this infographic for more of their findings:
So it's clear that credit card debt is a major issue is this country, but what do we do about these alarming statistics? Here are 6 steps that you can take to get out of debt.
Being in a large amount of debt can be an overwhelming feeling. Sometimes it may even feel hopeless. The first step to getting out of debt is realizing that the repayment process is going to take time. You’re not going to be able to pay it all off immediately. Instead of focusing on that daunting number, focus on the amount of money that you’re going to put towards your debt each month and work on slowly increasing it.
One of the reasons people fall into large amounts of debt has to do with poor spending habits. You’ll never be able to get out of debt if you don’t follow the number one rule of personal finance: spend less than you earn.
In order to correct this, you MUST know where your money is going. Track your spending with an app such as Mint, or with a spreadsheet on your computer. This will help give you an overall picture of your financial state and where you have been spending your money. Identify areas on which you could improve upon. Have you been spending a lot of money on eating out at restaurants, entertainment, and coffee? These areas will look different for everyone, but the fastest way to cut your expenses is to locate the high spending categories of your budget and scale those back. Try to focus on areas that aren’t as important to you, so that cutting back won’t be as difficult and you’ll be more likely to stick to it. The goal will be to take the money that you’re cutting out of your budget each month and funnel it directly into your debt repayment.
Another reason people fall into credit card debt is when they’re hit with an unexpected expense. With no savings, it’s easy to panic and put it all on a credit card when the car breaks down or someone in the family gets sick. Before turning your focus on paying down your debt, first build up an emergency fund of at least $1,000 in a savings account. Don’t touch this money unless a legitimate emergency happens. Having this money will give you some security and peace of mind that you’ll be able to handle the curveballs that life throws at you.
Once you’ve built up that $1,000 emergency fund, now it’s time to start to fully focus on paying off your debt. Start by getting organized. List out the debts that you have, including the total balance, interest rates, and minimum payments due.
Next, decide what strategy to employ. Popular financial guru Dave Ramsey is an advocate of the Debt Snowball method, which is listing out your debts smallest to largest, and starting with the smallest balance. The idea here is to pay minimum payments on all your debts, and then put everything else that you can afford towards your smallest balance. In this way you’ll be able to pay off that first debt quickly, allowing you to see fast results and boost your psychological state.
The downside to the Debt Snowball method is that you will likely spend more on interest over time. An alternative method to combat this is the Debt Avalanche method, which is the same process except you start with the debt that has the highest interest rate instead of the smallest balance.
Check out this Debt Payoff Calculator to see how long your debt will take to payoff, and the effect that making additional payments will have on your debt payoff time.
We’ve discussed cutting back your expenses, but another way to have more money to put towards your debt is to increase your income. This could be communicating with your boss to put in some overtime and take on additional projects, or it could be picking up a part-time job on the side. The key is to immediately put all this additional income towards your debt, without being tempted to spend it. Any work bonuses or raises should also be funneled straight into your debt repayment.
This process is difficult and takes time. It’s extremely important to stay motivated throughout. Why do you want to get out of debt? Let your answer to that question fuel your desire. You can use this Retirement Calculator for extra motivation. It lets you plug in numbers to see how your savings rate affects how quickly you’re able to retire.
The average American has $15,000 of credit card debt, but you don’t have to be like everyone else! You have the power to change your financial situation, to accomplish this goal takes discipline and commitment. Trust the process and focus on your end goal. By taking these small steps over time, your debt will continue to shrink, and before you know it you’ll be free from the financial burden you’ve experienced for so long. Good luck!
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