Most people look at credit card debt as a mountain, especially when the collective balances move well into the thousands of dollars. If the balances are too high, resignation can set in, and at that point you’re beat. The best you hope to do is to find a way to live peacefully with your debt and hope that it doesn’t swallow you up one day.
You don’t have to live that way! Yes, a large pile of credit card debt can be intimidating, but like every other effort, it’s always more manageable when you break it down into smaller steps.
Getting control of credit card debt is a multi-step process. You don’t (and shouldn’t) have to make a bunch of changes at once. Take one at a time, master it, then move quickly to get the next one going.
Here’s the plan:
1. Cut expenses
It’s often recommended that the first step is that you stop using your credit cards, but before you can do that you first have to take away the problems that led you to use them in the past. Most likely, you have credit card debt because you spend more than you earn and credit has been used to close the gap.
Step number one, then, should be pruning your budget of any unnecessary expenses, and reducing as many others as you can. Set a goal to cut your spending by 10% over the next 30 days—you’ll be surprised what that can do. Once you accomplish that, look to cut another 10% the following month.
If that isn’t enough to eliminate your need for credit cards then try this…
2. Increase your income
If you’re cutting expenses and still coming up short, the answer is to increase your income. Often just a little bit of extra income makes the difference, and can open up a lot of options you didn’t have before.
Getting a part time job is the usual answer to finding extra income, but you can also try some of the following:
- Try to get a higher paying full time job
- See if there are any ways to make extra income on your full time job, such as selling your company’s products or services for a commission, or see if there are any referral programs you can take advantage of
- Start a side business in anything you’re good at; it could be babysitting, tutoring, lawn cutting, basic auto repair, computer troubleshooting, or anything you can think of
Not only will this eliminate the need to use credit cards, but it will also set the stage for the next important step…
3. Build a savings cushion
Many people have credit card debt because they have no savings. Only when you have savings can you completely eliminate dependence on credit—you’ll have money available for emergencies and unexpected expenses.
At a minimum, try to accumulate an amount sufficient to cover 30 days of living expenses; that should cover you for at least 90% of financial contingencies. You can build the account from the money saved by cutting your expenses, and with any extra income you earn from steps 1 and 2 above.
4. Stop using your credit cards
Once you’ve cut your living expenses, created an extra income stream, and built a healthy savings balance, you’re ready to stop using your credit cards. You’ll have the extra room in your budget, plus savings in case you don’t, so you won’t need to borrow like you have in the past. Not using them at this point should be easy!
5. Get the debt snowball rolling!
Once you’ve loaded up your savings, you can shift the extra cash flow you have from cutting expenses and the extra income source to paying off your credit cards. Since your budget is already under control, and you have adequate savings, this will be much easier to do than if you started doing it from Day 1.
As is typically recommended with the debt snowball, start by concentrating on paying off your smallest credit card balances first, then moving up to the next largest and so on. Not only will that cut down on the number of card balances you have, but as each disappears you’ll have that much more money to payoff the larger ones.
6. Never stop doing all of the above
Once you have your credit card balances paid off continue with all the steps above so that you never find yourself carrying large credit card balances again. Credit cards should be used only in must-use situations, such as purchasing airline tickets, renting cars, or buying merchandise that needs the buyer protection that credit cards provide.
Credit cards should never become lifestyle, and the best way to avoid that rut is by using them only on an as-needed basis.