Getting out of debt is by far one of the biggest challenges facing many people today. The statistics show that on average, Americans carry $15,956 of high interest (credit card) debt per household. Typically this isn’t because they have $16,000 sitting in the bank and just forgot to make a payment – it’s because they have spent well more than they’ve earned in their pay checks and are now struggling to pay this debt off.
It’s a problem so widespread that thousands of business exist to just help people pay off debt, or prevent them from bankruptcy. This blog is centred around helping people pay off debt and stay out of debt by living frugally – and like myself – the majority of you reading this article have probably experienced the financial, emotional, and relationship stress that being in debt provides. Let me tell you – it is a stress you don’t want to experience.
You’re not alone!
If you are in this situation it is easy to feel depressed and alone. First off, you are not alone – neither are you a bad person, dumb, or isolated. You may have made bad decisions or lost your way financially, but it is possible to turn your situation around and begin to have hope again.
You just need to take the first step and start your journey out of your financial situation. This first step will provide hope, which will provide the follow-on steps. It’s important to just make progress, and then let it snowball from there. If you never take the first step – nothing will happen.
Eliminate your debt
The 7th money principle is to eliminate your high interest debt & then all your debt. It’s simple to say, but extremely difficult to do – especially getting started. I write extensively about this subject here, so I am not going to rehash everything in this article. I will however give you 3 simple (and proven) steps to start the process of eliminating your high interest debt (credit card debt).
These 3 simple steps have been used over and over again by many individuals. I would be willing to bet that you know someone who has used them, or have done them yourself. One thing’s for sure, it will ‘kick start’ your debt elimination plan and give you some hope for the future if you are struggling to pay off your credit card bills.
Step 1: Cut up those credit cards
The first step in getting out of debt is to ‘stop the bleeding’. You need to stop going into more debt in order to begin the journey back to fiscal sanity. For many of us, this means cutting off access to credit. If you’re highly self disciplined, you can just take those credit cards out of your wallet and put them in a secure place, like your safe or the sock drawer.
If you have trouble with self discipline, I recommend cutting up your credit cards so that you can’t use them at all. Go ahead and cut them up! Don’t worry, the credit card companies will be happy to send you a new card one day if you need one in the future. Again, if you’re struggling in this area – just cut them up already.
What this essentially does is force you to live on your budget. Removing access to ‘getting into more debt’ is the goal of this step, so that you can effectively start the trend in the opposite direction and get on the road to financial freedom. You can never get on the ‘freedom road’ if you’re on the other side of the highway going the opposite direction. Cutting up your credit cards is essentially exiting the off-ramp and jumping on the on-ramp in the other direction. It is the first step you need to make.
Step 2: Re-negotiate your interest & use balance transfer offers to your advantage
The next step is to re-negotiate your interest payments. If your credit is still good and you have not starting missing payments, I recommend using the 0% balance transfer method to your advantage here. Many credit cards (such as Citi, Bank of America, Discover, etc) will allow you to transfer your credit balances to 0% for a number of months – usually 12 months or higher – as long as you have a good credit score. Keep in mind that this is only temporary and the interest rate will change after the entry period is up (please read the fine print!!) – but if done correctly it is an efficient way to jump start paying off debt, as your entire monthly payment will go to principal & not interest.
If you are not able to use balance transfer to your advantage, then pick up the phone and call your current creditors. Many times your creditors will be able to lower your interest rate right over the phone in less than 10 minutes, due to you doing nothing more than just asking. I’ve done this twice before, and both times was able to drop my interest rate by over 10 percentage points – so I know it can happen.
Step 3: Use the snowball method
Once you have removed your temptation to add more debt and have restructured your interest rates, you’re ready to knock off your debt for good. To do this I recommend the debt snowball method.
The snowball method works where you make a minimum payment on all your debt, but maximise your payment to your lowest balance in an effort to pay it off fast. You focus on the lowest balance because you will pay it off quicker, which gives you a psychological boost and encourages you to continue and achieve success. Once you paid off your lowest balance, you can focus on the next highest balance, and the next, thus working your way through your debt paying off one balance after another. It is called the snowball method, because once you paid off one card, you can add that cards minimum balance to the new card and thus pay your debt off faster & faster as you work through your different debt balances.
The snowball method is by far one of the best methods out there to pay off debt quickly and keep you motivated. I highly recommend it and would encourage you to use this method when paying off your high interest credit card bills.
Finally – Apply this method to all your debt!
Now that you have your high interest debt paid off, don’t stop!!! Start working on all your debt by applying this method above. Pay of your school debt, auto debt, various toys you may have purchased, and finally your home. I don’t recommend avoiding your short term savings, or saving for retirement – you must have a solid plan in place to save at the same time as paying off debt.
That being said, once you have your savings in place – knock off your other debt instead of buying useless things.. Better yet – decide to live frugal and become completely financially free – then you can really bless others through giving!