We always stress the importance of having an emergency fund and planning for a rainy day. Why we stress this as a foundation for any financial plan is to allow you the option to pay for unexpected expenses that may come up without necessarily having to turn to your high interest credit card. Once you have gotten into a cycle of consumer debt, it can be very hard to climb out. In this post we will focus on “consumer debt” like credit cards and look at ways to begin paying off or paying down the debt.
- Stop increasing your debt and tally up all credit card balances – The first thing you should do if you are serious about paying off credit card debt is to stop adding to your overall balance as best as you can. While this may seem hard at first, you will be thankful later. Often times when people are forced to use cash instead of credit, they think twice before making discretionary purchases. Once you’ve committed to trying to cut back on using your credit cards, put together a list of all outstanding balances of each card and all other pertinent information like interest rates and minimum payments associated with each card.
- Put a budget together – Once you’ve gotten a good sense of your overall outstanding debt, put together a realistic budget. This exercise will do you no good if you put together a budget that you know you will not be able to adhere to. A good place to start would be to look at your last 3-6 months of spending and determine where your money is going. Divide expenses up between fixed payments like rent, mortgage, car loans, etc, and variable expenses like groceries, eating out, and entertainment. There is often little you can change about fixed expenses, at least in the short term. So look toward variable expenses and determine where you can cut back. Often times by looking back at the last few months of expenses, you can find “impulse buys” or purchases that weren’t really necessary at the time. You might even find some automatic payments for subscriptions and services that you no longer use and can cancel. Once you’ve put a realistic budget together, determine how much per month you can put towards paying down your credit card debt.
- Determine how much to put toward each debt per month – Once you’ve determined a number that you can allocate each month toward your credit card debt, decide which card to tackle first. You should already have collected information on interest rates and minimum payments for each card. There are typically two schools of thought when it comes to paying down debts: 1) Put all extra payments beyond the minimum toward the credit card with the highest interest rate first or, 2) Put all extra payments toward the credit card with the smallest balance first then move to the next smallest account once the smallest account has been paid off. While we tend to gravitate toward option one because we don’t like to see interest ballooning on large credit card balances, some people psychologically like the idea of paying off one debt relatively quickly which keeps them motivated to tackle the next one. Think about your personality and what motivates you when determining a payment plan.
Credit card debt can be a hard cycle to break free from. However, with some careful preparation and perseverance, you can put a plan in place that can make you feel like you are in control. If you need help or guidance, seek out a qualified professional.
Securities and Advisory Services offered through LPL Financial, a Registered Investment Advisor, member FINRA/SIPC. LPL Financial and Croxall Capital Planning do not provide tax or legal advice. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.