Steps to paying off credit card debt
Reach a zero balance on your credit cards with this simple, step-by-step guide.
Digging your way out of credit card debt is a huge accomplishment. Not only will it help keep money in your pocket every month, but it could also help raise your credit score. Getting to that point, however, takes commitment and a clear action plan.
Credit card debt is considered “bad debt” because it typically comes with extremely high interest rates, no appreciating assets (unlike a loan on a house, where the house value may increase — or appreciate — while you live there) and minimum monthly payments that are so low that it could take several years to pay off your card.
Paying down credit card debt may help improve your credit score. Thirty percent of your credit score is determined by how much you owe. In addition, if you’re looking to get a loan — like for a car or house — lenders look at the amount of debt you have compared to your monthly income, known as your debt-to-income (DTI) ratio. While things like buying a house may not be on your radar now, after graduation it may become a priority, and credit scores can take a while to improve.
Ready to start paying down your balance? Follow these simple steps to take control, once and for all.
1. Assess what you owe on each card. Make sure you know the total amount owed for each card and the interest rate on each.
2. Pay off the card with the highest interest rate first. The higher your interest rates, the more you’re paying each month in interest on the debt, so you want to eliminate that as quickly as possible.
3. Pay more than the minimum payment each month — much more, if possible! The sooner you can pay off your debt completely, the less money you’re spending on interest.
4. Set a monthly budget and stick to it. Calculate your fixed expenses each month, including the amount you’ve committed to paying off your debt, and then plan for variable expenses afterwards. Keep in mind that you may need to cut back spending on entertainment or shopping for a while!
5. Stop using your credit cards for the time being. While you’re in the process of paying off credit card debt, don’t keep adding to your balance by spending more with your credit card! Stick to cash for a while — that way, you’re only spending what you know you can afford.
6. Call your credit lenders (the companies who issued your cards) and discuss any possible assistance they can give you. There are lots of ways they may help, such as lowering your interest rates or waiving late fees to help you get back on your feet. There’s no guarantee they’ll cut you a break, but it doesn’t hurt to ask! Mentioning that you’re a student is a good idea, too.
