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On The Right Track. Strategies For Paying Down Credit Card Debt.

Credit card debt really sucks.

There’s a decent chance that many of the folks that come to this blog to learn a little bit about personal finance are battling some kind of debt.  And none worse, in my opinion, than credit card debt.  I’ve been there right with you reader.  It’s a horrible feeling to carry that debt balance- for me it was a daily pit in the stomach, a sour upset that would mark and frame all my thoughts.  It affects your mood, your day to day life, and your very being.

So why carry it at all?

Of course, when you’re in debt you have to carry it until you can pay it down.  But what I actually mean is why let yourself get there in the first place?  When I became determined beyond belief to pay off those cards, I often returned to the same thought…how did I get here?

The short answer: I spent more than I made.

The longer answer:  You slowly convince yourself to live an uncomfortable life, in hopes of a better future.

Can I Be Real A Second?  For Just A Millisecond?  Let Down My Guard And Show My Debt And How I Feel A Second?

I was speaking to my dear friend Skimbleshanks recently about their credit card balance.  It wasn’t an enormous debt, and to ol’ Skimby it felt like a very manageable number to live with.  We’ll call it just about $2,500 in credit card debt.

How did Skimbleshanks manage to rack up an extra $2,500 on their card?  He just loves that catnip, couldn’t control himself.  It’s an addiction man, be sensitive!

But Skimbleshanks said something to me that really stuck out- he said, “Ya know, I started only holding an extra $500on my card at the end of the month, that felt reasonable, something I was willing to live with.  And as the months went by, nothing too bad happened, and overtime that number just started to go up.  And eventually I was comfortable with $1,000 on my card- and then $2,000– and now here we are.”

When I look back on when I first took on some credit card debt, I can remember those same thoughts pulsing through my mind.

“I’ve paid off as much as I can this month, and there’s still X left to pay.  That’s OK.  I’ll figure out a way to make more money next month to pay it all off.”

My first mistake was letting myself spend X (the extra amount above what I could actually handle) in the first place.  My second mistake is thinking I could fix the problem by just making more money.

I’ve never made an enormous salary in my adult life.  I’ve been self-employed for the better part of almost four years now, and in a way, I’ve always felt like I traded a meaty, stable salary for the wonderful freedom of being my own boss- making my own rules, and building now multiple businesses that could become seriously monetizing enterprises sometime in the (hopefully not too distant) future.

I always had enough for my rent, my food, for the clothes I needed, to take a trip here and there- and that was good enough for me.  Truth be told I even had enough to save and invest, probably more than I did.  If your mind isn’t in the right place, you’re always going to think up ways to spend that money.  Case and point, folks can think up ways to spend money they don’t even have– which is why we’re in this position in the first place.  

And thus, the avalanche effect begins.

“Tell My Story!”

-TT

Because Skimbleshanks keeps an extra $2,500 on his card, the banks that lent him that money are going to want it back with interest. (Remember how credit cards work from my first card review of the Chase Sapphire Reserve?).  Let’s say Skimby’s card has an 18% annual interest rate.

One month goes by with that $2,500 balance.  Skimby now gets charged interest – 18% divided by 12 months = 1.5%.  The bank that gave our favorite railway cat his credit card is going to charge him $37.50 that month in interest.  Now Mr. Shanks needs to pay back that bank $2,537.50.  And guess what?  In exactly the same way that compound interest is an amazing, amazing gift to the savvy investor- it’s going to cripple to unsavvy spender.

If left unchecked for a year, that same balance will become $2,950.  After another year, $3,500!

What is poor old Skimbleshanks to do?  He asked his friend Old Deuteronomy for a short-term loan, but that old cat knew better.  There’s only one way to fix this problem, and until Skimby could prove to everyone (including himself) that he can spend less than he earns, this problem is not going to go away.

Climbing Uphill Daddy, Paying Off Debt

The #1 piece of advice I can give here is simply that.  You need to spend less than you earn.  And in order to do that, you need to keep eyes on what you spend & earn closely (are you tracking your income and expenses yet?).

If you are carrying credit card debt, you need to look at every interest charge every month as an expense in your overall budget.  It’s money you are spending whether you like it or not (and you really, really shouldn’t like it). 

But once you get a handle on all of that- it’s time to get to work.  Here are the two most common ways folks can start down the road of paying off credit card debt.

1) Avalanche Method

In the avalanche method, you are making the minimum payments on all of your debts, and then throwing any additional monies possible above that to the highest debt.  Here’s an example:

Skimbleshanks has a Visa, Mastercard, and American Express Card with varying balances and varying rates of interest:

According to the avalanche method, Skimby should make the minimum payments on all three cards, and then anything extra goes straight towards paying off the Amex, because it has the highest interest rate here.

Mathematically this will benefit him best in the long run, as it results in lower payments over time.

2) Snowball Method

The snowball method is different in that after you make all your minimum payments for each card, you start by attacking the card with the lowest balance first, which in this case would be the Visa.

This is more of a motivational method as it might feel mentally awesome to eliminate one of the three cards more quickly and then move on to the next lowest balance.  It can make you feel more quickly accomplished, and hopefully light a fire to attack that next card with even more vigor!

Both methods can be effective, it’s going to depend on the kind of person you are and what motivates you best. If I’m being honest: I’m completely a snowball cat myself. I know mathematically I’d do better if I followed the avalanche method- but I personally take such joy in seeing those debts disappear quicker one by one. Choose the route that inspires you the most!

Keep It Positive, Let Out Your Inner Saver

The truth is, there is no magic wand here- it’s going to be hard work no matter which route you go.

But I can’t emphasize enough how important it is to take this seriously.  Over half of Americans are in credit card debt.  It’s a national crisis that we obviously have an awareness of, but in my opinion isn’t spoken about nearly enough in more private and social settings.

I’m not saying we need to go around talking about our debts, or other financial mistakes- but one of the awful side effects of debt is that it can feel like it’s something that is happening only to you.  And I promise it’s not.

But it’s going to be up to you to decide if it’s a burden you will carry with you in life.

The reason we talk about how much we dislike debt, is because we want to see our net worth grow for the future.  I’ve mentioned a couple of times in this blog how we want to assume an 8% rate of growth in our investing (our Roth IRAs, 401ks, etc.). The nest egg you’re trying to build for retirement.  If you’re paying anywhere from 15-20% interest to your credit card company along the way, you’re compromising your money’s growth potential.  You will never be able to keep up with the high interest these banks are going to charge you.

And for what?  That new sofa you weren’t really able to afford yet?  Those snazzy sunglasses that look awesome, but just as awesome as the other three pair you already own?

Make a plan, hold yourself accountable, and stick to it.  Your future self is going to thank you for it.  And trust me when I say, we know it’s not easy.  But take it easy kid.  You’ll get there.  You’re on the right track.


Thanks for reading today’s post all about strategies on paying off debt! Have another strategy that works really well for you or someone you know? Drop a comment below!

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