Updated: Jul 9, 2020
You've decided that you have had enough and it's finally time to pay off your credit card debt. The question is how do you do it?
Paying off credit card debt is a six-step process.
Step one: Create a realistic goal for when you want to be debt-free.
Step two: Address the root problem; your spending habits.
Step three: Review your monthly statement and find out your current balance, interest rate, and minimum payment on your credit card.
Step four: Use a debt-repayment calculator to figure out how much you need to pay against your principal each month.
Step five: Create a budget that locks in your monthly payment against your credit card debt.
Step six: Automate your debt repayment plan.
Let's review all of these six steps and how you can apply them in your life and get that credit card paid off, once and for all.
Credit card debt is rising
Despite record lows in unemployment and 10 straight years of economic growth, credit card debt is on the rise. Total credit card debt in the U.S is just under $1 trillion. The average person with credit card debt carries a month to month balance of $6,950.
This is a big problem because the average interest rate on new credit cards is 19.24% while some of the highest interest rates on credit cards are pushing 30%. These are absurd interest rates.
Credit card companies are making more money off your debt than Warren Buffett makes in the stock market. The inverse is also true; you are losing more money on credit card debt than Warren Buffett makes in the stock market.
If you are carrying credit card debt, this article is for you. I'm going to walk you through step by step, how to pay off a high-interest credit card or any loan for that matter.
It all starts with setting a goal
The very first thing you need to do is set a goal for when you would like to be debt-free. How much money you need to pay against your credit card balance every month depends upon when you want to have that card paid off.
You'll need to pay a lot more every month if you want that high-interest credit card paid off in one year then if you want it paid off in five years. Your goal should be to pay off that credit card in the shortest amount of time.
With the caveat that you need to be realistic. If you have $100,000 in credit card debt and you make $50,000 per year, it would not be realistic to expect to have that paid off in one year.
Step 1: Before you do anything, take a few minutes to think about a reasonable timeframe for when you want to have that credit card paid off. Write it down and place it somewhere visible that you will see every day. Keep your goal top of mind every day.
Addressing the real problem
If you have a lot of credit card debt, odds are the credit card debt is a symptom of the real problem; you are spending more than you are making.
The reason anyone falls into debt is simple. You bought something that you did not have enough money to pay for, so you used debt to finance that purchase. That is not always a bad thing. If you use debt to buy a house or a business it can help grow your wealth. If you use debt to buy a new flat-screen TV, you're going to be in hot water.
Before you start paying down your debt, you need to start tracking your spending. When I say track your spending, I mean track where every single penny is going. Compare your monthly spending to your monthly income and ask yourself if the way you are using your money is moving you closer to or further away from your goals.
Step 2: You need to begin tracking your spending. You have two options to do this through an app or a spreadsheet. Go to google and type "best free expense tracker" and pick one of the many options that you will find. Alternatively, you can use the expense tracker that I created for you here.
Calculate exactly how much you need to pay against your debt every month
Remember when I said you need to set a goal for when you want to be debt-free? The reason I listed that as step 1 is because it is going to be the determining factor to help you understand how much money you need to be paying against your credit card balance every month.
You're also going to need to know the following.
Total balance on the credit card or cards
The interest rate charged against that balance
The monthly minimum payment
All of this information can be found on your monthly credit card statement. This will either be mailed to you or available online.
Step 3: Grab your monthly credit card statement and highlight the key information discussed above. If you can't find your credit card statement, call the phone number on the back of your credit card and ask them to send you a copy of your most recent monthly statement.
Once you have the key information from your monthly statement, you are ready to calculate how much you need to pay against your credit card balance each month to reach your goal of being debt-free in the timeline you set for yourself in step 1.
Step 4: Go to Google and type in "free debt repayment calculator". Alternatively, you can use this free debt repayment calculator that I have provided for you here. Under "Loan term", enter the number of months or years you want to be debt-free.
Create a budget that locks in your goal
Now that you know exactly how much you need to pay against your credit card every month. You need to create a budget that ensures your success. If you found in step 4 that you need to pay $450 against your credit card debt to be debt-free in the timeframe you set out for yourself in step 1, then that needs to be reflected in your budget.
Step 5: Create a budget that accounts for the amount you need to allocate towards your debt each month. There are a ton of great budget spreadsheets online. Go to Google and type in "Free budget template". Alternatively, you can use the one I provided for you right here.
What if I don't have enough money to meet my goal?
After you go to create your budget, you might find that you don't have enough free monthly cash flow to meet your goal of being debt-free in the timeframe you set for yourself in step one.
This is very common when people are setting financial goals for the first time. It's easy to be excited about setting goals, it's another thing to follow through on them. It's going to require a lot of sacrifice on your part, but I want you to know that it is possible to turn things around.
Here's what I would do if you don't think you have enough money to pay down your debt.
Start by tracking your spending and seeing what costs you can easily cut out.
If you can't cut any more expenses, you might consider a side-hustle to increase the amount of money you have coming in each month.
Every extra dollar you save and make should be automated towards paying off your credit card. I explain these steps in more detail in my free 1-week course available here.
Step 6: Once you are sure you have enough money to pay towards your credit cards call your bank and set up an automated monthly payment for that amount.
If you found out in step 4 that you need to pay $450 per month towards your credit card to meet your goal from step 1, have your bank set up an automatic transfer from your checking account to your credit card every month.
The final step
Once you have figured out how much money you need to pay towards your credit cards each month and you have automated that process, I want you to do one more thing. Think about what you'll do with that extra money once your credit card debt is cleared.
If you're paying $450 per month towards your credit card debt, that is an extra $450 you will have once that debt is gone. You could decide to pay off your mortgage, invest for retirement, spend on vacation.
The options are limitless so I want you to think about how you can use that extra money to have the most positive impact on your life.
I also want you to know that you don't have to go through it alone. I've created a private place for "Millionaires in the Making" to provide each other with support on their financial journey. Click here to join the group and don't forget to introduce yourself and tell us what your goals are.
This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions