First, there are a few DON’Ts:
- Don’t consolidate even though it “feels” better to have only one payment, you may end up paying more in interest or fees by consolidating to one card.
- Don’t rush to move everything to an “introductory 0% financing” credit card unless you have read the fine print and know how long and under what conditions you have 0%. Life happens and you may not be able to pay off your balance as quickly as you want and suddenly 0% goes to 23%.
- Don’t start paying down your debt until you have at least $1000 saved, because when little things come up like car repairs, or camp, you will end up charging them again and building your debt if you don’t have a little cash saved to pay for them.
DO - Pay down the smallest balance first so you feel some success and “snowball” your payments onto your other balances. Let’s say you have 3 credit cards and their balances are something like this:
1. Credit card A - $2500 at 19%
2. Credit card B - $5000 at 11%
3. Credit card C - $600 at 16%
- Remember, you are probably charging a certain amount each month just for your basic living expenses, right? Not many people pay cash at the grocery store, gas station, restaurant etc. Let’s say you generally charge about $500/month on one of your credit cards just to keep your household going. The order of priority for putting money toward your credit cards should be:
- Pay everything you charged in the current month off that month even if that means you can’t put any money towards paying down balances. You will just keep growing your balances if you don’t get your “current spending” under control. Put a plan in place to spend less next month!
- Pay your minimums on Credit Card A and B
- Pay any remaining money you can on Credit Card C
Here’s how “snowballing” your payments works:
- Say you have $200 remaining every month after paying your current charges and your minimums
- Say your minimums are $50 each per month.
- Put all $200 towards Credit Card C, it will be paid down in 4 months (4th payment is $8). YAY!!!
- Now, you only have one minimum (Credit Card B $50) and one to focus on (Credit Card A)
- Put the $200/month you used to pay down the last credit card PLUS Credit Card A’s $50 minimum together and pay $250 each month on Credit Card A
- Still pay ALL your current charges for the month and the $50 minimum on Credit Card B.
- With $250/month towards Credit Card A, it will take 11 additional months, but you will conquer Credit Card A (11th month payment is less than $250).
- Next, you continue paying all your current charges each month and put $250 plus the $50 minimum you were paying on Credit Card B towards paying off Credit Card B.
- At $300/month, Credit Card B will be paid off in 19 months and you will be debt free.
- You conquered all your debt in 32 months (a little over 2.5 yrs) start to finish. Not bad!!
- If you paid your credit cards (in my example) down by highest interest rate first you would save $10 in interest and it still would take 32 months.
- I recommend paying small balances first for the emotional WIN, but it depends on your interest rates!
- Here is where you can find a good “snowball” payment calculator