It all started with a pair of gold Jimmy Choo sneakers. She didn't need them, but they were stunning and with the swipe of a card they were hers. Over the next five years, the shopping momentum built. She couldn't resist a sale, booked vacations without a second thought, and little parcels arrived at her front door daily. Fast-forward to 2017, and she now has $30,000 in credit card debt.
This story might seem like an extreme example, but research suggests most Americans can relate to my friend's relationship with that little piece of plastic. A NerdWallet study found that the average U.S. household with credit card debt owes an average of $16,061, yet debt is a taboo topic among millennials.
"Just like having a gym buddy to keep you motivated to work out, it's important to talk about debt because peers can keep each other accountable," says John Ganotis, founder of Credit Card Insider. "You might be surprised how many friends have debt or damaged their credit history."
If you've missed a repayment, lost track of how much you owe, or just want to get back on track, it's time to take control. We turned to Ganotis and Jocelyn Baird, associate editor at NextAdvisor to break it down into five manageable steps.
Here's exactly what you need to do to pay down your credit card debt, once and for all.
Assess the Damage
"Sit down and assess your financial situation as a whole," Baird says. "This includes your monthly expenses, separating the necessities like rent and bills from the extras such as coffee shop visits, as well as your debts." Then use this information to create a budget that includes credit card repayments. List debt repayments next to rent, utilities, and transport to encourage you to treat it as a non-negotiable cost, not an optional expense.
On a separate spreadsheet, create a list of your credit card accounts, Ganotis says. "Figure out how much you owe on each account and the interest rate. Use a service like Credit Karma to see the balances reported to credit bureaus to make sure you're not forgetting any accounts," he recommends.
STEP 2: Consider a Balance Transfer
Next up: Weigh up the pros and cons of a balance transfer. "Are you paying high interest on one or more credit cards that have a balance? If so, your monthly payments are likely going mostly to that interest instead of paying off your actual debt," Baird says. "Transferring the balance to a new credit card with 0% intro APR on balance transfers for a year or more gives you more time to focus on just paying off your debt."
She points out that balance transfers aren't right for everyone, though. "It should be noted that if you own a hefty amount of credit card debt, you may be better off consolidating your debt with a personal loan. As long as your loan's interest is lower than your current credit card's, you will have an easier time paying off the debt."
STEP 3: Start Small
There are two types of debt repayments to consider: the "snowball" method, which involves paying off accounts with the lowest balances first, or the "avalanche" method, where you start by addressing high-interest rates. "If you have any accounts with much higher interest, those might be the smarter place to start to save you money in the long run. If all your interest rates are similar, starting with the lowest balance might be more motivating," Ganotis says.
If you're someone who needs to see immediate results to stay motivated, science says this is the best method: "People are more motivated to get out of debt not only by concentrating on one account [at a time] but also by beginning with the smallest," writes Harvard Business Review.
STEP 4: Automate Repayments
The answer to streamlining repayments is simple: automate, automate, automate. "Make sure you're paying at least the minimum due on each account, and then pay as much as you can for whatever account you're focusing on paying off first," Ganotis tells us. Don't feel pressured to make large lump-sum payments. "It's okay to make multiple payments throughout the month if that helps," he adds.
It's important to stay motivated during this phase of debt repayment. "As you pay down your accounts, use a service like Credit Karma to monitor your balances decreasing on credit reports. As your utilization goes down, you will likely see your credit scores go up," Ganotis says, which can be a big motivator.
KEEP YOUR CARDS IN ORDER:
STEP 5: Try a Cash Challenge
Now that you've set a budget, chosen a debt method, and automated repayments, it's time to tackle the root cause of credit card debt: your approach to spending. Studies suggest people tend to spend less when they hand over physical cash, which explains why credit card debt is so easy to accumulate.
"People experience what my research collaborators and I call a 'pain of paying' when they pay for purchases, and this pain is more intense with cash than with cards," George Lowenstein, a professor of economics and psychology at Carnegie Mellon University told Market Watch. "Paying with cards is more carefree."
To change your spending habits, challenge yourself to use cash for a week. On Sunday, withdraw the exact amount in your budget. Divide this cash into envelopes according to each day of the week so you can clearly see how much money you have to spend. You'll be less inclined to make impulse purchases.
While you're in this repayment stage, Baird has one key piece of advice: "Try not to charge anything new on your credit cards while you are paying them off," she says. "Added expenses only increase the balance you need to pay, and that's the last thing you want."
When you reach your goal, make sure you don't fall into a common financial trap. "Keep your unused cards open if there's no annual fee," Ganotis says. "It might be tempting to close a card once you pay it off, but as long as you're not paying an annual fee, [you will] be better off leaving it open and unused to maintain a high credit score."
Now it's time to celebrate! These out-of-the-box activities don't cost a thing.