Tackle Your Credit Card Debt
Credit cards are a necessary part of our lives - especially these days - but they can quickly get you into trouble if you are not careful. If you are carrying a monthly balance on a card that charges 18% interest, you are paying 18% more for each new purchase on that card, as well as interest on the rest of the balance. To stop this debt spiral with my clients, I use three easy steps: 1) Know Your Interest Rate, 2) Rank Your Cards, 3) Pick a Paydown Method.
Step 1: Know Your Interest Rate
Review the last statement for each of your cards and note the interest rate you are paying. This will generally be listed after your monthly activity and should be labeled “INTEREST CHARGES”
Step 2: Rank Your Cards
If you have more than one credit card with a balance, create a list for yourself of the outstanding amounts and interest rates for each.
Step 3: Pick a Paydown Method
Choose from one of the four options below to start paying off those cards!
The Cash Flow Method of debt reduction focuses on paying off the debt with the largest monthly payment.
PRO: If you're already tight on cash, this offers the most relief.
The Avalanche Method involves paying the minimum due on all of your bills, and focusing all extra funds on the one with the highest interest rate.
PRO: Save money on interest payments.
The Debt Snowball method pays the minimum due on all debts, except the littlest one. You attack your smallest debt with a vengeance until it’s paid off.
PRO: This gives a quick victory and is perfect for people who enjoy checking things off their list.
With the Volcano Method of debt reduction, you attack whichever debt you hate the most (the one that makes you blow your top like a volcano!), without worrying about interest rates or balances.
PRO: This is very motivating because it brings you emotional relief once it’s paid in full.
Pick whichever method works for you so you can stick with it. If you don’t have a preference, go with Avalanche as you will save the most interest expense.