Scarlett McCarthy developed a habit of supplementing her spending with credit cards as a college student.
“It was a back-up plan whenever I ran out of cash,” says McCarthy, 26, now a writer and founder of Literally Broke, a blog about money for artists and creatives. She would let the balances grow, then pay them off when she worked longer hours or had an influx of cash. But after graduation, McCarthy says she began leaning on credit even more to maintain her New York City lifestyle.
“I was doing everything you’re not supposed to do: buying coffee, eating out every meal,” she says. “I just kept putting my daily expenses on my card, and at its highest, it reached $10,000.”
Credit card debt can be a slippery slope, says Katie Bossler, financial expert and quality assurance specialist at nonprofit Greenpath Financial Wellness. “And there is a wall that you will eventually hit because those monthly payments are so high, or there’s nothing left to borrow on those credit cards because you’ve maxed them all out.”
After years of racking up balances through periods of underemployment and using debt to maintain a lifestyle beyond her means, McCarthy “hit the wall” during a friend’s birthday dinner.
“I was going to offer to pay and I was going to have to put it on my credit card,” she says. “And I had this looming feeling where I knew I couldn’t keep floating my lifestyle with my credit card. I knew I had to get serious about this.”
Take these steps to begin working toward credit card debt relief:
Evaluate Your Debts
Before you can enlist a debt relief strategy, you’ve got to know your starting point.
McCarthy says the first step she took was making a list of all her debts. Not only was it a foundation for moving forward, but knowing that total and facing it added to her motivation, she says.
If you’re ready to tackle your credit card debt, take time to look at your finances as a whole. Know the details of your situation and make sure you’re in the right place to begin a payoff plan.
Ask yourself the following questions. The answers can help you determine how to approach your debt in a way that’s effective and sustainable.
- Do you have an emergency fund? Even if it’s not fully-funded, make sure you have some amount of cash in the bank for security while you pay off debt.
- Do you have extra cash each month to put toward an aggressive payoff plan? If not, identify how much you are able to devote to your credit card balances and consider how it may be best allocated.
- Can you stop using your card altogether and switch to cash-only payments until you have a better grasp on your debts?
- What does your budget look like? Are there recurring expenses you can reduce to free up more cash for your debt?
After taking stock of your situation, here are a few options to consider implementing along the way:
Talk to Your Creditors
“Talk to your creditors first,” says Billy Hatton, CFP, founder of Billfold Budget Counseling in Los Angeles. “Often, you can get your rate reduced, but you have to go out and seek it. That reduced interest can have a humongous effect.”
If you’re able to still make payments, see what your credit card company is willing to offer you. Since the start of the coronavirus pandemic, working with your issuer directly has become an even more viable option. Many have implemented forbearance and assistance programs for those facing financial hardship.
Ask for interest forgiveness for a period of time, Hatton recommends, or a zero interest offer. Not only will your payments go directly toward your principal balance, but interest relief can also buy time as you research the other options available to you.
Consolidate Your Debt
If you’ve racked up balances on several cards, have debts from personal loans, or even carry collections debts, consolidation is one of the most effective ways to both lower your interest rate and help you pay off your balances more quickly.
Make extra payments toward your balance whenever you can. Even $5 or $10 on top of your regular payments can add up and help eliminate your debt more quickly.
There are a few different ways to consolidate, each of which comes with its own refinancing possibilities and qualification requirements. Consolidation options to consider include opening a balance transfer credit card, taking on a HELOC or personal loan, or working with a nonprofit credit counselor on a consolidation plan.
These options often require a good credit score, though, and large amounts of debt can have a negative impact on your score over time. Make sure you research the consolidation methods most accessible for you and that align with your needs before applying for any new loan or line of credit.
Look into payoff strategies that can motivate you to keep up your momentum as you go.
This can be especially important for someone who may not qualify for consolidation or refinancing options, or who receives unfavorable terms, as was the case for McCarthy. She considered a balance transfer, but was turned off by the $300 fee, as well as how her own habits might hinder her progress.
“I already had that debt for so long, and if I didn’t just attack it, I was worried I would let it stay on that balance transfer card and not be proactive about it,” she says.
Instead, McCarthy says she overcame her debt through budgeting, working overtime shifts and multiple side hustles to bring in extra income, and using only cash to become more conscious of what she was spending.
Identify a strategy that will best set you up for success, whether you’re motivated by the discipline of a strict budget and extra payments, the mental boost of snowballing your debt, or the mathematical progress of the avalanche method.
If you’re not sure which direction is best for you, speaking with a nonprofit debt counselor or financial planner can help.
More Things To Consider
Other Financial Goals
While you might not make as much progress on other financial goals during your debt payoff period, you shouldn’t lose sight of them, either. Instead, prioritize your debt while building the habits that will help you take those next steps toward building up savings or contributing to retirement.
The faster you can pay off high-interest debt, the faster you’ll free up more cash to direct toward your other goals. And achieving your debt payoff goal can make it easier to implement the behaviors you learned along the way into those other aspects of your financial plan.
Debt Relief Scams
There are plenty of predatory companies waiting to take advantage of you and your debts. “If it sounds too good to be true, it probably is,” Hatton says.
You can view common scams to look out for and recommendations for credit repair and debt relief from the Federal Trade Commission. If you do reach out for third party advice, look for a counselor endorsed by the National Foundation for Credit Counseling who can not only help provide debt relief but teach you the skills to remain debt free.
“The main thing I look for is that they are nonprofit, that they have a focus on education, and that they don’t just try to focus on getting rid of the debt right away, because this is a process,” Hatton says.
Bankruptcy: A Last Resort
Bankruptcy may provide relief from your credit card debt, but it won’t solve your financial problems. It’s an extreme measure that’s best considered only after you’ve exhausted your other options or you’re facing lasting financial hardship.
“If somebody is in a situation that’s not likely ever to change — a permanent loss of income from death of a spouse or transitioning through a disability — it may be worth exploring,” Bossler says.
But if your situation is temporary, or you can reduce costs in a meaningful way (large expenses like housing and transportation), start making those changes before considering bankruptcy.
“I’m generally not a huge fan of saying you have to live frugally, but the consequences of bankruptcy kind of force living in frugality anyway,” Hatton says. “You may not be able to have that same quality of life that you once had, so it might as well start before the court forces you to do so.”