Even tasks as challenging as eliminating credit card debt can be boiled down to less than a dozen steps. Notice I called them simple, but that doesn’t mean they are not difficult to follow through on. It will take sheer determination, and a lot of sacrifice, to see all those credit card balances go to zero. However, eliminating credit card debt is one of the smartest financial moves you can make, and you can do it without filing for bankruptcy.
Before you even begin the steps below, there is one important task to complete. Identify why you want to be debt free. Saying you want to be debt free is not enough, you must identify why you want to be debt free. For me, it was because I was tired of not having options. Credit card debt forced me to stay in a bad job longer than I should have. Debt forced me to skip out on opportunities because I just couldn’t afford to take the risk. Once you have identified your “why” move on to tackling the steps below.
Ten Steps To Eliminating Credit Card Debt Without Bankruptcy
1. Save three months of expenses in an emergency fund. You may be asking yourself, “I thought this was a list of tips for getting out of credit card debt?” It is, but to do so you must first create a cushion between you and the emergencies currently financed on your credit cards. I didn’t take my own advice here when I first started my journey for debt freedom. It wasn’t long before our home’s air conditioner broke, my car’s brakes began to fail and I was forced to run up debt to make repairs. Back to square one.
My second attempt began with saving up three months of expenses in a savings account. Not $1,000, not $5,000, but three months worth of expenses; no more, no less. This provided a buffer for future emergencies so I could avoid resorting to credit cards to finance the inevitable hiccups that happened along the way.
2. Take an inventory of your debt. Once you have identified why you want to get out of credit card debt, and have saved an adequate emergency fund, you will need to list all of your credit card accounts. Include the account number, current balance, interest rate, minimum payment, credit limit and contact number. This is a painful step, because most of us walk around not really knowing exactly how much we owe. We have some idea, but it usually significantly less than the actual number. Finding out the actual amount is kind of like having a bucket of ice water dumped on your head.
3. Contact each credit card issuer’s customer service number. Take a deep breath, dial the number and walk through the verification procedures. Then explain that you are in the process of consolidating cards and would like your account reviewed for a lower interest rate. If they decline, ask to speak to a supervisor and repeat your pitch. If they decline, thank them and hang up. Resist the temptation to close the account at this point, no matter how angry they make you by refusing to lower your interest rate. You will be calling back to cancel the credit card soon enough.
4. Now try to consolidate as much of the high interest debt to cards with lower interest rates. You may have to visit the card issuer’s website you want to move money to, or contact their customer service department again to request a balance transfer. Ask if there are any balance transfer fees associated, and ask to have them waived as a one-time courtesy. Some banks will waive the fee, some won’t.
If a balance transfer is not available, consider a low-interest consolidation loan from a social lending site like Lending Club. At this point we are interested in getting as much of your debt as possible to lower rate cards.
5. Get angry. I mean get angry at that credit card debt staring up at you. At this point you are half way through the ten steps to paying off your credit card debt, but the trail ahead is about to get much steeper. Take another look at your spreadsheet. How many dreams have been put on hold by that number? How many sleepless nights have you stayed awake worrying over that number? Do not suppress your anger. Harness it. Use it to get fired up about this plan to pay off your credit card debt, once and for all.
6. Cut up all but the card with the highest available credit. You are deep in a hole, and it is time to stop digging. Grab the sharpest pair of scissors you can find, and set up your cards in firing squad fashion. Set aside the card with the highest available credit – you will keep this one in a sock drawer at home for emergencies until all your debts are paid off. Cut up all the other cards, and be sure to clear their numbers from any online store you frequent.
7. Reorder your list of debts, putting the smallest debt at the top. Put a big “#1” next to it. Write its name in bold. Highlight the amount. Draw a big bulls-eye next to it. Do whatever you have to do to put the focus squarely on that credit card account. Imagine that card sweating under the lights in a police holding room. It is guilty of robbing you of your dreams, and it is going down!
8. Throw every single dime you can find at debt #1. For this step I opened up another free checking account at my bank and tossed every bit of found money in it I could find. Loose change, birthday and Christmas gifts, and proceeds from sales of my CD collection on eBay all qualify. Consider taking on a part-time job, or starting a side hustle like mowing lawns or painting house numbers on neighbors’ curbs. Every single extra penny goes into this account, and at the end of the week transfer the exact balance in that second account to the credit card with the lowest balance. You may want to do it every other week, but don’t wait an entire month – you’ll pay slightly more in interest at the end of the billing cycle. Some weeks it might only be an extra $17 payment, others may be as much as $85. No amount is too small to getting you closer to getting out of debt.
9. Close your paid-off credit cards.
9a. If you are planning to buy a home, skip to step 9b. When the balance reaches zero, and you have paid off the entire balance for that credit card, call the issuer again and close the account. Immediately follow up that phone call with a letter to the issuer’s correspondence address asking that the account be closed, and ask for a written confirmation. I know the card has sentimental value. Maybe you opened it in college, or it has a picture of your dog on it. Tough. It has to go. You just don’t need the headaches associated with carrying a wallet-full of credit cards. Debit cards and cash spend just fine. Repeat step 9a with all but your last credit card. When your last credit card balance reaches zero, move on to step 10.
9b. This step is for those planning to buy a home after they are debt free. Closing a credit card account, even if it is paid off, can have a negative effect to your FICO score. If you are considering applying for a mortgage in the near future, it is a good idea to leave your credit card accounts open, particularly accounts you have had open for many years. Length of credit history is an important factor in calculating your score, and by closing older credit cards you are effectively lowering the average age of your active trade lines. You have already cut up the card, canceled any automatic billing and removed it from your online shopping profiles, so just let it sit for now.
10. Put away that final credit card. Presumably, this last credit card was the one with the highest credit limit and the best interest rate – that’s why it is last in the lineup. If that is in fact the case, tuck the card away some place safe around your house. Maybe stash it in a sock drawer, or locked away in a safe or lock box. Wherever you decide to store it, just be sure it is not in your wallet, unless you are traveling and need to take it along for emergencies. Keep this card around until your fully-funded emergency fund is in place, at which point you can consider yourself “self-insured” against future emergencies. At this point you may decide to keep the card to score rewards points, or scrap it. It’s up to you. Me? I say dump it. Who needs the hassle?
If you are like me, you have probably been accumulating debt for years, but now it is time to stop. Draw a line in the sand, and vow to never cross it again. It is time to start living the rest of your life debt free. Living without debt reminds me of being a kid again and pedaling your bicycle like crazy to climb that tall hill in your neighborhood. Just when you think you can’t spin those pedals another turn you see the top of the hill. You crest the top of the hill in complete exhaustion and then begin to descend the other side, wind blowing in your hair, the sun warming your face as you look up and smile. That is the feeling of living debt free, and I can’t wait to coast down that hill again soon. How about you?