What’s the one thing nobody wants but many people have? Debt.
Debt is one of those money topics that many, many people can relate to – around 80% of Americans carry some amount of debt – but it can be an embarrassing thing that no one wants to talk about. It’s also one of those things that can add up and get overwhelming really quickly, and make you feel like you’ll never get out of. In fact, 45% of Americans say that debt makes them feel anxious on a monthly basis, and 15% believe that they’ll be in debt for the rest of their lives!
Of course, the easiest way to stay clear of debt is to never get into debt in the first place, or only getting into a reasonable or small amount of debt with a clear plan to pay it off before you get into it, but life happens and sometimes we make some mistakes. That doesn’t mean we need to beat ourselves up about it! But, instead of ignoring and hoping that it goes away, it’s important to take a deep breath, acknowledge the debt, and start taking steps to decrease debt so you can then start working on growing your money, and not just paying money back! I’m not saying it’s an easy process. It definitely takes effort, behavioral change, and commitment, but it’s not impossible!
I previously had to pay off credit card debt that piled up during a not-so-great time in my life that I was living paycheck to paycheck and struggling to make ends meet. Or…not making ends meet. It sucks. I was barely able to make my minimum payments, and it was so defeating to see the debt keep piling up due to a high interest rate. I honestly had no idea how I’d ever pay it off. I am happy to share that I am finally credit card debt-free using the tools I’m sharing here today!
There’s many different types of debt, including credit cards, student loans, mortgages, car loans, medical debt, and personal loans, amongst others. Student loan debt in particular is one that is the most associated with Millennials. But in reality, 40% of millennials say that their largest source of debt actually comes from credit cards or their mortgage! According to the consumer credit reporting agency Experian, the average credit card debt for a Millenial in the U.S. was close to $5,000, and about 22% don’t know the interest rate they’re being charged.
Now, I won’t go into the resources available to pay off every kind of debt, but I’ll start with approaches to tackle debt that you can apply to whatever debt you might have, and then give a couple tips specifically for credit card debt as that one can get especially expensive very quickly.
The very first step towards paying off debt is creating a budget. 20% of U.S. adults don’t know how much debt they have but at the end of the day, the only way to pay off the debt is to put more money towards the debt. And in order to do that, we need to know exactly how much debt we have and how much money we have coming in. Whether you want to use a tool like Mint.com or a good old Excel spreadsheet, write down your income, your bills like rent, utilities, and phone bills, the total amount of debt you have and the interest rates on them, and then find the areas where you can cut costs. Maybe this means cooking more instead of eating out, cancelling those pesky monthly subscriptions that add up really quickly, or unlinking your credit card from shopping sites so it’s not as easy to make an impulse purchase when you’re window shopping online. If you need some more motivation and inspiration to solidify your budget, check out the budgeting episode, “The B-Word”, where I talk about ways to make budgeting fun! Once you have your budget and have found some extra money in it, it’s time to put that money towards your debt. This needs to also be part of your budget! It’s not a one time or one week thing, but a habit change.
Another way to tackle debt is to increase your income. On average, about 34% of people’s monthly income goes towards paying off debt. Having more money coming in means being able to pay off the debt faster, which means paying less in interest…which means more money for you and less for the lender.
This could mean finding some side hustles – maybe you’re really crafty and have products to sell on Etsy, can tutor someone in a specific subject, or have special skills that you can put to work on freelancing sites like UpWork! Or, you can take some time to do a deep clean, unearth those old birthday gifts you never used, and sell them online. Do some research to see what kind of value they have, take good photos of them, and easily post them to sell on the Facebook Marketplace or sites like OfferUp. You can also sell your clothes through a site like ThredUp where they’ll take the photos and price the items for you – although they will take a cut of the sale. I personally have used UpWork to find freelance marketing and voiceover work, and sold some clothes and furniture online when I moved. It does take a little bit of time to get good photos, post a detailed and attention grabbing description, and then coordinate with potential buyers, but I made over $500 in a little over a month just by selling furniture and electronics I wasn’t using anymore.
When it comes to actually paying off your debt, you may have heard of two popular methods: the snowball method and the avalanche method.
The snowball method is when you start with your smallest debt first, regardless of interest rates. This means if you have $500 worth of medical debt and $1000 worth of credit card debt, you make minimum payments on the credit card and put everything else towards paying off the $500 medical debt. The avalanche method is when you start with the highest interest debt, regardless of the amount of debt. So, taking that same example, let’s say that the hospital has an interest-free payment plan, so your $500 medical debt has no interest. On the other hand, your $1000 credit card debt comes with a 20% interest rate. With the avalanche method, you’d start tackling the credit card debt first.
40% of millennials say that their largest source of debt comes from credit cards or mortgages and, according to the Experian, the average credit card debt for a Millenial in the U.S. is close to $5,000. Plus, about 22% don’t know the interest rate they’re being charged!
Many people recommend going with the avalanche method because it’s less expensive. By tackling the high interest debt first, you’re decreasing the amount of interest you’re paying in the long run. For example, only making the minimum payment on your high interest credit card means that you’re mainly just putting money towards the accumulating interest and not towards tackling the actual debt. However, if your high interest debt is also your largest debt, this might mean that the journey to getting debt free feels even longer. That’s why some people prefer the snowball method. Even if it’s not the highest interest debt, by starting with a more manageable debt amount, you can celebrate those small victories and feel the satisfaction of paying off debt that can motivate you to continue tackling the next one. With the avalanche method, you might get discouraged if it takes you some time to pay off that large amount, even if it does save you money in the long run. If you have multiple types of debt – say, student loan and multiple credit cards – maybe you’ll choose a combination approach! To get that win, tackle the smallest amount of debt so you can celebrate that, and then tackle the high interest debt next. Either way, the important thing is to meet the minimums on all of your debt and put all other available dollars towards the specific debt you’re tackling.
This brings me to my next point. Celebrate paying off debt! That is a huge win! Take some time to celebrate – preferably in a not-expensive way.
If you have multiple kinds of high-interest debt – like multiple credit cards – another option is to consolidate the debt. For example, you might look into getting a personal loan from a local credit union. These not-for-profit institutions tend to not only have better customer service, but also have lower interest rates and more flexible terms than banks. You can apply that loan towards your high interest debt, and then it will be cheaper and quicker to pay off your lower-interest loan.
If you’re struggling with credit card debt, there are a couple things you can do. First, you can call the credit card company and ask for a lower APR. Side note: APR, which stands for annual percentage rate, includes the interest rate on the loan as well as other fees and discounts associated with the loan. This is why sometimes, two different lenders may offer a loan at a similar interest rate but have different APRs due to the difference in their fees or discounts or rebates they’re offering. For reference, the average credit card APR in 2019 was 17.14%. So, back to negotiating – I know negotiating with the credit card company can feel intimidating, but there’s plenty of scripts online to work off of so you can feel confident when you call. CreditCards.com has a great script example, or you can also search “negotiating credit card interest rates” on Google or YouTube for others. If they aren’t able to lower the interest rate and you’ve been meeting all of your monthly payments and don’t have any late fees, you can ask if they can at least waive your most recent interest charge. Also, if you usually make your payments on time but something happens and you miss a payment, resulting in a late fee, you can also call and explain the situation and ask them to waive that late fee for that one missed payment. Again, this doesn’t mean that all credit card companies will do this every time, but it’s worth a shot! I was so nervous when I called Capital One…but was able to lower the APR on my card with them the first time I called!
Another way to make credit card debts approachable if you have good credit (meaning a score of 690 or above) is to transfer your balance to a new credit card with lower interest. Some companies offer a 0% introductory APR credit card on balance transfers, which means that you transfer the debt from your current, high interest card to this new card, where you can tackle the debt without needing to pay interest for the introductory period which is typically 12 – 18 months. If you go this route, make sure you’re looking at cards that have the 0% introductory APR on balance transfers, as some offer the 0% just on purchases! Depending on the card limit, you may not be able to transfer your full balance but if you can move a good amount of debt over to the new card, it will help eliminate at least some of that expensive interest that piles up so quickly! Also be aware that you may need to pay a transfer fee of about 3 – 5% of the total amount transferred, which means $30-$50 for every $1000 transferred. But, if the amount of interest you’ll save during that 0% introductory period outweighs the fee or the card has other features that are compelling, that transfer fee could absolutely be worth it! Lastly, keep in mind that you usually can’t transfer your balance within the same company. So if you already have a Citi card and find a great Citi balance transfer card, they, understandably, may not allow that.
Having debt of any kind is definitely stressful, but it’s not impossible to pay off. I hope you found some useful tools to tackle debt in this episode, and are feeling more confident that you can pay it off and be debt free!