How to Eliminate your Credit Card Debt

Note — In my quest to not Suck at Life, this post is about the why and how of  how I came to eliminate $18,000 worth of credit card debt. The post contains a lot of the beliefs, philosophies, and methods I used to accomplish this. It worked for me, but it may not work for you. That being said, I still think it’s a pretty effective means of going about it, but user experience may vary.

Credit cards are one of the tools necessary for building a successful financial life in the modern world. With so much of the things you may want in life based upon your credit score (mortgages, car loans, even some job interviews), using a credit card wisely is one of the most effective means of getting what you want.

The key word there, is “wisely”. Like a lot of people, I had racked up a lot of credit card debt over the early parts of my adult life. It started in college when I used it to buy kegs for the parties at my off-campus apartment and continued on through my first years as a professional, maintaining a standard of living that I couldn’t really afford. By the end of 2008, I had $18,000 in credit card debt sitting on my back.

Then the economy, for lack of a better term, sh*t the bed. I remember all of a sudden thinking, with scores of people losing their jobs and large companies going out of business, that I should really be taking better care of my finances. I had that large chunk of credit card debt dangling over my head. I had no real savings to speak of. Most of all, there was no reason for either of those things because I was making a good money at the time as a consultant. Like a lot of my friends and others my age, I was living paycheck to paycheck and only making minimum payments on my credit card debt, and I didn’t want to do that anymore.

So I didn’t. I had to revamp my spending, my savings, and my entire outlook on personal finance, but in 1 year I had eliminated all of my credit card debt. Eliminating your credit card debt is something that you really should want to do. With the economy fluctuating up and down, you may be seeing that interest rates out there for things like home and auto loans are at some of the lowest points in history. Credit card interest rates, however, haven’t budged. And with the 2010 legislation meant to protect consumers from credit card company policies, the rates are probably higher than ever. Besides the peace of mind derived from it, paying off your credit card debt is just a good fiscal decision.

This is how I did it (results may vary):

I got in the mindset of really wanting to do something about my finances. Saying you want to do something is a good step, but actually executing it can be difficult unless your mind is in it. For me, I was sick of this feeling of spinning my wheels working because I know I had this mountain of debt that needed to be paid. I wanted to at some point in my life do work that I enjoyed and felt strongly about, despite the amount I would be compensated for it. High interest credit card debt did not fit into the picture.

Know that it took time for you to get into your debt situation and it will take time to get out of it. It took me almost 8 years to rack up that $18,000 in credit card debt, and I knew that it would be longer than a month or two before I would be rid of it. I didn’t particularly like that idea, because I didn’t want the burn of cutting back on the things I loved to do, get and purchase to linger… but the alternative was even less attractive a thing.

Change the mental picture of your finances from a savings model to a net worth model. Most people think of the amount of wealth they have as the cash that they have in savings. This is misleading because you could have $1,000,000 in savings, but it doesn’t mean anything if you have $1,250,000 in debt. That’s what your net worth is, simply your assets (cash, possessions, investments) minus your liabilities (debts). If it’s a negative number, then you could be doing a lot better with your money. Think in terms of your net worth and you begin to understand the importance of eliminating all debt and keeping it away from you like a plague.

Paying off debt equates simply to spending less than you earn. It’s that simple, really. This can be accomplished by either (a) cutting costs and expenses, (b) making more money, or both. Luckily I was making a good sum of money with my day job and just not making the best use of it. When I got my spending under control and re-prioritized to pay off the debt instead of immediately focusing on savings the debt started falling away fast. Making more money is a really good option too, better to some people even, but only if you don’t fall into the sand trap of lifestyle inflation, that being filling the gap of extra income with extra spending.

Don’t bother with savings until you pay off your credit card debt. That credit card debt is costing you a lot of money each month in interest and you want to get rid of it as soon as possible. If you’ve cut expenses and/or are making more money and have money available to pay off the credit card debt, do that instead of putting into savings. A lot of people believe in building up an emergency fund prior to working on the credit card debt, but I don’t. I was living paycheck to paycheck anyway, so keeping on with doing that until I had the credit cards paid off wasn’t going to kill me. Put everything you have to paying off those cards asap.

Don’t bother with debt consolidation companies. Yes, it will reduce your monthly payment but it also lengthens the amount of time you will be paying that debt off. You’re just paying the debt consolidation company instead of the credit card company and chances are if you do the math out, you will end up spending more money in the long run than if you just paid the money right to the credit card company.

I actually didn’t bother with a budget. I knew I wouldn’t stick to it if it were too complicated and I frankly didn’t have the attention span for it anyway. Instead I did a one time assessment of my monthly spending and set a few guidelines.

• I was already banking electronically (which you should be doing 100% anyway because it’s just easier) and examined all of the money that went out for my essential expenses like, rent, utilities, car payment, insurance, gas, groceries (not restaurants), cable/internet, student loans, and credit card minimum payments. This was the money I HAD to spend every month.
• I then gave myself a weekly cash allowance for discretionary spending. Beyond this amount, I wasn’t dipping into my wallet for a credit card or my ATM card for more cash. I took it out on pay day and that was it, whatever I spent that on and whenever I spent it was it for the week. This amount, at first, was $40/week (Later on as I paid off some of the debt, I upped this to $60). As a result, I became more conscious of my spending. I also didn’t do so much out and about. I still had fun, but fun became hanging out at a friends’ house on a saturday night with a six-pack playing cards instead of bar and club hopping.
• I took what was left and dumped it into a credit card, one at a time, until the balances were paid off. I didn’t split it up between all of the cards because I wanted to knock off the card balances completely before moving onto the next one. This was a big psychological win (something picked up from the Dave Ramsey school of thought he calls the “debt snowball”) and got me amped to keep going.

That’s it, seriously. I had just turned 28 when I started and for my 29th birthday I gave myself the present of making my last credit card payment to pay off my existing balances. This year I’m buying myself a house, fulfilling another desire of mine that I wouldn’t have been able to accomplish with all of that credit card debt, in having peace of mind in my home as well as in my finances.

I still follow a lot of the guidelines I listed out above. The money that I was spending to knock off the credit card debts and to pay the existing card minimum payments now mostly go to savings and investments. I still use my credit cards too. I have one main card with a points award program where I pay all of the bills I can on with. I pay that off each month and never carry a balance on it. I have my other cards still too, with each one carrying an automatic payment for a magazine subscription. The reason for that is so that I can have multiple credit lines in use and paid off each month to work up my credit score. I also still give myself the discretionary cash allowance each week, though its higher than it was in the past. The way I view things now, without credit card debt looming out there, is if my bills are paid and I’m accomplishing my goals for savings and investments, what does it matter what happens to the rest of it?

Paying off your credit card debt is not a glamorous or really at all fun of a thing to do, but it gives you something that’s worth more than having all those things you were buying with your credit cards, or even just in having the money itself. It gives you peace of mind. I still work my day job but I really believe that I enjoy it more now that I know I’m not there because I have to be, but more because I want to. You can’t put a price on that kind of freedom.