Ask the Classy Frugalist: What To Do If You're Carrying a Credit Card Balance? (Part 3)

Welcome back to our brief series on credit cards! Two weeks ago I took a look at how to evaluate whether or not you really need a credit card, and last week I explored some things to consider as you choose your card. This week, we’re exploring what to do if you end up carrying a balance on your card (or cards) and need some assistance getting out of debt.

Step 1: Know what you owe

I know it may seem obvious but it’s important that you have a solid understanding of what you owe before you can make a plan to pay it off. When you’re in trouble it can be easy to get so overwhelmed by fear that you avoid taking the first step. Avoiding the problem won’t make it go away. Facing it head on, with all of the facts on the table, is the first key to success. You’ll want to know the interest rate, total balance, minimum payment amount, and the balance due date.  

Step 2: Figure out what you can contribute to your debt

Yes, you can just pay the minimum payment but you’ll end up paying lots of money in interest and likely do some damage to your credit score in the process. Wondering how much your debt will really cost you? Use NerdWallet’s calculator to see when you’ll be debt free.

So, let’s see what you can contribute. Take a hard look at your budget – what things can you reduce or cut entirely in favor of repaying your debt? Every little bit counts – even forgoing a cup of coffee, getting one less drink when you’re out with friends, or using coupons at the grocery store can really add up. Looking for larger savings? Do you own anything that you can sell? Any memberships that you’d be willing to forgo for the time being? Make sure that your new lifestyle is sustainable – going too far too fast will only hurt your debt repayment process.

On the other hand, is there any additional income that you could put towards debt repayment? Bank any windfalls like a tax refund, bonus, or holiday gifts. Maybe you could start a side hustle – freelance writing, selling crafts, mowing lawns – to help you get your debt paid off. Susie Moore has great suggestions on how to start your side hustle and make it sustainable.

Consider where debt repayment falls in your list of priorities, if it’s high on your list, you might reallocate some of your savings toward repaying this debt.

Step 3: Evaluate your options to lower your interest rate
Begin by talking to your credit card company. Explain the situation and ask if there is anything they can do to help you. They may lower your interest rate for a period of time or waive any current late fee balances to help you catch up on your debt. If you’ve been a customer for a long time, be sure to mention that. If you don’t receive a “yes,” don’t be afraid to speak to a manager or the retention department, or try and call back another time.

You might also consider a balance transfer credit card. Look for a card with a 0% introductory APR. Take a look at when this APR offer expires – usually within 12 to 15 months. Evaluate if you will be able to pay off the whole amount in the designated time period. Even if you think you’ll be able to pay off your debt during that introductory period, you’ll want to research the new APR after the introductory period and figure out if interest is charged retroactively on any balance leftover after the time period. Research whether or not there is a balance transfer fee (typically 2 to 5% of the balance you’re carrying). All of these fees can really add up – you’ll want to do the math and make sure the card is really worth it. And, it goes without saying, but don’t charge new purchases to this card – the goal is to pay off the debt not accrue more during the introductory period. Take a look at some of the best balance transfer and 0% interest card offers on NerdWallet.

Another option is a personal loan. This might be a good option for you if you don’t want the temptation to use your credit card anymore. Personal loans are installment loans so you agree to make a set monthly payment at a certain interest rate for certain period of time. While you get a hard date by which your debt needs to be paid off, you will be locked into a set monthly payment so you won’t be able to revert back to just paying the minimum if you get into a bind. Interest rates on these loans are primarily based off your credit score – meaning you may or may not qualify for an interest rate lower than the one you’re already paying. Again, you’ll want to do your research: do you qualify for a loan? If so, at what interest rate? What length of time do you have to pay off the loan? What’s your monthly payment? Are there any penalties for paying back the loan early?

Note: A credit score of less than 600 may make it difficult to qualify for products like balance transfers or competitive personal loan offers. 

Step 4: Assess what payoff strategy can help

If you only have one credit card to pay off your strategy is pretty simple – keep putting as much money as you can towards your single credit card (without charging more) until it’s paid off. But, what do you do if you have more than one card? There are two main strategies for paying off multiple debts – the debt avalanche and the debt snowball. These methods apply to paying off just about any debt – including student loans. The debt snowball strategy focuses on the psychological motivation by inviting you to pay off your debts in order from smallest to largest debt amount. You’ll put all that you can towards your smallest debt and pay the minimum on the rest. Once you’ve got the smallest debt paid off, you’ll putting everything that you put towards the smallest debt towards the next smallest one on the list. This method allows you to have a couple of exciting “wins” under your belt early on to keep you motivated – creating a snowball effect as you move from one loan to the next.

On the other hand, you have the debt avalanche strategy. This strategy is nearly identical to the debt snowball but instead of paying off your debts in order from smallest to largest debt amount, you’ll pay them off in terms of the interest rate. You’ll begin with the debt that has the largest interest rate (regardless of size) and then move on to the loan with the second largest interest rate. At the end of the day, this strategy will save you the most money over the long-term, but if you need the psychological boost the debt snowball can be very helpful.

You can use the site to evaluate both of these approaches to see which one might work best for you.

Step 5: Set a goal and track your progress

Once you’ve chosen your repayment strategy, you are ready to set a goal for yourself and get started on repaying your debt. It can be challenging to stay motivated over the long-term, find some milestones along the way to celebrate and some small (not budget-busting) ways to revel in your achievement – maybe it’s takeout from your favorite restaurant or splurging on a new sweater. If you can, find a celebration that doesn’t cost much at all like taking a family hike, binge-watching your favorite show with your BFF, or having your significant other make you dinner.

As you work toward your goal, consider what new rules you’ll have for credit card use after you finish repaying your loans. Maybe you’ll eliminate your credit cards entirely or keep one just for emergencies? If you think that you can use credit cards again for regular use, you might start with just a trial period and see how that works for you.

Track your progress and follow your goal through to the end. When times get tough and you get discouraged, remember why you’re paying off this debt. What are you most looking forward to about being debt-free? Maybe it’s freedom and flexibility? Maybe it’s the ability to save up for other things like a new home or car? Picture your debt-free life and let this image be your motivation.