Unfortunately, it’s pretty easy to get in over your head in credit card debt. Swiping that credit card wherever you go is mindless. You don’t think about what you’re spending until you get the bill in the mail. Maybe that doesn’t even bother you. It’s not until you realize you’ve maxed out your credit cards that you start to panic.
No matter when your panic started, you can always get back in control. You have to know the steps to take, though. Just haphazardly paying various amounts to your cards won’t work. You need a system to help you get out of debt and stay there.
We’ll discuss your various options below.
Use the Snowball Effect
One tried and true method to getting out of credit card debt is the snowball effect method. With this method, you focus on one credit card, paying as much as you can to it each month. You’ll also pay the minimum amount due on every other credit card you have. Once you pay off the first credit card in full, you’ll take that amount plus the minimum payment you’ve already been making and knock down the second credit card. You keep doing this until you are done.
In order for this method to work, though, you’ll need to focus on the card with the highest interest rate first. This way you pay off the most expensive debt first. As you take the money you used on that card and apply it to the 2nd card, you’ll pay that one down even faster. Eventually, you’ll be out of credit card debt.
Of course, all this hard work won’t matter if you go right back to your old habits. Before you start charging up again, take these simple steps:
- Take inventory of your old credit card debt. What was the reason for it? Where did you spend the most money? Once you figure it out, try cutting back on those expenses. If they don’t fit in your monthly budget without credit cards, don’t spend it.
- Put your plastic away. We don’t recommend that you close your credit card accounts as that could lower your credit score. But, you should stash them away so you aren’t tempted to use them again.
- Keep the credit cards for emergencies only. If you don’t have an emergency fund saved, your credit card can be your emergency fund, but only for real emergencies. Leaking pipes or a medical emergency are two examples. A desperately needed haircut or a cute pair of shoes aren’t emergencies.
Refinance out of Credit Card Debt
If you aren’t disciplined enough to use the snowball effect method, you may want to refinance out of credit card debt. This only works if you have equity in your home. Before you proceed, take stock of your credit cards. How much debt do you have? Don’t estimate – pull each bill and look at the real balance. You might be shocked to learn just how much debt you have. Many people underestimate – it’s a psychological thing.
Once you know how much debt you have, find out the value of your home. You can do a quick estimate on sites like Redfin. It may not be exact, but it will give you an idea. Next, you’ll compare your current outstanding balance on your mortgage to your home’s value.
If determined your home might be worth $320,000 and you have $200,000 outstanding in mortgages, you have a 62.5% LTV. You have $120,000 left in equity. It’s this equity that you may be able to use to get out of credit card debt.
Once you know you have equity, you can apply for a cash-out refinance or a home equity loan. Either way, the lender will determine if you qualify for the loan based on your income, assets, credit score, and home value. Make sure you let the lender know you’ll wrap the credit card debt into the loan. This can help your debt ratio. The lender can remove the credit card payments from your debt ratio calculations. However, if your approval is dependent on you not having credit card payments, the lender will pay your credit cards for you at the closing.
Just as is the case with the snowball effect method, you must be financially responsible after the refinance. It doesn’t help to run out and use your credit cards again. You must put them away and forget they exist. If you can’t trust yourself not to use them, closing the accounts may be the best thing for you. This might cause your credit score to dip slightly, but it will bounce back when you make your mortgage payments on time.
Before you implement any credit card debt strategies, take a long, hard look at yourself. Determine if you can handle avoiding the use of your credit cards. Paying them off doesn’t mean you have a clean slate and can use the cards again. Instead, it’s like a second chance at financial freedom. If you can’t avoid using them, consider getting support. You can obtain credit counseling or just partner up with a friend or relative. The point is you need accountability. If you have someone to answer to, you might hesitate before using those credit cards again.
No matter the method, when you choose to get out of credit card debt, make sure it works for you. Don’t assume the snowball effect will work. You have to put the work into it. The same is true for a refinance. Just paying off your credit cards isn’t enough. You need to be mentally tough to avoid using them. adopt the strategy, if you can’t afford it now, don’t buy it. Once you get that in your head, hopefully you can stay out of credit card debt once and for all.