Are you ready to tackle credit card debt? It can seem so overwhelming when you’re just trying to get through the month, particularly if you’re spending a good portion of your time (and income) working and managing a household, but it’s important to take a step back and consider your options. Learning how to be debt free from your credit card debt can be a major reset for your finances, giving you more financial options and long-term visibility.
If this is the year you plan to become debt-free, you can begin by reading about these useful and effective methods to eliminate credit card debt and better manage your finances going forward.
Make more than minimum payments
If you are only dealing with a couple thousand in debt, you should be able to handle it on your own by making more than just the minimum payments. When you’re only making minimum payments, you’re mostly paying off interest rather than what you actually owe (your principal debt), which means you’ll end up paying much more in the long run. Putting extra cash toward your accounts at the end of the month can help you get out of debt a lot faster.
Two effective do-it-yourself ways to eliminate debt are the avalanche and snowball methods:
How to be debt free using the avalanche method
If you’re dealing with one or two accounts with high interest rates, the avalanche method might work for you. With this method, you target the account with the highest interest rate first while making the same minimum payments on your other accounts. After paying off the highest interest account, simply move on to the account with the next highest rate. Using this method, you could save more on interest and get out of debt faster.
How to be debt free using the snowball method
If you have multiple credit card accounts with similar interest rates, the snowball method may be your best option. With this method, you’ll focus on paying off the smallest individual accounts first, then work your way up. After eliminating the account with the lowest debt, move on to the next and repeat the process. This way, you’ll end up with fewer accounts to worry about.
Even if you’re dealing with several thousand in debt, the avalanche and snowball methods may benefit you—as long as you have enough income to make a dent in your debt.
Consolidate your debt with a loan
Rolling all of your debt into a consolidation loan could enable you to pay off your outstanding debt, save on interest, and simplify your payment schedule. You’ll still have debt, but it could be at a lower interest rate and with a specific end date, which could help you budget more effectively. However, in order to get a favorable rate, you need a good credit score.
Debt consolidation is effective if you’re dealing with $5,000 or more in debt and you’re approved for a loan. But if you can’t qualify, or can’t get a better interest rate than you’re already paying on your debt, you may want to seek professional help with your debt.
It is even possible to get a consolidation loan if you have bad credit, but you may need to be more strategic and spend more time searching for the right lender. Remember, learning how to be debt free means understanding your various options.
Enroll in a debt management program
A debt management program could be a good option for you if your high interest rates are stopping you from paying off your debt. Debt management programs are offered through credit counseling agencies. The purpose of these programs are to help you get out of debt at a lower interest rate, while credit counselors help educate you on maintaining better financial health.
When you enroll in a debt management program, the credit counseling agency you work with will set you up with an account that you deposit money into each month. Then, the agency uses the money you save into this fund to pay your creditors on your behalf at a lower, pre-negotiated rate. To help you manage your money better, credit counselors could also work with you to develop a personal financial plan and budget based on your current situation.
How to be debt free by settling your debt
If you’re strapped with $10,000 or more in debt, debt settlement could help you get out of debt faster. With debt settlement, a company you hire negotiates with your creditors to accept a reduced payment on your debt and forgive the rest. This could end up saving you hundreds or even thousands on your debt. However, debt settlement often lowers your credit score (at least temporarily), while you may receive calls from debt collection agencies or even threats of lawsuits from creditors.
The way it works is that you stop paying your monthly payments to creditors and instead contribute money to a dedicated savings account. Once you’ve saved enough money in this account, you (or a company working on your behalf) negotiates with your creditor(s) for an amount that’s lower than your total debt load. Once the negotiated amount is paid, your debt is considered resolved.
Settling on your own can be a difficult and time-consuming process, but working with a debt settlement company can provide some major advantages. First of all, professional debt settlers know just how low creditors are willing to go and have a better idea of how the process works.
The importance of staying debt free
Once you’ve cleared your debt load, it may be tempting to go out and reward yourself with a few big purchases; but that would be a mistake. After you learn how to be debt free, it’s important to maintain your financial health by developing some new habits. The most important first step is to create a household budget and track your spending.
There are many ways to make a budget, but the basic idea is to determine your average monthly income, total up your average monthly expenditures, and make any necessary adjustments to ensure that you don’t go over budget. Your income is the “top line” in a budget, your necessary expenses (rent/mortgage, groceries, utilities, etc.) is your “bottom line,” and any space in-between those two lines is either disposable income or money that can be put into savings or toward a retirement account.
A properly conceived budget will give you visibility into your finances and help guide you toward making smart, healthy choices with your money. Using your budget, you can find ways to change your spending habits or, if feasible, increase your income.
Take the first step toward financial freedom
Learning how to deal with debt, money, and planning for your future doesn’t need to be hard. If you’re learning how to be debt free, then you’re taking that important first step. At Freedom Debt Relief, we’ve developed a simple-to-follow guide to help you find the tools you need to realize a brighter financial future. Get started today by downloading our free guide.
- What is a Balance Transfer? (Freedom Debt Relief)
- U.S. Credit Card Debt Hits All-Time High, and Overdue Payments Rise for Young People (NPR)
- Americans are rapidly shrinking their credit card debtduring the pandemic (CNN)
- Which Debts Should You Pay Off First? (Freedom Debt Relief)