How to Pay Off Credit Card Debt & Avoid Overspending

Melissa Davidson  | 

Unlike mortgages and student loans, consumer debt is not necessarily an “investment” type of purchase.

Consumer debt is the type of debt that can easily get out of hand, because it’s debt incurred by using credit cards to go shopping or purchasing things that don’t always appreciate over time, such as a car.

When it comes to debt, you’re not alone. According to Federal Reserve 2017 Q1 report, the total amount of money owed by the average U.S. household looks like this:

Credit cards = $16,425

Auto loans = $29,058

Mortgages = $180,018

Student loans = $50,868

Although credit card debt is lower than the other sources of debt listed, it often has the highest interest and is harder to tackle, because there’s no interest write-off on taxes and isn’t necessarily associated with investments.

The good news is even if you’re spending slightly beyond your means, you can turn it around. How can you do it? Below are five ideas to help move you toward debt elimination and financial freedom.

1. Pay Off Your Credit Cards:

This may seem like a daunting task, but with a few simple steps, you can make a huge dent in your credit card debt.

Sort by interest – The card with the highest interest rate is costing you the most money and maybe taking you the longest to pay off, so tackle it first. Then move down the line to the card with the next highest interest rate.

Request a lower interest rate – Yes, you can negotiate rates with your credit card company! All it takes is a phone call to each credit card company and requesting they lower your interest rate. If you’re in good standing with the company and have been offered lower rates from the competition, be sure to mention it to customer service. Lower interest rates means lower monthly payments and you’re that much closer to paying off the principal.

Balance transfer – If you have racked up debt on one of your high-interest rate credit cards, consider transferring the balance to a different credit card company offering a lower interest rate (some even go as low as 0 percent). This can be a good way to cut debt and pay off the new balance faster. Plus, you save on high interest charges. Just watch out for balance transfer fees, as many cards will charge a one-time fee before letting you make a balance transfer.

Pay more than the monthly minimum – It could take decades just to pay off a single credit card if you only make the minimum payment. This minimum is designed to extract interest from you, not to help you keep your bills under control. Paying above the minimum — or better yet, the full outstanding balance — each month keeps you from losing money in interest to the credit card companies.

“As an example, my wife and I recently had a credit card balance of $5,167 following a family vacation,” says Rob Berger in Forbes. “The minimum payment due was just $51 a month. By making the minimum payment, it would take us until 2035 and cost us over $11,000 to pay off this card.”

If his family paid the minimum monthly payments, which is 1 percent of the total owed, it would take nine years. If his family paid 3.5 percent of the total every money, or $183, it would take three years to pay off. They would end up owing $6,572 in interest alone.

Judiciously use your cards – Pay cash when you can. And if you can’t afford something, don’t buy it until you can. Simple enough?

Have you ever noticed that when you carry cash you tend to be more conservative with spending it than you do with cards? With credit and debit cards it’s easier to look at them more abstractly and ignore the sums of what’s actually being spent.

2. Layaway:

Layaway is a method of purchasing retail merchandise that allows shoppers to reserve an item and make payments on it until it is paid in full. Unlike most installment plans, you get the product after you make the final payment, rather than when you begin making payments. This way there is effectively no debt involved, so there is normally no interest or risk of repossession. It’s a great option if you want to take advantage of sales and avoid credit card usage.

Layaway is also something that has fallen off people’s radars over the years, especially during the freewheeling decades of the 1980s and ‘90s. However, the financial crisis of 2008 started a resurgence of layaway as a debt-free shopping tactic.

The point is, if you can’t afford something, why buy it? Layaway is like a defined savings plan, rather than using consumer debt to buy merchandise. It makes more sense to pay as you go instead of putting an item on a credit card and paying interest on something you could have just paid cash for with a little patience.

Good lessons in layaway plans: You realize why it’s important to budget, save, and make on-time payments for Christmas and birthday presents or back-to-school clothes, for example.

3. Make a Budget

Do you know what you spend in a month and where you could trim? Making a detailed list or spreadsheet of where the money goes will help. Maybe you need to eat out less, get a less expensive car, use less air conditioning, stop going to the local coffee shop every day, or buy fewer new clothes, etc. Any extra money can be used to pay off a high interest rate credit card at a faster rate.

If you need more help in understanding where all your money goes while reducing unwanted spending and saving for future goals, you can see all of your accounts in one place with online money management tools such as Buxfer, a leading expert on organizing personal finance information.

Compare your income to expense ratio and set aside the amount you are able to put toward the credit cards every month. It adds up, even if you’re living paycheck to paycheck.

Buxfer is a handy tool that creates custom reports showing your spending habits and even financial forecasts, which would work well in conjunction with applying for a loan or even just getting some Christmas presents on layaway before the season lands on you.

If you take a hard look at your finances, what are your priorities and what is at the bottom of the list? Decide if you wants those things or if you want more financial stability. A “strategic spending plan” is when your expenses are lower than your income.

4. Build an Emergency Fund

While paying your debt off before anything else makes sense because you’re cutting interest payments, it doesn’t help you prepare for unexpected expenses. Setting aside a certain amount in savings might give you some comfort, and buffer against the unpredictable. An amount as low as $500 can help protect you from financial shocks, so you don’t add more debt when an unexpected expense hits.

It may seem impossible to save money, especially if you’re living paycheck to paycheck, but there are good reasons to save first before, or even while, paying off debt. An emergency fund could come in handy in case you need to make home or car repairs, for example.

There will always be sudden, urgent costs in life. Not having at least a modest emergency savings pot can put you into a cycle of debt, borrowing and missed payments,

Experts recommend trying to save three to six months’ worth of expenses and putting it in a savings account. Compare savings accounts to find one that pays better, such as a money market account.

5. Freelance to Earn Extra Money

Either you have to alter the way you live, or you need to earn more money, or both.

Do you have a skill or talent that could make you extra cash every month? You could rent out space in your house through AirBnB, become a freelance writer, drive for Uber, sell valuables on Ebay, sell your hair (or your plasma), or even open an online store like Etsy. Thanks to modern technology, it has never been easier to become a small business owner or side-hustle some extra income.

Retirement might have to wait a few years while you get out of debt. Biting off bite-size chunks of debt will make your life less stressful. When you watch the debt dwindle, you’ll be more motivated to just get it done once and for all. Don’t put it off anymore.

Everyone at some point in their lives carries consumer debt such as credit cards, student loans and a mortgage. By finding ways to pay off debt, you’ll be happier in the long run.

Looking for more ways to use a credit card without adding to your debt? Visit our credit card resource and learning center for more tips and guides.

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This post was updated February 28, 2019. It was originally published August 24, 2017.