Financially successful people find ways to get out of credit card debt. However, staying out of credit card debt is more challenging than ever. Many merchants no longer take cash making the cash envelope system difficult to implement. We use credit cards for everything: checking out in online shopping carts, tapping at grocery stores, and swiping at restaurants.
It’s no wonder that the average credit card balance is over $10,800 per household as of August 2024, according to a WalletHub credit card debt survey. With fees and new charges, your balance continues to grow unless you pay off the whole thing each month. At an average annual percentage rate of 22.7%, charges can add up.
Paying off your credit card balance every month is ideal for improving retirement readiness. This way, you can enjoy the convenience and benefits of a credit card without the high-interest rate charges.
Here are 11 ideas to pay off your credit card balances and keep them at zero:
Borrow for wealth building, not for consumer spending.
To grow your wealth, use debt as leverage for wealth building, such as buying a home, and reduce borrowing money for consumer spending. Many people need to build car and student loan payments into their budgets, but credit card debt for consumer spending is a drag on wealth building.
Take action: Increase the percentage of your cash flow earmarked for building wealth, such as investing in growth assets for your future.
Review your monthly credit card statement and cancel unused subscriptions.
Start with an easy win. Do you have automatic subscriptions or charges on your credit cards for items you don’t use? We all do. My husband and I just let our Netflix subscription lapse since we don’t use it often.
Take action: Review your recent credit card statements for recurring charges on services you don’t use and cancel them.
Reduce credit card use.
Reduce or eliminate new transactions while you develop a plan to pay off your credit cards. Try alternatives such as cash for merchants that offer this option. Purchase prepaid debit or gift cards instead of paying with credit cards for entertainment and shopping.
These options may take longer to set up, but the benefit of being unable to spend more than you’ve loaded on the cards may be worth it.
Take action: Choose and set up an alternate payment for your online shopping such as PayPal, Apple Pay, or a prepaid debit card. Track your spending and only spend based on your budget allocation.
Analyze your spending trends.
Review your recent credit card transactions through the lens of your spending. In what category is the bulk of your spending? If your goal is to get out of debt, curb any unnecessary and unimportant expenditures in the future, such as entertainment, shopping, or technology.
Take action: Make it more challenging to spend online. Add an extra step by removing your credit card information from gaming, shopping, or other apps where you tend to overspend.
Calculate your total liability balances.
Build a list of your liabilities. Review all of your debts, including your mortgage, car payments, student loans, and credit card debt either on a spreadsheet or simply in a notebook. Use categories such as your lender, balance, payment and interest rate.
Take action: The first step to getting out of debt is awareness. Take an inventory of your liabilities.
Implement a debt reduction method.
If you have multiple high-interest rate credit card balances, implement the debt avalanche or the snowball method to pay off your debts as effectively and efficiently as possible.
Take action: A debt elimination strategy must include curbing new purchases each month. Either stop using credit cards completely or limit purchases to those you can pay off each month.
Craft a realistic budget.
To stay debt-free, you need to manage your cash flow. Create a realistic spending plan for your expenses, including your financial goals. Either track your spending with a physical system like from The Budget Mom, a budgeting app from your bank, or an online app such as YNAB (You Need a Budget.)
Take action: Set up a cash management tracking system and review your spending compared to your targeted budget categories at least once a week. Make adjustments as you go.
Find extra money to pay down credit card debt.
After analyzing your spending, cut back on at least one non-essential category. Many people can reduce spending on entertainment, sporting equipment, shopping, and restaurants. Pick up a side gig if there is no room in your budget. Then, use these funds to make extra payments on your credit card debt.
Take action: Use a Debt Free Date calculator, such as Dave Ramsey’s Snowball calculator, to determine the extra amount you’d need to pay on your credit cards to pay off debts by your target date.
Set up an account for expected but irregular expenses.
Certain expenses, such as birthday celebration, holiday presents, and car maintenance don’t occur monthly, but are anticipated at some point annually. Estimate those expenses, divide by 12, and add them as a category into your monthly budget.
Take action: To avoid tapping your emergency fund for regular expenses, set up a savings account for irregular expenses and name it a sinking fund. Fund this account monthly and transfer funds to your checking account as needed.
Build your emergency fund and debt payment plan simultaneously.
Your emergency fund and your debt payment plan work together. When an unexpected expense hits and there are no funds to tap, your credit card is the only answer. To get and stay out of debt, you need a slush fund.
In real life, funding both goals is a balancing act. In the short term, it seems like you should pay off high-interest credit card debt first, since savings accounts pay very little interest. In practice, a savings account helps you stay out of debt so it’s essential to have both.
Take action: Set up an automatic transfer from your checking to a monthly savings account for an amount you can easily manage. Simultaneously, build up your savings and pay off debt.
Align your money and your values.
We often waste money on goods and services that don’t bring us value. Determine where you and your family want to earmark funds and splurge there. Be parsimonious in other areas.
Take action: Look through your budget and find the areas where you don’t want to cut spending and where you find great value, such as family trips. Look to drastically cut in other areas, such as takeout food.
There are four primary levers to achieving financial independence: lifestyle spending, income streams, investment growth, and taxation. No matter your net worth, managing your lifestyle spending is a big part of your financial plan. If you can manage your cash flow to get out and stay out of credit card debt, you are well on your way to financial independence.
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