Have you ever struggled with paying off credit card debt?
If so you are not alone!
There’s a reason it’s difficult to pay off, because of the way interest is charged.
Let’s first discuss how the interest is compounded. If you hate math, don’t sweat it, you can skim through this section! This is pretty basic stuff (but an important financial concept to understand).
How credit card interest is compounded
Usually interest is compounded daily. This means if you have an interest rate on your credit card of 18% APR (annual percentage rate), you would have to take 18% and divide that by 365 (days in a year) to get the amount of interest charged per day. The reason we do this is because APR is shown in a yearly rate.
Fun fact: Interest rates are almost always shown as a yearly percentage rate.
To help you understand, let’s break this down even further to see how much interest per day you are charged.
On the calculator: .18/365=.000049 per day
When doing these calculations, I tend to use monthly compounding because there isn’t much difference between daily and monthly compounding calculations.
On the calculator: .18/12= .015 per month
Whatever your outstanding balance is will be used as the base calculation for the amount of interest charged. Your average daily balance is generally what the interest calculation works off of, but for simplicity sake let’s say your average daily balance is $10,000. So if you carry a balance of $10,000 on your credit card, you would be charged:
$10,000 (average balance) x .015 = $150 interest
What that means for you
If you have a minimum payment of $150 and you make your payment, your credit card balance is directly reduce $150.
$10,000- $150 = $9,850 –> you now owe
But wait! Not so fast! Remember you have interest to pay.
Interest calculation would be:
$9,850 x (18%/12 months) = $147.75
So now your balance turns into:
$9,850 + 147.75 = $9,997.75
In summary: From making the minimum payment you have officially paid down $2.25.
That means if you are making the minimum payments, it is taking you much much longer than it should to pay off your debt. You have got to pay more than the minimum to see results.
Here’s how to
Pay it off fast
Okay, so you want to pay off our credit card debt fast right?
Here’s the process that will get you results.
Cut up your credit card
This is critical to getting rid of the debt. You cannot dig your way out of a hole if you are don’t stop digging. So pull out the scissors, line up the cards, grab a glass of wine and snip those babies up! This is a temporary action step. (I actually do not have a credit card to this day. I think they are a bigger pain than they are worth.)
If you can’t handle life without a credit card….and you can, I promise….then you can always call your credit card company and have them send you another card. Easy peasy!
Pay more than the minimum
Duh, right? After all that discussion on how interest is calculated I hope you see the importance of paying more than the minimum. Ideally, you would pay significantly more ($100-$200 extra per month).
You’ve got to sacrifice
If you want abnormal results, you have to do abnormal things. There is absolutely, positively, no way you will get kick ass results without making sacrifices. What is being debt free worth to you? For me, it was not buying coffee, not going out to eat, meal prepping every Sunday, working two jobs (70-80 hours a week) and saying no to social outings and vacations. It definitely wasn’t fun, but neither is being in debt.
What are three things you are willing to sacrifice to get results? Write those down.
Do not seek quick pay-off strategies like balance transfers, refinancing, etc .
Just go to work and pay off your debt. There isn’t a balance transfer, or refinancing stragegy that will save your butt quite like going to work. It’s a simple concept but a critical one! If you want to get out of debt, the best place to go is to work.
NOTE: Of course, in some cases these options can be beneficial, but from my experience coaching people motivated to get out of debt, they typically pay off that credit card debt before they have time to recoup the refinance fees/balance transfer fees.
The big elephant in the room
This is one of the most common questions I get asked. “But, Whitney, how do I fix my credit score? Don’t I need my credit cards to build my score up?”
It’s a great question! Let me explain a couple concepts for a second.
Your credit score is 100% based on borrowing money.
Plain and simple. Paying off your debt will not hurt your credit score. In fact, the strategy I always recommend is not worrying about your credit score. (Shocking, I know.)
Our society has it all wrong.
We teach people they need to build their credit so they can get a house, a car, and even in some cases a job.
We’ve got it backwards.
We should be teaching people to live on a budget, save money, and get so damn good at managing money that if we chose to introduce a credit card, it’s not a big deal at all.
Focus on cleaning up your debt, living on a budget, and then once you prove to yourself (12 months straight of being a rock star with your money), then you can reintroduce a credit card.
Your credit score is not an indicator of financial success. Your net worth is.
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So what does this mean?
I strongly believe that if you have poor credit, the best thing for you to do is clean up your credit report first. If you have many accounts that were sent to collections, this could haunt you for a very long time.
Not sure if you have any negative remarks on your credit?
You can pull your free credit report at: annualcreditreport.com
Do not pay for your credit score. Your score isn’t the important part right now. Your credit report is.
Your credit report will show you a few different things. The length of time you’ve had an account open, your credit limit, the amount owed, if you paid any payments late, and if the account was sent to collections.
Again, be more concerned about your credit report than your score at this point.
What to do
Credit card debt sucks. If you’re reading this, you likely already know this.
Follow these steps to really help you start paying off credit card debt:
Step 1: Get clear on how much you actually owe.
Step 2: Review how credit cards charge interest. (the first section of this post)
Step 3: Pay much more than the minimum.
Step 4: Download my 3 tips to paying off credit cards once and for all by clicking the button below.
You have what it takes to achieve amazing thing with your financial life. Don’t let credit card debt hold you back anymore.
Download the cheat sheet and start paying off your credit card debt today.
Forever livin’ debt free,