At the beginning of 2020, my overall credit card debt was $29,722.42! My credit card debt was spread across 12 credit cards ranging from premium cards like Amex Platinum to retail cards from Amazon and JCrew. As of the date of publishing this post, my credit card balance is $0. I am immensely proud of myself and I wanted to share my journey with my blog readers. The goal of this post is not just to inspire but to also provide some practical steps that can help you pay off your credit card debt.
A little background story
There is no excuse for my excessive credit card debt, I used credit cards because 1. I was a poor law student and 2. they’re convenient. In addition, I never fully established a credit card use policy because I never really fully considered the impact that my credit card usage had on my finances. However, at the end of 2019, I had an “oh-shit” moment. My oh-shit moment occurred when I needed money to pay my divorce attorney and I realized that I did not have enough money in my savings account.
In order to pay the retainer fee of $5,000, I had to borrow from my brokerage account. It’s embarrassing to know that I did not have $5,000 in available cash. Yes, I have a 401k and a brokerage account but I did not have an emergency account or any cash savings at all. This made me realize that I was not making financially sound decisions. So, I decided then and there that I needed to: 1. reduce my monthly expenses, 2. get rid of my high credit card debt, and 3. establish an emergency fund. In 2020, I was able to accomplish two of those goals: I reduced my monthly expenses (read this blog post) and I paid off my credit card debt.
In order to pay off $30,000 in credit card debt, I followed a very simple three-step process. I did not hire a financial planner, accountant, or credit card/credit score guru. I simply had some honest conversations with myself and took a deep dive into my finances. The three steps that helped me pay off $30,000 in credit card debt are as follows:
Step 1: A mindset shift
The first step in my plan was a complete mindset shift. In order to pay off my credit card debt, I needed to fully change the way that I viewed my credit cards and credit card debt in general. My mindset shift resulted in my understanding a few important lessons:
- Your checking account should be your default option: Your credit card balance is an available line of credit. It’s credit, high-interest credit. Like other types of credit (e.g. a traditional bank loan), you need to pay it back. However, the money in your checking account belongs to you, you don’t owe anyone for that money. When making a purchase or payment, your default choice should be your checking account, it’s your money and you never have to pay high interest in order to use that money. Use your money!
- Stop using your credit cards: It’s very difficult to pay off your credit card balances while still actively using them. You’re going to be running in circles if you attempt to pay off your credit cards and use them at the same time. Stop using your credit cards!
- Don’t buy what you can’t afford: As a rule of thumb, if you need to use your credit card to make a purchase, that more than likely means that you can’t afford it. If you could afford it, then you would use the cash in your checking account. No amount of cashback points and travel miles justifies using your credit card like it’s money in your bank account because it’s not. Live within your means!
Step 2: Increase your disposable income
I needed to increase my monthly credit card payments. In order to do this, I needed more disposable income. Unfortunately, I do not have a side hustle and I don’t have the time to create a new income stream. So, I had to figure out how to increase my disposable income without having a new source of income. In order to do this, I did two things:
- Reduced my monthly expenses: In 2020, I reduced my monthly expenses by undertaking a series of small (and not so small steps) like moving to a smaller apartment, terminating my cable service, and changing my phone plan. You can read more about what I did in this blog post.
- No contribution to my 401k: Prior to 2020, I maxed out my 401k every year by making monthly payments of roughly $1,500 to my 401k plan (pre-tax). Retirement savings are extremely important and I 100% believe that everyone should max out their 401k. However, in my case, the best long term decision for me was to forego one year of retirement savings in order to reduce my high credit card balances. My high-interest credit cards were keeping me from savings. Therefore, for me, paying off my credit cards was more important than my retirement savings (at the moment). Now that I’ve paid off my credit cards, I intend to continue to max out my 401k every year until I retire. In the end, I believe that I made the right decision for me: missing out on 1 year of returns in my 401k account was worth paying off my high-interest credit card balances.
Step 3: Create a Repayment Budget/Plan
I have always tracked my credit card balances using an excel spreadsheet. I created a simple spreadsheet that tracked the beginning and ending balances, minimum payment, payment due date, etc. However, when I decided to pay off all my credit card debt, I added some additional details to the spreadsheet that proved to be exceptionally helpful:
- Annual Percentage Rates: I added the annual percentage rate (“APR“) for each card. Your APR is the price you pay to borrow money on your credit card, it’s similar to the interest rate on a traditional bank loan. Adding the APR to my spreadsheet helped me visualize the cost I was incurring by carrying so much credit card debt. The APR on my cards ranged from 20.24% to 27.49% (which is a lot). Let’s do the math. In August 2020, one of my cards had an APR of 22.99% and a balance of $4,541.55. With an APR of 22.99%, I was paying roughly 1.92% in monthly interest or roughly $87 per month. With my 12 different credit cards, I was paying upwards of $1,200 in interest each month. Adding the APRs to my spreadsheet allowed me to see the extent of my indebtedness; it also allowed me to prioritize. I decided that it was prudent to focus on paying off the credit cards with the highest APRs first. For more information on APRs, read this post.
- Monthly Targets: I added monthly targets to my spreadsheet. I knew that I wanted to pay off my debt over 12 months; therefore, at the beginning of 2020, I divided the balance on each card by 12. For e.g. using the card above as an example, I divided $4,541.55 by 12 which equals $378.46. So in January 2020, I paid $378.46 on that card. In February, I divided the new balance by 11 and I paid that amount; in March, I divided the beginning balance by 10 and paid that amount. This isn’t perfect math, but it allowed me to stay on track to pay off my debt in 12 months. At the minimum, I always paid the monthly amount that would get me closer to a $0 balance by December.
After being stressed out for the past few years, I cried tears of joy when I paid off my debt in December. One of my financial goals for 2021 is to build an emergency fund. Given the discipline that I displayed in 2020, I am sure that I can achieve my 2021 goal. All it takes is discipline and a plan!!
Let me know if this blog post was helpful. Also, I’m more than happy to share my excel repayment spreadsheet if you’re interested, just let me know.
Caveat: Although all of the factors above were instrumental in helping me pay off my credit card debt, working from home and student loan forbearance also helped significantly.
Arthur McKarley
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