Getting Out of Credit Card Debt
The Henssler Financial Group Position Paper

Did you know the average consumer has about $8,000 in credit card debt? Regardless of the amount, credit card debt is usually the worst type of debt to have, as interest rates on cards can be as high as 28% and there are no tax benefits. If you or someone you know has any kind of credit card debt, this article offers a plan of action to take those balances to zero. This plan is fairly simple, but will take time and discipline.

While there are other ways to alleviate credit card debt, such as getting a second job or a home equity line of credit, the plan outlined below is simple because it redirects the funds you are already using to pay off your credit cards. That being said, if your income increases, the process can be sped up allowing you to get out of debt faster.

Step One: Stop Using Your Credit Cards

The first step is to stop using your credit cards by removing credit cards as an option in your daily routine. The easiest way to do this is to remove them from the your wallet, put them somewhere safe and forget about them.

Step Two: Open an Emergency Account

The second and most important step is to establish an emergency account so that if something happens and you need cash you can use this money rather than your credit cards. During an emergency, this account will help prevent adding additional debt to your credit cards. In general, you should try to save at least $1,000 in a money market account for any emergencies.

Step Three: List Out Your Credit Card Debt

Once steps one and two are complete, put pen to paper and write out the balances and the payment minimums for each credit card. Rank these from the highest balance to lowest balance. While having your debt listed out can be overwhelming, you are now ready for step four where you will begin to see your progress.

Step Four: Paying Off Your Credit Cards

Looking at your list, pay the minimum payment on all the cards EXCEPT the one with the lowest balance. Instead of spreading the amount you have monthly to make payments, concentrate any leftover funds after minimum payments on one card.

For example, let's assume Mr. Debt has four credit cards and only $300 per month to spend on payments. Below is a list of his latest monthly statements and the payments he should make.

Using the above strategy, Mr. Debt pays the minimum balance on all of his credit cards EXCEPT the department store credit card with the lowest balance. On that credit card, Mr. Debt will pay as much as he can with each payment until it is paid off.

Now, you may wonder why you would pay on the lowest balance credit card first. The answer is as simple: positive reinforcement. People who try to pull themselves out of credit card debt usually want to see results fast. In the case of Mr. Debt, if he does not see something good happening within a short period of time, his chances of quitting before he is completely out of debt are greatly increased.

Lack of results could make Mr. Debt feel helpless, like he is destined to be in debt. However, if Mr. Debt rearranges his payments and pays his department store credit card off first, he will see positive results quicker. Seeing that credit card go from a $500 balance to zero in a relatively short amount of time can reinforce Mr. Debt's desire to pay off the rest of his credit card balances.

Step Five: Roll Payments Over to the Next Credit Card

Once you have the first credit card paid off, move the funds you were allocating to the first card to the next lowest balance card. Repeat this cycle until all of your credit cards are paid off.

Using the above example, Mr. Debt would move the $130 he was paying on his department store credit card to his Mastercard. This amount coupled with the $20 minimum payment he was already paying will allow him to submit a $150 payment to Mastercard each month. Once his Mastercard is paid off, Mr. Debt would take that $150 and apply it to the next lowest balance — his Discover card. He would continue this process until all his credit cards were paid off.

Bottom Line

This is only one way to approach getting out of credit card debt that does not involve other sources of income. There are other ways to get out of credit card debt that you may want to consider, such as transferring balances to a credit card with a lower interest rate or paying off the credit card with the highest interest rate first. Another option would be to take out a home equity line of credit and pay off your credit cards. In this situation, your credit card debt will be alleviated and you will be able to write off the interest while making payments to your home equity line of credit.

At The Henssler Financial Group we stress that everyone should create and live by a feasible budget. We believe that in order to accomplish anything, whether it is monetary or otherwise, you must not only establish a plan of action but you must stick with it as well. A budget is the perfect way to control and monitor your expenses. Following a budget will also make using credit cards for funds you do not have very unlikely — thus reducing the likelihood that you will find yourself in credit card debt again. For more information on creating a budget, refer to our financial tutorial All About Budgets.