Crushing Credit Card Debt
How I was able to eliminate my credit card debt.
Introduction
I HATE credit card debt. Coming out of college, I had thousands of dollars of credit card debt and a job that wasn’t paying all that great for the time. It was a drag on me to achieve any of my financial goals, and it was something I had to focus hard on to get under control.
In my first Substack post, I noted that there were five things that I found to be very important before I started investing in non-retirement accounts. They were:
Contributing to an employer’s 401K plan
Getting rid of debt
Cutting spending
Creating an emergency fund
Creating an IRA account
I covered details of contributing to an employer’s 401K plan on Monday, which you can read here. In this newsletter, I’ll discuss popular strategies to eliminate credit card debt and the strategy I used which I personally find to be the best.
In the coming days and weeks, I’ll go over the other steps above, as well as provide a first-hand look at how I'm investing today. This is not financial advice, just myself sharing my investments, stocks, index fund strategies, what I'm buying, and where I plan to take those investments.
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Strategies to get rid of credit card debt
There are two popular methods to eliminate credit card debt: 1) The Snowball method and 2) The Avalanche method. Then there was the strategy I used, which was consolidating my debt into one low-interest account and then paying that off within a certain amount of time.
The Snowball method
This is a strategy recommended by many financial advisors, including radio personality Dave Ramsey. What you do is list all of your debts except for your mortgage and order them from smallest to largest - regardless of the interest rate. So if you have a $500 balance on a credit card with a 15% interest rate, you pay that before a credit card with a $6,000 with a 20% interest rate. You aggressively attack the smallest debt while paying minimum payments on everything else. Once the smallest debt is paid off, you take that payment and put it toward the second-smallest debt, making minimum payments on the rest.
The idea with this method is that the faster victories by knocking out the smallest balances first gives a morale boost since you’re seeing quicker results. This is great for people who are more likely to stay committed to eliminating their debts with these victories. The major con with this method is that it could cost more, as you could be paying much more interest by paying off a small balance with a lower interest rate while keeping a larger balance with a higher rate.
You can get more details on the Snowball method here at Banktivity.
The Avalanche method
The major difference between the Avalanche method and the Snowball method is that you pay off the debt with the highest interest rate first, instead of the lowest balance as with the Snowball method. So you list all of your debts except for your mortgage and order them by the interest rate from largest to smallest. You then aggressively tackle the debt with the highest interest rate while paying minimum payments on everything else. Once that is paid off, you aggressively attack the debt with the next highest interest rate.
For people that can stay motivated at tackling debt, I feel that this is a better option than the Snowball method because you save money by working on debt with the highest interest rate first. However, if you have a credit card with a $20,000 balance with a 19% interest rate and another with a $500 balance with a 17% interest rate, then it might be better to just wipe that $500 debt out quickly before tackling the larger balance. You can read more about the Avalanche method at Mint at this link.
What I did (Consolidating debt)
With my credit card debt out of college, I ended up signing up for a new credit card that offered a 0% interest rate for one year on balance transfers (you’ll see these offers in the mail from time to time). Each balance transfer still cost 3%, but it was much better than the interest rates I was paying. I then left that credit card alone and set up automatic payments to have that paid off in 10 months, so I had two months to spare with the one year deadline. During that time I just used debit cards, cash and checks for all my expenses so I didn’t accrue any new debt.
The drawback to what I did is that if you can’t pay off the balance in one year, then the interest rate shoots up from 0% to the regular interest rate (which for the card I was using, I believe was around 20-25%).
So if you couldn’t realistically pay off the debt in one year (or whatever the timeframe being offered is), another option would be to get a personal loan with an interest rate that is lower than your debt. For instance, SoFi is offering loans for as low as 8.99% APR (you can get details and find your rate / apply here) * once you’ve applied all discounts. Then set up a monthly payment plan to pay it all off and don’t accrue and more debt. Using this link, you can find out what you’re rate is in under a minute and decide if this is the best way to go.
* Disclaimer: This is a referral link where if you were to sign up and get approved, you would receive a $300 bonus while I would receive a commission as well.
Conclusion
Please let me know your thoughts on first newsletter and submit any feedback. You can follow me on Twitter at @TheRajGiri or on Threads at @RealRajGiri . If you haven’t already, please subscribe below: