How to Pay Off Credit Card Debt (And Use Credit Cards Responsibly)


Credit Card Debt Reduction Strategies


Today, I have a guest post from Bob Haegele, creator of the blog The Frugal Fellow, on how to get out of credit card debt.  This is important because credit card debt can become your worst enemy.  For me, it was one of the reasons I ended up in the not so secret group Broke Phi Broke.  

Take it away, Bob!


Credit cards are a huge part of the economy in the US. According to NerdWallet, the total credit card debt in the US was $944 billion at the end of 2018. That is a huge amount, with the average household having $6,929, according to the same article.

Considering that the average household doesn’t even make that much in a month, that is a huge economic burden. And while the credit card companies may be doing well, other parts of the economy are strained as a result.

So, what can we do about it?


Stop Opening New Cards

This should be step #1 if you are struggling to repay your credit cards. Never open a new credit card as a way to spend money you don’t have. If you are maxing out the cards you do have, you need to start paying those cards down first.

If you continue to open new credit cards, this could really hurt your credit score. In addition to the derogatory marks you are probably already getting, each new card will result in a hard inquiry into your credit history.

A hard inquiry can be expected any time you open a new credit card, but you also see them when signing a lease on an apartment, buying a new car, and several other major purchases.

And, of course, if you are opening new cards due to maxing out existing ones, that means your credit utilization rate is also going to be quite high. This is actually an even more important factor than your number of hard inquiries since it shows your tendency to pay down existing credit card debt.

Unfortunately, all these factors could be a big enough red flag to cause you to be denied for financing on any of those major purchases.


What You Can Do Instead


If you are opening more credit cards because you are struggling to make ends meet, the best thing I can recommend is some combination of reducing your expenses and increasing your income. For most people, the biggest three expenses are housing, transportation, and food. If there is any way you can reduce those expenses, you should start there.

Is it possible for you to move into a place that costs less per month? In terms of transportation, if you are buying new cars often, I would recommend sticking to used cars, which cost much less. And if you are dining out frequently, you can make home-cooked meals that are cheaper (and probably healthier, too).

In terms of income, is it possible for you to ask for a raise at work? If not, you can try getting a second job or picking up a side hustle. Thanks to the internet, it is easier than ever to find a side hustle.


Start a Budget

Another thing you should absolutely do, if you haven’t already, is to start a budget. This is important because, in a lot of cases, people don’t even where their money is going until seeing it written down.

If you are struggling to keep your credit cards until control, you may want to start what’s known as a zero-based budget. The idea behind a zero-based budget is that every single dollar you spend is accounted for.

Hence the name – once your budget is done, you’ll be left with zero dollars left over.

If you’d like more information about how to make a zero-based budget, PFGeeks has a great guide on zero-based budgeting.

Paying Credit Card Debt: Debt Snowball vs. Debt Avalanche


When it comes time to actually start chipping away at your credit card debt, there are different ways to do this. Two of the most popular strategies are the debt snowball and the debt avalanche.

Debt Snowball


In case you aren’t familiar, the debt snowball was popularized by Dave Ramsey. How it works: you start with the smallest debt (regardless of the interest rate) and start putting all of your extra income toward that debt. Once that debt is repaid, move to the next smallest debt, and so on.

The idea here is that the smallest debt will be repaid the most quickly, and the psychological boost you get from repaying that first debt will give you the motivation to keep going.

The biggest problem with this method, as I hinted at above, is that it ignores interest rates. So if the smallest debt you are repaying has a 5% interest rate, but the largest debt has a 20% interest rate, you’re going to rack up a lot of interest on that larger debt even while you work through your debt snowball.


Debt Avalanche


This is where the debt avalanche shines. With this method, you start with the debt with the highest interest rate. This might be your biggest debt or it might be your smallest. But with interest always accruing, you’ll pay the least overall if you start with the highest interest rate and don’t pay attention to the outstanding balance.

Of course, the downside is that if the debt with the highest interest rate also has the biggest balance, you won’t get that initial mental boost.

How you actually choose to tackle your debt is a personal decision. In theory, the debt avalanche is better, but perfect is something that humans are not. Thus, if you need to go with the snowball in order to effectively repay your debt, there’s nothing wrong with that.

The snowball is still far better than not taking action at all.


Avoid Credit Card Fees


Ideally, you should pay your credit cards in full each month. This is just good practice and is the best way to avoid credit card fees. It’s true that there is a grace period where you won’t be charged interest even though you’ve gone past the due date. Typically, this is between 20 and 25 days.

I wouldn’t recommend running up against this grace period though since that will just put you in danger of being late on your payments. Not only will that cost you, but it will further lower your credit score.

Hopefully, through proper budgeting and cutting costs, you will be able to pay your cards in full every month. That is easily the best recommendation I can make.


Limit Credit Cards to Everyday Spending


What I mean by this is, if possible, don’t use credit cards to use something you want, but can’t afford.


I like to use credit cards for several reasons, including:


  1. Credit card rewards allow me to maximize the value of my money.
  2. Credit cards act as a middle man which makes them more secure than a debit card.


These are probably the main reasons I use credit cards. However, I only use them for my daily spending. I don’t use them to buy things I can’t afford. As a result, I pay them off promptly and I am able to avoid fees.

If you can limit credit card use to only your regular, everyday expenses, you’ll be making a much smarter choice.


In Closing


The first thing you need to do if you want to pay off credit card debt is to get your spending in check. One of the best ways to do this is with a zero-based budget.

Then, you will want to attack your debt by using a debt payoff method – see the debt snowball vs. The debt avalanche.

Finally, be sure to limit your credit card usage. Credit cards should really never be used to buy things you can’t afford. That is a surefire way to get yourself into trouble with credit cards.

If you do all of these things, you are sure to be on a much better track financially!


About the author: Bob Haegele is a personal finance blogger at The Frugal Fellow. His blog primarily covers topics around personal finance with a focus on student loans, credit cards, and investing. Having moved to various parts of the US, he is a bit of a nomad. He’s working toward financial independence while blogging, writing, and traveling.

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