5 Steps to Pay Off Your Credit Card Debt; Plus a Story of What it Really Means to Be Broke

credit cards are evil

Here is the story of how I began adulthood with frugal precision, and then slipped into debt as my life situation changed. To skip the story and get right to 5 Steps to Pay Off Your Credit Card Debt, scroll down to the numbered list.

I remember the sunny day my parents dropped me off at college as a freshman. I noticed a table set up by a credit card company to attract student applicants. My mother instructed me to sign up for a credit card to build credit history so I could qualify for future pursuits like car purchases and apartment rentals. However, she was careful to impress upon me, “Credit cards are the devil and you should never, ever keep a balance month to month.”

Why Credit Cards Are Evil
When I asked her why credit cards are so bad, Mom said, “To have a credit card balance that you can’t pay off in full each month means you get charged interest. To get charged interest means you might as well flush a fistful of cash down the toilet.” She told me to charge something to the card once in a while to keep the account current and build credit, but always pay it off right away.

She explained that credit card companies like to hook naïve college students who would do things like charge beer to the card and then pay only the minimum required each month and get charged interest. Each month a student held a balance, he would get charged interest again on the remaining balance. Monthly interest changes meant he was getting charged interest on top of interest, so he wasn’t just paying for beer any more. He wasn’t even just paying for the beer plus interest. He was actually paying dearly for the right to stay in debt.

As the months dragged on with a balance and new interest charges added on top, this compounded how much he was actually paying for that beer to mind boggling proportions. Ultimately, the student was being charged way above and beyond the original price of the beer, which would be long gone by the time he was through paying it off. She painted credit card companies as being conniving and underhanded, a force to be feared and shunned.

As a college student living off savings from my summer job and with my mother’s advice ringing in my head, I knew I couldn’t afford to be flushing cash down the toilet. So I rarely used that card, and when I did, I paid it off immediately.

I Only Thought I Was Broke
In 1998, I moved to the New York City metropolitan area to work for CNBC as a multimedia producer. I was one year out of college and making $24,000 a year. Despite my meager earnings, I was hell bent on following the sage advice to never keep a credit card balance.

So I lived within my means. I rented a ground floor, $600-a-month studio apartment from the Red Oak Diner pastry chef in Fort Lee, NJ. My home was roughly a mile from CNBC, and I leased a Honda Civic for $157 per month. I don’t remember ever filling up on gas, but I’m sure I only had to do it about once a month.

I recall that to make ends meet, I allowed myself $13 in expenditures per day. This was to cover everything – food, laundry, phone, internet and savings. I didn’t have cable, but then again, I was surrounded by televisions and live TV production all day at work. I didn’t feel the need to come home at night and sit in front of a set. Instead I would come home to cheap dinners of eggs or pasta, carefully measured into portions to stretch the box as far as I could take it.

To stick to my budget, I kept this tiny green journal where I wrote down everything I spent every time money came out of my pocket. When the $13 was used up for the day, that was that. No more spending. I managed to save about $200 per month. I enjoyed this little game I was playing. I don’t recall feeling deprived. It’s just what I did and it worked.

Then I Was More Broke Than Dirt
Then “irrational exuberance” took over and my work situation changed in 1999. I was working for a dot com in downtown Manhattan for only a hair more money, with the airy promise of stock options to stand in for the lousy pay.

Despite Silicon Valley fairytales, I somehow wasn’t snowed by the empty promise of stock options coming from a start-up so I refused to buy in. As disgruntled as I was over the compensation terms, I had very little experience at that point and needed to keep my job with its crappy paycheck. I knew the skills I was acquiring would pay real dividends eventually, and so I stuck it out.

The increased cost of my commute and the expense of working in Manhattan far outweighed my penny-pinching abilities. I moved to be closer to my job, which toned down my commuting costs but upped my rent considerably, so it was a wash. Ends were no longer being met, and I made up the difference by using my dreaded credit card.

Mo Money, Mo Problems
Two years later, after a few promotions and raises, I was making about $20,000 more than when I’d started out. But I was still underpaid considering my level of ability, responsibility and the cost of living in the New York City market.

More notably is that somewhere along the line, as a result of making more money, I became careless in my spending. I made a basic and common mistake: I never sat down and revised my budget as I got raises. Instead, I had tossed the old budget out and trusted that more money meant I was fine. But the truth was that I was still living beyond my means and I had a wallet full of credit cards with balances to prove it.

Suddenly it seemed, I had $10,000 in credit card debt. At a rate of less than $14 per day over what I should have been spending those years of working downtown – the difference between bringing my coffee and lunch from home and eating out – I dug myself into a hole. The years I’d gone underpaid while overspending had caught up with me and I felt panicked. I realized that I literally couldn’t afford to keep my job while simultaneously getting out of debt and enjoying a normal lifestyle.

By then, it was December of the year 2000 and I was nowhere near alone in my overspending; I felt as if the whole tech industry was about to go down with me. Another dot com acquired the company I was working for, and it was clear this new entity had completely screwed up fundamentals and would soon go bankrupt. I tried to tell my friends not to buy the stock options, but few listened. I felt like a rat fleeing a sinking ship as I scrambled to get the heck out of there.

Luckily, I had secured enough experience managing teams, resources and projects to get a respectable job with civilized pay somewhere else. So I went back to the Mother Ship — CNBC — where I would again be immersed in the world of finance, investments and Wall Street news.

Digging Out
It was time to get my finances under control. With a new job, a new salary and a new commute, it was the perfect time to do the math and pay the piper.

Here are the steps I took to pay off my credit cards.

5 Steps to Pay Off Your Credit Cards

1. Add Up Your Debt
This can hurt. When you carry multiple balances on different credit cards, you can avoid looking the lump sum of your debt full in the face. Suck it and add it up so that you have the whole picture. Take courage knowing that this is the worst it has to be if you cut up those cards and begin paying down your debt now. Each month, the picture gets a little prettier.

Do an initial estimate of how long it will take to pay off your credit cards. Once you get a budget in place, you’ll do this exercise again with the goal of paying more towards your cards each month to shave down the amount of time you hold a balance. This means less interest paid out, and more money back in your pocket.

A Note About Cash Savings vs. Debt
I’m assuming that if you have credit card debt, then you don’t have cash sitting in a savings account. (I’m not referring to a retirement account. Please leave that alone.) If by chance you do have liquid cash in a savings account, then use that cash immediately towards paying down credit card debt. Cash is of no use to you when you’re getting charged a greater rate than you’re earning. I know psychologically it’s tough to drain savings, but by allowing yourself to get charged interest when you have cash laying around doing nothing, you are literally robbing yourself of money every single day. Don’t worry: paying off debt is the first step to amassing savings. You must get your negative balance to zero before you can build a positive balance in your savings account.

2. Budget: Here is where you will find the money to put towards your cards each month. How to Budget will be detailed in a future post, so I will only cover the basics here.

To work out my budget, I sat down and wrote out all my expenses for each month.

  • Record your fixed expenses, like housing and car payments.
  • Decide what you will spend on items you can be more flexible with, such food, entertainment, clothes and gifts.
  • Add it all up and see what’s left over for you to pay towards your credit card balances each month. With the new knowledge of your budget, figure out more accurately this time how long it will take you to pay off your credit cards.

If you don’t have a warm fuzzy feeling about how long it will take to get those cards paid off, then we need to reevaluate your budget. You want to be left with a sum of money that will get you well above the minimum payments due on your cards each month. If you’re not there yet, then it’s time to get stingy and see where you can cut corners. Each dollar you pay towards those cards is a dollar that you can’t get charged interest on, so don’t underestimate the good fortune a little bit of thriftiness will bring.

There are two kinds of cutting corners:
Pinching Pennies. Here’s where you decide to make your coffee at home, bring your lunch to work, and potentially go vegetarian a few nights a week to cut back on your grocery bills. You can shop at the thrift store if you’re in dire need of an outfit and sell items you no longer want at a consignment shop or on eBay. Get in the spirit and make regular trips to the local library and cut back on trips to the movies. Skip dinners out and invite friends over for a potluck. Make greeting cards and gifts rather than buying them. Get into it, people! Divas, ditch the salon and spa, do your own nails and start coloring your hair at home. Dudes, buy hair clippers and learn how to use them. Make it a game and see how many expenses you can cut. Every dollar counts, literally.

Lifestyle overhaul. This is what you should decide to do when — despite pinching pennies — your fixed expenses like housing and car payments will keep you in a damp, steep-walled pit of debt, rubbing lotion on your skin as often as the credit card company demands, possibly for the rest of your tormented life. In this case, it’s time to move to a cheaper living situation and consider exchanging the nice car for a beater or the bus. Trust me, you’ll feel better when Buffalo Bill (your debt) is gone.

Revise that budget until you can get a foothold and climb out of the pit so you can run to safety.

3. Pick a Card, but Not Just Any Card
Once your budget is set, assess which card has the highest interest rate, because this is the one you’ll pay off first. It can be tempting to go for the card with the smallest balance to get it out of the way, or the card with the biggest balance because it looks the scariest, but math is not on your side if you do it that way. The highest rate card is the most expensive one to keep, penny for penny. It must die, and quickly.

Pay the minimum monthly balance on the rest of your lower rate cards, and use the largest chunk of cash possible to pay your high interest rate card each month. Hopefully you are paying much, much more than the minimum balance. In fact, ignore the minimum balance and throw as much cash as you can towards paying off this credit card bill each month. Keep in mind that the faster and more aggressively you pay it off, the less money overall that you wind up paying because that’s less interest they can charge you.

Please note, you can consider transferring your higher-rate balance to a lower rate card to save on interest fees, but be careful! You must read the fine print and do the math or you could wind up costing yourself more money this way. Aside from a balance transfer fee, many cards will also charge you a higher rate for balances transferred, which means you aren’t necessarily going to get the attractive rate that’s advertised out loud as if you made the purchases on this lower rate card.

4. Pick the Next Highest Rate Card
Once your highest rate card is all paid off, then repeat the process with the rest of your cards. Evaluate which card charges you the most interest, and pay the minimum on the lower rate cards. Then hurl everything you’ve got left towards your highest rate card in order to pay it down as quickly as possible.

5. Bask in the Power of Zero
The day those cards are all paid off, enjoy the feeling. Drink a margarita to celebrate! But go for the tequila with the worm in it, and avoid the Patrón. We’re not trying to get all spendy again already. In the coming months, you can send all that money you were using to pay off your cards towards amassing a beautiful safety net in the form of an emergency cash account, your retirement and other ways that money can make us feel good instead of bad.

So, the credit card companies had you over a barrel, but you wiggled away from their evil grasp and now you’re free. Soon we will learn how to take back the power and perks from the credit card companies so they are giving you money!