This post may contain affiliate links. Please see my disclosure for more information.
FREE Monthly Budget + Expense and Bill Tracker
The easiest way I've found to stick to a budget is the good old fashion pen and paper method. This budget template + expense and bill tracker helps keep things simple.
Credit card debt is a bummer.
If you’ve ever run up the balance on your credit card, then you probably know the feeling. You may be paying more than the minimum payment, but with interest rates of 15-20% or higher, it feels like you’re stuck in a never-ending loop.
One payment forward, two interest fees back.
Does the cycle ever end?
No matter how daunting your credit card debt seems, there is a way out.
Follow these tips on how to pay off credit card debt, even if you’re broke.
Take Action as Soon as You Know You’re in Trouble
Known to avoid conflict at all cost, I am the queen of sweep-it-under-the-rug-and-pretend-it-doesn’t-exist.
But when it comes to your credit card debt, the last thing you want to do is shrug it off.
TAKE ACTION NOW.
If you aren’t able to make your minimum payments and do nothing about it, you will incur late fees. On top of that, your interest rate will go up because of those late fees, and your credit score will suffer.
Talk to your credit card company. More than likely, they will be able to work with you to figure out a solution. It’s their money, after all. They want to make sure they get it back.
Whatever you do — do something. Avoiding the situation will only hurt you in the end.
Understand How Your Debt Affects Your Credit
If you plan or think you may need to borrow money for any reason in the future (e.g. to get a mortgage, buy a car, etc.), then you should care about your credit score.
Your credit score is what lenders look at to determine whether you are a good or bad risk. A good credit score = lower interest rates and a higher loan amount. A bad credit score = high interest rates and a lower loan amount (if any loan at all).
Your credit score is calculated based on:
Payment History = 35%
Any missed or late payments or accounts in collections will show up here. The significance of this factor on your credit score is why you never want to avoid your debt and should always try to make your full payment every month, and make all payments on time.
Amounts Owed = 30%
Creditors also look at the amount owed to other lenders in determining whether or not you’re a viable risk.
This includes your credit utilization ratio (credit used/total available credit) as well as the outstanding balance on loan accounts. The lower your credit utilization ratio, the better. Most recommend a ratio of 30% or less.
So, for example, if you have a $1,000 limit on your credit card, you should try and keep your balance at or below $300.
Length of Credit History = 15%
Generally speaking, the longer your credit history, the better. That’s why you may want to reconsider canceling your credit cards after you finish paying them off. Closing your credit accounts could have a negative impact on your score.
Credit Mix = 10%
This includes your different types of credit accounts: installment loans, credit cards, retail accounts, mortgages, etc.
New Credit = 10%
Every time you request credit (applying for a loan, signing up for a store credit card, etc.) it shows up on your report. A high number of credit inquiries can negatively impact your score.
Keep an Eye on Your Credit Score
When you’re paying off debt, it’s important to keep an eye on your score and look for better deals, like options for refinancing.
This is why I signed up for a free account with Credit Sesame. Not only they show you your credit score for free, they also give you actionable steps to take to improve your credit score.
How to Pay Off Credit Card Debt
Step 1: Organize Your Finances
Before you even think about how you’re going to pay off your debt, you need to know what you have to pay.
A lot of the time when people say they’re broke, what they’re really saying is “I don’t have any money left at the end of the month and I have no idea why.”
It’s not because they aren’t making enough; it’s because they don’t know where their money is going.
Your first step is to figure that out. Only when you get organized can you actually begin to understand your situation.
And you know what? It may not be as bad as you thought.
On the flip side (and I hope this isn’t the case), it could be worse than you thought. If that’s the case, this may be just the motivation you need to take action.
Step 2: Make a Budget
Only one in three Americans create a detailed household budget. My guess is because most people think budgeting is just too difficult and time-consuming.
But it’s not!
(At least, not the way I budget.)
Creating a budget doesn’t have to be difficult or take forever. It can be as simple as a budget template or spreadsheet you update weekly.
Here’s the template I use for my monthly budget and bills:
I also use Personal Capital to track all of my spending and my loan accounts. Personal Capital is a free online software that allows you to track your income and expenses, as well as your investments and other financial accounts.
It’s helpful to see everything in one place, and I also use it to double check my paper budget and make sure I haven’t missed anything.
The best advice I can give to you when it comes to creating a budget is to BE REALISTIC.
If you’re used to spending $500 per month on groceries and think you’re all of a sudden going to be able to get by on $100, I’ve got news for you: probably not gonna happen.
It’s not impossible to drastically cut your spending and change your spending patterns quickly. However, for most people, it’s a process.
Analyze your previous spending, create a realistic budget, and plan for some unexpected or miscellaneous expenses.
For more information on creating a successful budget, check out How to Budget When You’re Broke.
Step 3: Get the Lowest Interest Rate Possible
Credit card interest fees add up fast.
If you’re having a difficult time getting ahead because of interest fees, look for ways to lower your interest rate.
The first option is to ask your lender for a lower rate. Seriously, it can work.
If you’re a loyal customer with a solid payment history and no late fees, your lender may be willing to decrease your interest rate. Before you make the call, do some homework on competitors with lower rates. If your credit card company gives you pushback, use this information for bargaining leverage.
Customer service tip (because I worked in customer service for way. too. long): Be nice! Customer service representatives are people, too. They deal with [rude] people’s problems all day, and it gets old. You’re more likely to get what you want, and in a timely fashion, if you’re nice.
Another option is to transfer your balance to a card with a lower interest rate. This could be to one of your other credit cards or a new card. Some cards offer a 0% promotional interest rate for a certain period of time.
If you choose to do this, beware of transfer fees. A balance transfer fee could negate any interest savings you would gain. Be sure to do your research. Call and talk to customer service, and make sure you understand the details, including any associated fees.
Step 4: Create a Debt Payoff Plan
This may sound like the same thing as your budget, but it’s not. It’s specifically for your debts, and it’s how you plan to pay them off — from now until they’re gone.
There are several methods you can use to prioritize and decide which of your debts you want to tackle first.
One is to pay off your debts in order of their balance, lowest to highest. This is called the Debt Snowball method. Watching your debt disappear quickly keeps you motivated to continue paying it off.
An alternative is paying your highest interest rate first. This may save you more money in the long run, depending on the balances of each of your cards.
Once you decide on a debt payoff plan and prioritize which debt to tackle first, write it down using this bill + budget tracker template:
Step 5: Reduce Your Expenses
If you’re really serious about paying off your debt, look for ways to decrease your spending.
Use your bank statements and the information you gathered earlier to create your budget.
Cut the cable, stop eating out, go on a spending fast. Don’t be afraid to get extremely frugal — it has its benefits.
Remember, it doesn’t have to be this way forever.
Step 6: Increase Your Income
Tackle your debt from both ends by reducing your expenses and making more money.
There are all kinds of ways to make money on the side of your regular job.
For example, you can earn some extra money every day by taking surveys and completing activities through your free Swagbucks account.
Here are a few resources to help get you started:
- The Best Paid Survey Sites to Earn Extra Money
- 10+ Real Ways to Make Money Fast
- How to Make Money as a Freelance Writer
- Note: There is a course mentioned in this interview. It could be a great investment for you, but if you don’t have the money to spare, don’t go into more debt by purchasing the course. The post still has a lot of valuable information. Holly’s story is so inspirational!
Know When to Ask for Help
Since everyone’s situation is different, this guide might not be the end-all-be-all solution for you.
If you’ve tried everything and still feel like you’re getting nowhere, you may want to consider reaching out to a credit counseling agency.
With a credit counseling agency, your interest rates will be lowered, which could save you money over time. Using a credit counseling agency will not affect your FICO credit score.
Your credit counseling agency will assign you a counselor, who will go over your finances with you and create a debt management plan. Then, you will pay them, and they will pay your credit cards according to your plan. The duration of plans is usually somewhere between four and five years.
Credit counseling agencies:
If you’re up to your eyeballs in credit card debt, or even if you’re not and you feel like you are, don’t give up the fight. Make a budget, create a debt payoff plan, reduce your expenses, and look for ways to make more money. And don’t be afraid to ask for help when you need it.
What have you done to pay off your credit card debt?
I’m a financial coach and author + owner of Goodbye to Broke. I love all things personal finance, money management, and healthy living. And I talk to my dog way too much, if we’re being honest.