How to Pay Off Over $5,000 Credit Card Debt

Feb 23, 2018 | Be First to Comment!

Pay Off Debt

After using credit cards irresponsibly and faced with high amounts of debt, it can feel like there’s no way out. I know that’s how I felt after having built up a hefty credit card balance of $5,000. I knew things had to change and fast. Fortunately, I was able to get my situation under control and within a couple years, paid everything off.

Here’s how to pay off credit card debt successfully.

Getting the Situation Under Control

Before making headway against my debt, I had to get my spending situation under control. My debt didn’t happen overnight. It came from months of bad financial decisions. Going out with friends, shopping, the occasional vacation, all of it went on my credit card. At $5,000 in debt, it was time to do something.

This is advice is generally taught to those who wish to become debt-free:

1. Pay off the highest interest

If you are focused and motivated to get rid of your debt, then tackle the card that’s hurting you the most. That card is likely the one with the highest interest rate. You don’t want to get stuck paying off only the interest each month instead of your principal debt. So pay off the card with the highest interest rate first, contributing more to those payments instead of paying the minimum amount. Once you get this monkey off your back, you can tackle the card with the next highest interest rate.

2. Snowball

If you are the type who likes instant gratification, this method might suit you best. Ignore interest rates and pay off the credit card with the smallest balance first. The idea is that you will feel a sense of accomplishment paying off the debt and want to continue. Giving yourself a psychological boost might help you pay off other credit cards quickly, too.

3. Transfer your balance

If you’re determined to pay off your credit card debt and want to set a deadline to do so, you might consider transferring your balance. After all, if you can only manage to pay off the interest rate each time your credit card bill comes, you’re not really going to improve your financial situation. If you can afford the fees (usually 3 percent of the transfer balance) associated with transferring your credit card balance onto another card (with zero or low interest), you will save money in the long run.

The key to a successful balance transfer is having a plan of action so that you continue to chip away at your credit card debt while taking advantage of paying lower or no interest. Merely transferring the balance isn’t going to help you. Note that a balance transfer might hurt your credit score in the short term, but if you can pay off your debt more quickly, it’s worth considering.

4. Cut back elsewhere

If you’re someone who can stick to a lean diet, then this strategy might work for you. Take a look at your monthly expenses and determine what you can cut out of your life. Can you downgrade your smartphone plan? Can you spend less on entertainment of food each month? Wherever you can save money, take action and do it. Then apply the amount of money you’ve saved towards your credit card bill. It won’t be fun, but it will help you cut down on your embarrassing credit card debt.

Each of these four strategies -- or a combination of them -- will help reduce your credit card debt and leave you feeling relieved instead of embarrassed. That said, if you’re the type who has read the article and still don’t feel motivated to do anything about your debt, it’s time to take drastic measures. To cut your spending -- and to stop piling onto your existing debt -- follow one of these steps:

  • Cut up your cards. Take the cards with the highest interest rate and cut each of them up. Keep one for emergencies, but get rid of all the others. Then do one of the steps below.
  • Freeze your cards. Put the cards in a large ziplock bag, fill with water, and stick them in your freezer. The next time you even think about using your credit card, you’ll have to wait for the ice to thaw.
  • Wrap your cards in paper. The next time you want to use the card, you’ll have to tear the paper off in front of the store clerk. It sounds silly, but it may deter you from needlessly swiping.
  • Give your cards to a trusted loved one. If your parents live nearby or you can trust your spouse or a loved one with your cards, hand them off. That way you’ll have to go through them first if you want to make a purchase on your card.

A Personal Strategy to Pay Off Debt

At this point, I switched to an all-cash budget. I set a weekly budget for spending and if I ran out of cash, I couldn’t cheat by using my credit card. For bigger purchases, I had to put money aside each week to save up. This was a valuable budgeting lesson that I still use today.

What also helped my situation is that even while I was adding on debt, I was still smart about credit. I never missed a monthly payment so my credit score was quite strong. If you’re in debt, never forget about these payments because a good credit score will give you options.

I was also lucky because I had opened a couple of extra credit cards after college. Even with $5,000 in debt, I still wasn’t close to maxing out my limit. I didn’t realize it at the time, but this also helps your credit score.

Stop adding to the balance

Once I had the situation under control and stopped adding debt, it was time to start paying everything off. After calculating my budget, I found I could put $200 a month towards paying off my credit cards. I was able to free up this money by cutting down my discretionary spending and putting less towards my retirement plans. I knew if I could stick to this plan, I’d be debt-free in a few years.

Checking my monthly statement, I realized that a sizable amount of my monthly payments was going towards interest. With a $5,000 balance, my interest payments were over $50 a month. To speed things up, I opened up a new card with a zero percent introductory APR for the first year. That way all my money was just going towards paying down my debt. I also made sure to find a card that didn’t charge a fee for rollovers. Most cards charge about 3 percent on balance transfers which would’ve cost about $150. There are cards that don’t charge this fee that are a better deal.

Taking Extreme Measures: Tapping an IRA

After a year of sticking to my budget, I was able to cut my debt in half to about $2,500. At this point, my zero percent introductory APR was about to expire. Since my debt was smaller, interest payments would’ve been less but this still wasn’t something I wanted to deal with. One solution could have been to open up another card with a zero percent introductory APR, but I chose not to.

Instead, what I did was take a withdrawal from my Roth IRA to pay off the remaining debt. At this point, I had about $20,000 in my Roth so I had enough saved up. With a Roth, you can take out your contributions and not owe any taxes or penalties, so this was a convenient way to get some extra cash.

Watch for penalties

If I had had a Traditional IRA or needed to take other my retirement earnings, this would’ve been a tougher decision. In that case, I would’ve had to pay income tax, plus a 10 percent withdrawal penalty, which would’ve been much more expensive than the interest rate on my credit card debt. I was lucky to have used a Roth IRA.

The way I saw it, the money I took out of my Roth was a loan, not a withdrawal. I kept saving $200 a month and put that money in my Roth so I wouldn’t set back my retirement plan. If you’re going to take money out of your retirement plans, make sure to pay that money back so you stay on track for your long-term goals.

When you’ve got thousands of dollars in credit card debt, it can feel like you’ll never get out but that’s just not the case. I was able to get out and so can you. If you follow a plan like mine and learn how to pay off credit card debt, you’ll be debt-free sooner than you think.

Refinance your credit cards at a lower APR:

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