When you’re stuck in credit card debt, it can feel like there’s no way out. I know that’s how I felt. I graduated college debt-free but after a couple years of careless spending, I 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 I could start 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. Because of the tough economy, I was making less money but still spending like I was at my first job. Going out with friends, shopping, the occasional vacation, all of it went on my credit card. At $5,000, I realized I needed to do something.
My strategies 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.
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.
I pulled out money from my Roth 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.
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.