Do a Debt Reality Check

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Paying down debt will help you reach your financial goals. It usually starts with having a handle on your credit card balances. The average credit card holder in second quarter of 2023 owed $6,568 to credit card companies. Compare that to the second quarter of 2022, when the card debt was $5,963, and it’s clear that the problem is worsening.

There is other debt besides credit cards. It’s time to take charge of all debt instead of it controlling you. It’s time to identify it, develop a plan, and start paying it down.

List Everything Owed

Start with making a list of everything you owe. This includes monthly credit t card payments, car payments and your mortgage or rent. Don’t forget to add in ongoing expenses like phone bills, utilities, Wi-Fi, and cable. You have to eat. What do you spend on food each month?

You’ll then know the amount of debt and what you need to pay monthly. You'll also understand what you need to do to keep your debt from adversely affecting your credit score.

Do not skip this step. If you don’t know where you are, you won’t know where and how to achieve financial independence from debt.

Create a Financial Buffer

Before you start seriously whittling away your debt, start an emergency fund. You should have at least $1,000 saved. This should never be touched except for emergencies.

To resist the temptation of withdrawing your emergency fund for non-emergency purchases, open a separate account, preferably in a different bank or credit union.

Use the Snowball Method

Once you have your emergency fund established, it’s time to tackle debt aggressively.

You’ve already listed your debt. Now rearrange it from the smallest to the largest (don’t count utilities, phone bills, etc.). This applies to your credit card payments.

Go after the smallest debt first. If you can double or pay extra, then do that rather than pay just the minimum payment. You want to pay off this card first. You'll still be paying the minimum on other credit cards; it’s just you’ve made the smallest the priority.

Once you’ve paid off the smallest credit card, apply that payment to the next largest card. This will be in addition to the minimum payment. Repeat this method until you’ve paid off all your credit cards or car payments.

This takes discipline and work and time, but it’s worth it.

Eliminate All Credit Cards

In conjunction with the snowball method, cut up your credit cards. This will keep you from swiping them when you see those new shoes or jackets you’ve always wanted.

This will keep you from swiping that card for instant gratification. The credit card industry says closing a card is a bad idea because of the debt-to-credit utilization ratio. This is the amount of credit you have available versus the amount of credit you’ve spent. A 30 percent ratio is the standard for good credit.

Credit utilization is one of the most significant factors in a credit score. A maxed-out credit card can lead to severe consequences to this ratio. That’s because a maxed-out credit card will also increase your credit utilization.

So, regardless of what you do, you’ve hurt your credit score.

Besides the credit-utilization ratio increasing, your minimum payments will also increase. This takes even more money out of your paycheck per month.

Avoiding using credit cards keeps you out of that cycle of debt.

The Envelop System Tracks Money

Instead of credit cards, use the envelop system.

Overspending often occurs when nothing is telling you to stop. You don’t see the money disappearing until it’s too late.

The envelop system tracks how much money you have budgeted for monthly activities. You place cash in these envelopes and label them. There are the groceries, eating out, clothes, etc. envelopes.

Suppose you have budgeted $500 for groceries monthly; when you receive your first paycheck, you should place $250 in the envelope. When you receive your second paycheck, place another $250 in the envelope. This will keep you within your budget.

If you’re making purchases online, write down the amount on the back of the envelope, and don’t spend more than what is in the envelope. When you’ve written down as much as is in the envelope, you’re finished spending it for the month. The money in the envelope will carry over to the next month, and the money you would have placed in it the following month will go toward a credit card.

On the other hand, if you’ve been frugal and haven’t spent all the money, put the excess dollars toward your credit card.

But remember, once you’ve spent the cash in these envelopes, you’re done. It forces you not to overspend. It also clearly lets you see where the money is going.

Avoid Temporary Solutions

Many people will consider debt consolidation. It often results in a large payment that some will find hard to handle. It also stretches out the interest you’d be paying. Instead of small credit card balances with interest that you can rid yourself of using the snowball method, you have a large balance that will take years to pay, and the interest just increases the total amount.

That’s a lot of money toward items you paid for with the credit cards. The price of those pair of shoes that were on sale has just doubled in cost due to interest.

There are those who are deep in debt and consider bankruptcy. This can harm your credit for years. Instead, talk to your credit card companies or anyone you owe and see if you can work out a smaller payment plan.

Credit Repair Takes Time

As long as it took you to accumulate this debt, it will probably take you as long or longer to rid yourself of it. Don’t be frustrated. It takes patience and discipline.

If you’re really in over your head, consider a non-profit credit counseling agency. For profits can sometimes be scammers, so be careful who you choose.

The Epoch Times copyright © 2023. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.