How To Sort Credit Card Debt in 8 Simple Steps
Sorting out your credit card debt is a very different thing to paying it off – if we could just paydown everything today we wouldn’t need to get organised, would we? Here are 8 simple steps (with free spreadsheets) to help you sort out & payoff your cards, starting today!
- Organise your cards by interest rate, outstanding balance, promotional rates, and monthly payments.
- Restructure your debts. If you can’t pay anything off at least stop it costing you the earth.
- Create a Budget. Decide how much your are throwing at your creditors and how often
- Repayment Method – Avalanche (cheapest) or Snowball (psychologically rewarding) method?
- Increase your income. Side hustles and second jobs don’t have to be forever but if you can pay off your debts faster you save on interest charges so it’s short-term pain for long term gain
- Negotiate with creditors. If it’s really bad and you can’t pay, try to negotiate but take professional financial advice before you do anything that might impact your credit score.
- Track your progress. Stay on track and watch the amount you owe shrink, it’s very rewarding!
- Check your credit Score. Paying off debts improves your it a lot, so even if you couldn’t get low interest rate credit when you started this, maybe you can now…!
If you’re struggling with getting organised with the amount of money that you owe to various places, you’re not alone. Many people find themselves in a similar situation, but the good news is that there are effective strategies to help you sort it out. In this comprehensive blog post, we’ll guide you through an eight-step process that applies to both the UK and US financial systems, providing you with practical advice and useful tips to get your finances back on track.
Whether you’re new to managing your finances or a seasoned veteran, this guide is designed to walk you through sorting this out, one step at a time. From organizing and restructuring your debt to negotiating with creditors and monitoring your progress, we’ve got you covered. So, get ready to take control of your financial future and make a positive change in your life by following these steps.
Step 1: Get Organized!
Before diving into your debt repayment journey, it’s essential to get organized. This step involves gathering all the necessary information about your debts and creating a master list to better understand your financial situation.
Gather All Debt Information
To begin, collect all the information available for each credit card and loan you have. This includes account statements, interest rates, minimum payments, and any other relevant information from both the UK and US financial systems. It may be helpful to request your credit report from major UK & US credit bureaus like Experian, Equifax, and TransUnion.
Create a List of Debts
Once you have gathered all of the information, create a comprehensive list of your debts. This will give you a clear, actionable overview of your financial situation. Consider creating a table or spreadsheet to organize the information, including these columns:
- Creditor Name (Bank or Lender)
- Loan Amount or Credit Card Balance
- Interest Rate (APR)
- Minimum Monthly Payment
- Due Date
To help you out with this we have a number of free spreadsheets so you can tick that of your to do list for a start
Step 2: Restructure
In this step, you’ll learn how to restructure your debts with several methods that can help reduce interest and expedite repayment. Let’s dive into the available options.
Debt Consolidation Options
Debt consolidation involves combining multiple debts into a single loan with a lower interest rate. This can help streamline your repayment process and lower your monthly payment. Two common debt consolidation options are:
- Personal loans: You can take out a personal loan to pay off your cards, leaving you with one monthly payment at a lower interest rate. Both the US and UK financial systems offer personal loans from banks, credit unions, or online lenders.
- Home equity loans: If you’re a homeowner, you can use your home’s equity to pay off outstanding balances at a lower interest rate. Be cautious with this option, as defaulting on a home equity loan can result in losing your home. This option is available in both the US and UK financial systems.
A balance transfer involves moving your debts from a card with a high interest rate to one with a lower interest rate or a promotional 0% APR period. Both the US and UK financial systems offer balance transfer credit cards, which can be a useful tool for tackling the overall amount.
When considering a balance transfer, keep these tips in mind:
- Look for a card with a low or 0% introductory APR period, ideally lasting at least 12-18 months.
- Watch out for balance transfer fees, which typically range from 3-5% of the transferred amount.
- Ensure you can make the new monthly payment, as defaulting on a balance transfer card can result in higher interest rates and damage your credit.
- Try to pay off the entire balance within the introductory APR period to avoid paying interest on the remaining balance.
By utilizing these methods of restructuring, you’ll be on your way to more manageable and cost-effective repayments.
Don’t over apply for new cards though – this can be a really big negative mark against you credit score wise.
Also, don’t be disheartened if you can’t get any good cards at the start of your journey to debt freedom – as you pay down your debt, more will become available to you.
Step 3: Monthly Budget
Creating a budget is a crucial step in the sorting process. A well-planned budget will help you understand where your money is going and where you can cut expenses to allocate more towards paying off your debt. Let’s dive into the two main sub-steps in budgeting.
We’ve made a few of these too – check out the freebies if you haven’t already and grab a nice simple budget planner to get you started.
Assess Your Spending
To start, gather your financial statements, including bank statements, credit card statements, and bills from the past few months. This will give you a clear idea of how much you’ve spent and where.
Analyse your spending habits by categorizing your expenses, such as utilities, groceries, transportation, and entertainment.
Once you have a clear picture of where your money is going, you can start making changes to reduce unnecessary expenses. It’s essential to be realistic about your spending habits, as well as prepared to make some sacrifices to make the most out of your budget.
Now that you have assessed your spending, it’s time to prioritize your expenses. Divide your expenses into two categories: essential and non-essential. Essential expenses include housing, food, utilities, and transportation. Non-essential expenses involve discretionary spending such as eating out, subscriptions, and impulse purchases.
Focus on reducing non-essential spending by cutting back on or eliminating these expenses altogether. In both the UK and US financial systems, you can find many alternatives to these expenses, such as dining in instead of dining out, switching to a more affordable subscription service, or taking advantage of free events and services.
By prioritizing expenses and implementing your budget, you’ll have a clearer path to tackle this whole thing way more effectively. Remember that progress may be slow at first, but your efforts will pay off in the long run as you minimize debt and regain control over your finances.
I found the practicalities of this a bit of a challenge with a normal budget – so I built one that shows 2 budgets side by side to make “cutting” easlier.
Step 4: Repayment with the Avalanche or Snowball Method?
Choosing the right repayment method is essential. In this section, we’ll explore two popular strategies: the Debt Avalanche and Debt Snowball methods. Both methods have their advantages, but choosing the one that works best for your situation can make a significant difference in how quickly you pay off your debts.
I’ve actually done a mini case study on the that you might find useful if you are at all on the fence between these 2 (hint – Avalanche is way cheaper & faster!)
Debt Avalanche Method
The Debt Avalanche method focuses on paying off the card with the highest interest first and pay off each card in full by descending interest rates. leaving the lowest interest rate for last. This way you minimize the average rate of interest & the total amount of interest paid over time.
To implement this strategy, make a list of how much you owe, one card at a time and organize them in descending order, starting with the highest interest rate balance first.
Dedicate any extra money you have each month to paying off the debt with the highest interest while continuing to make the minimum payments on your other debts.
This method can save you both time and money in the long run, as you’ll pay less in interest overall.
For example, if you have the following credit card debts:
- Card A: £3,000 / $3,000 balance, 19.9% APR
- Card B: £2,000 / $2,000 balance, 17.5% APR
- Card C: £1,000 / $1,000 balance, 15.0% APR
With the Debt Avalanche method, you would focus on paying down Card A first, then move on to Card B, and finally, tackle Card C.
Debt Snowball Method
This method, on the other hand, focuses on paying off your smallest debts first. This strategy helps you build momentum, as you’ll gain a sense of accomplishment by quickly eliminating smaller debts, keeping you motivated to continue tackling your larger debts.
Like the Avalanche method, start by listing your debts, but this time, arrange them in ascending order based on the total balance. Focus on paying off the smallest debt first while continuing to make minimum payments on your other debts. Once the smallest debt is paid off, move on to the next smallest debt.
Using the same example as above:
- Card A: £3,000 / $3,000 balance, 19.9% APR (Annual Percentage Rate)
- Card B: £2,000 / $2,000 balance, 17.5% APR
- Card C: £1,000 / $1,000 balance, 15.0% APR
With the Snowball, you would focus on paying down Card C first, (i.e. the smallest balance), then move on to Card B, and finally, tackle Card A.
Both options can help you sort what you owe, (although avalanche is faster and cheaper – just saying!) but it’s crucial to choose the strategy that best suits your preferences and financial situation. Remember that consistency is key; whichever method you choose, stick to what you know you can afford to pay on a regular basis and maintain a strong mental commitment to becoming debt-free.
Not that I’m obsessed with spreadsheets but….I made a super simple one just for this purpose so help yourself to a free copy.
Alternativly you can check out these amazing ones from my good friends Someka over on the sunny side of Europe!
Step 5: Increase Your Income
Increasing your income can help you pay off your overall debt faster (who would have guessed that!?). There are various ways to earn extra money, and we’ll look at two main categories: Side Hustles and Passive Income (jury is still out on whether passive income is an urban myth or real thing…).
Side hustles involve using your skills or interests to make extra income outside of your primary job. There are several options available to you in both the UK and US:
- Freelancing: Offer services such as writing, graphic design, or web development to clients.
- This can we quite a nice little earner if you have skills that are in demand. You don’t have to be a master coder to make it big in freelancing – you just need to be consistent and specific out what it is you do. Don’t try to be all things to all men, it won’t work.
- Try Upwork Or Fiverr for these types of jobs and make sure you do your research 1st before you dive into anything that might already have a lot of competition.
- Ridesharing: Drive for companies like Uber or Lyft during your spare time.
- Again, like freelancing this is selling your time, so if you have time to spare, a car and you like to drive then have at it…
- Online tutoring: Teach subjects you’re knowledgeable in to students in need of help.
- I did this myself for some time and it’s really good fun but not overly lucrative in all honestly. Here again it pays to be super specific about what you offer and niche down as much as you can so that you can target your audience.
- Selling products online: Set up an online store using platforms like Etsy or eBay and sell handmade or vintage items.
- Many believe that this is quite saturated now and they may have a point but in person local table top, garage and boot sales can still be a good earner if you have an eye for a deal or lots of stuff to get rid of.
Keep in mind that any additional income may be subject to taxes. Make sure to research your tax obligations in your country.
This is of course not an exhaustive list and I would strongly suggest that you do a lot of research before you follow any self-pronounced guru on the side hustle matter.
Passive income involves earning money without actively working for it, such as investments or rental property income. Some examples of passive income options for both the UK and US include:
- Affiliate marketing: Promote other companies’ products for a commission by sharing links to their products on your blog or social media channels.
- Dividend investing: Invest in dividend-paying stocks or funds, which pay you a portion of the company’s earnings.
- Real estate investing: Buy rental properties and collect rental income from tenants.
- Creating and selling digital products: Write eBooks, create online courses, or design printables to sell online.
As with side hustles, be aware of any tax implications related to your passive income sources. Consult a tax professional if you are unsure about your responsibilities.
Passive income is, unless you hit on exactly the right activity, at the right time and have access to the right audience, anything but passive in the set up stages.
If you have cash to invest in property, then it can be relatively instant but I’m guessing that if that were the case you wouldn’t be here reading this!
Anything that’s going to earn passive income will require a lot of unpaid time for you to set up, so given that our objective is to pay off credit card debt as soon as possible, this might not be the strategy to choose right now.
By exploring side hustles and passive income options, you can increase your income and work towards eliminating your debt faster.
I personally really rate Ali Abdaal when it comes to advise on these matters (along with over 4m other people!)
Step 6: Negotiate With Creditors
When you’re trying to sort out credit card debt, one effective approach is to negotiate directly with your creditors. Negotiation can help you reduce your overall debt or make your payments more manageable. In this section, we will discuss two common negotiation strategies: debt settlement and payment plans.
Debt settlement involves negotiating with your creditors to significantly reduce the amount you owe. In some cases, you may be able to have a portion of your debt forgiven.
Begin by reaching out to your credit card company and explaining your financial situation. Be prepared to make a settlement offer, which should be a lump-sum payment that is lower than your outstanding balance. Keep in mind that negotiating a debt settlement may be easier when your account is in default or delinquent. Creditors may be more willing to settle for less when there’s a risk of getting nothing at all.
In the US, debt settlement may have tax implications, as the forgiven debt can be considered as taxable income. In the UK, there may be tax implications if your debt is settled for a considerable amount less than what you owe, so it’s important to consult with a financial consultant or tax adviser before making a decision.
Another option is to negotiate a payment plan that makes your monthly payments more manageable.
Even if you currently just pay the minimum, but you want to restructure your debts and pay off the high-interest cards 1st, a conversation with the card issuer to explain your current financial situation can help you throw more cash at the expensive debts asap.
Most creditors will be open to working with you to adjust your payment structure in a way that maintains a good relationship. Remember that it’s in their interest to work with you on this, as long as you start paying something (over potentially nothing) then they are better off than they were before.
Possible adjustments to your payment plan could include:
- Lower interest rates
- Extended repayment terms
- Waived fees or charges
Keep in mind that your negotiation success will largely depend on your persistence and your ability to present a compelling case for why the creditor should work with you. Regardless of the outcome, remember that communicating with your creditors and attempting to work out a solution is a crucial step in gaining control of your situation.
Take care though as some “agreements” can hurt your ability to get credit in the future.
Step 7: Track Your Progress
Keeping track of your progress is crucial when it comes to sorting out debt. By monitoring your payments and remaining balances, you can adjust your strategy, stay motivated, and make better-informed decisions.
Monitoring and Adjusting
Use budgeting tools or debt repayment apps to help monitor your progress. These tools can provide real-time insights into your spending habits and allow you to easily adjust your finances. Remember to review your budget regularly and make necessary adjustments based on your progress and any changes in your financial situation.
UK and US Financial System Examples
UK: If you’re in the United Kingdom, consider using services like Money Dashboard or Money Advice Service’s Budget Planner to help monitor your debt repayment progress. These tools allow you to set goals and track your spending, which can be particularly useful for staying on top of your debt repayment plan.
US: In the United States, popular apps like Mint and You Need a Budget (YNAB) offer similar budget tracking and goal-setting features. These tools can help you stay organized and focused on your debt repayment plan, helping you to consistently pay down your balances.
By regularly checking your progress and optimizing your financial strategy, you will be well on your way to sorting out your card debt in both the UK and US financial systems. Remember to stay patient, stay committed, and keep track of every milestone on your debt repayment journey.
Check out our FREE sheets and some extra special ones in the shop if you want something a bit more flashy.
Step 8: Check Your Credit Score
After making strides to pay off your credit, it’s crucial to keep an eye on your score. This step will help you understand your financial standing and how it can impact your borrowing capabilities in the future and finally get you into the “good credit” bracket where lower interest rates are more available.
Understanding The Scores
Your credit score is a numerical representation of your creditworthiness, which lenders use to determine your eligibility for loans and interest rates. It’s based on factors such as payment history, outstanding debt, length of credit history, types of credit, and recent inquiries.
Obtaining Your Credit Score
You can request a free copy of your credit report from the major credit bureaus in both the US and the UK. In the US, you can use AnnualCreditReport.com, while in the UK, you can check your report through Experian, Equifax, or TransUnion. Regularly reviewing your credit report helps you identify any errors and monitor your progress in improving your numbers.
Improving Your Score
To improve this, consider the following steps:
- Make timely payments: Pay your household and credit card bills on time to establish a positive payment history.
- Set up a direct debit for the monthly minimum payment – it’s really not worth the risk of missing a payment, if you fall behind and potentially incur late fees it can be a red flag to lenders.
- Reduce your credit utilization: Keep your balance on cards low by paying off debt and avoiding maxing out your cards.
- paying your card each month and in full can really help. Even if you use your card to pay for general cost of living expenses on a daily basis.
- Monitor your credit report: Regularly review your report for inaccuracies and dispute errors if you find any.
- Checking this regularly is great when you are paying debt off because you can see it change (which is very rewarding) it also means that if you are struggling with high interest rates, throwing whatever you can at them over an above the minimum amount can put you in a lower “risk category” from a lenders viewpoint and might mean that you can get better interest rates.
- Avoid making too many credit applications in a short period: This can signal financial stress and lower your metrics.
- applying for a new card too soon after paying off some old ones can hurt your progress
UK and US Credit Score Systems
In the UK, credit scores are usually measured on a scale of 0 to 700, with a higher score indicating better creditworthiness. The Equifax rating system, for example, considers a score above 420 to be good.
On the other hand, the US uses a slightly different scale. The FICO score, one of the most widely used systems, ranges from 300 to 850, with a score above 670 considered good or excellent.
Understanding the credit scoring systems in both the UK and US can help you better assess your financial health and make informed decisions when managing your credit card debt.
It all sounds so very simple written in a list like this but the practicalities and the years it can often take to get out of debt can require some serious commitment.
knowing where you stand, the number of months it will take and the total amount you owe at each point in this journey helps you to move from one stage to the next and just keep going, one credit card at a time.
It’s all about balance, and I don’t just mean your credit card balance!
Life goes on while you’re doing all this, so set yourself some rules about using your credit, don’t pay high interest charges, if at all possible, always at the very least make the minimum repayment, try not to carry a balance and stick to a monthly budget as often as you can (I’m realistic – we are all human after all!)
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