Climbing out of a significant debt hole, such as a $10,000 credit card debt, is no easy feat. It often takes years of hard work, determination, and financial discipline.
In this article we’ll explore the story of Kelsey, a client of ours.
The Realization and Decision to Act
Like many of us, Kelsey found herself relying on credit cards when her finances were tight. She regularly used credit to fund her lifestyle, but it wasn’t until her credit cards were maxed out that she realized her debt had become an overwhelming issue.
When she was no longer able to access new credit and started getting declined for purchases, she acknowledged her debt problem and decided to take action. She committed to eliminating her high balances and reframing her view of credit cards as a financial tool, rather than a quick-fix solution to her monetary needs.
Step 1: Increasing Credit Card Payments
Kelsey started her debt payoff journey by doubling and even tripling her credit card payments. Initially, she was only making the minimum payments each month, which she realized was keeping her trapped in a cycle of debt.
By paying more than the minimum, you can start reducing your principal balance, in addition to the interest accrued, accelerating your journey to becoming debt-free.
Step 2: Opting Out of Additional Credit Card Offers
The temptation to spend more through attractive credit card sign-up bonuses can be a significant obstacle when you’re already deep in debt. To avoid this temptation, Kelsey opted out of receiving unsolicited credit card offers.
Step 3: Leveraging Unexpected Cash Windfalls
Any bit of extra money can be an asset when you’re working to pay off credit card debt. Kelsey committed all her unexpected cash windfalls, including year-end bonuses, raises, and income tax refunds, to her debt repayment plan.
Step 4: Negotiating with Creditors
Every day that passes with a high credit card balance, interest accrues, increasing your debt. Kelsey took the initiative to negotiate lower interest rates with her creditors. By doing this, she was able to significantly reduce her payments, making it easier to manage her debt.
Step 5: Acknowledging the Debt
Kelsey confessed to being in denial of her high credit card debt, a phenomenon known as the “ostrich effect” in behavioral economics. She thought her debt was manageable because she had a stable job, a six-figure income, a RRSP, and she was making all her bill payments on time (even if it was just the minimum). However, when she decided to face her debt, she listed everything she owed – and it was a wake-up call.
Step 6: Curtailing Excessive Spending
Trimming unnecessary spending is essential when you’re working to pay off debt. Kelsey recognized that her spending was “out of control” and started cutting back on expensive habits like vacations and dining out.
Step 7: Choosing the Right Debt Payoff Strategy
The best debt payoff strategy is one that suits you. Some people prefer to pay off balances with the highest interest first (the avalanche method), while others prioritize paying off smaller balances to gain motivation (the snowball method). Kelsey chose a third option, focusing on the credit cards with the highest dollar balances first.
Responsible Credit Card Use After Debt Payoff
Today, Kelsey uses six credit cards, including a business credit card, and generally pays off her balances in full each month. The only times she carries a balance is either for cash flow purposes or when she has an introductory 0% APR offer, thereby costing her no interest.
The Bottom Line
After paying off her six-figure debt, Kelsey adopted what she calls a “Zero Debt mindset.” She continues to follow the steps above to be more prudent in her credit card usage and to limit taking on any additional debt.
Learning from her experience, we understand that paying off a substantial amount of credit card debt takes time, commitment, and a well-thought-out strategy. The journey is surely challenging, but with the right mindset and habits, it is possible.
