A member of a popular online financial planning community recently admitted to having $100,000 in credit card debt and seeking advice.
The original poster (OP) read: “My wife and I have made bad decisions over the past 10 years and accumulated $101,000 in credit card debt. About $50,000 of that amount was spent on living expenses while I was in school. We have three children and a house that we love.”
Many people’s virtual jaws dropped and they couldn’t believe that someone could have that much credit card debt. Others, however, were sympathetic and gave these helpful suggestions.
1. Make a really tight budget
Creating a tight budget is the first step in tracking and controlling expenses. As a result, many have recommended the You Need a Budget (YNAB) app. This software uses the envelope method to get you to stick to your budget.
The envelope method is a way to keep track of your expenses by creating different budget categories (or envelopes) such as groceries, tuition fees, mortgages, car loans, etc.
The original method was to put cash in physical envelopes so that, for example, you wouldn’t use money from groceries to eat at a restaurant. However, many budgeting apps (like YNAB) and websites offer this method electronically with virtual envelopes.
2. Use the Debt Snowball Method for Psychological Reasons
The debt snowball method, or “Dave Ramsey method”, is to pay off the smallest loan first because you finish paying it off quickly, which gives you the fantastic feeling that you’ve crossed something out.
You do this by paying the minimum amounts on all loans and using all the extra money to pay off one loan at a time in ascending order. Then, when the smallest loan is repaid, you add that amount to the smallest loan, creating a repayment snowball.
3. Use the Debt Avalanche Method for Lower Interest Fees
Unlike the snowball method, the avalanche method is a logically superior strategy. Instead of paying off the loan with the smallest principal amount, you will pay off the highest interest loan.
Otherwise the same as the snowball method. You pay the minimum on all loans except the one you focus on until it disappears. This method may be better for credit card debt as CC interest rates are usually very high.
However, some argue that you shouldn’t take money from small accomplishments, and that paying off smaller debts first builds self-confidence faster, motivating you to do more.
4. Start a part-time or part-time job
One suggestion was to find a part-time or part-time job and use all that extra money to pay off your credit card debt much faster. One commented, “It will be difficult for a year or two, but it will pay off in the long run and you will be freed from this oppression for $100,000.”
5. Cut Your Credit Cards Immediately
Many in the thread agreed that cutting back on your credit cards is vital to getting out of debt and staying that way. You can even call the bank to settle and turn off your cards. Sometimes the most drastic steps work best.
One elaborated: “Even before that, you must cut these cards and never use them again. Even after you pay them. They are no longer available as a tool for you.
Don’t look at it as “how can I solve this problem so I can get back to normal” because “normality” is beyond your means. Same problem: “I need to go on a diet so I can eat ice cream at every meal again.” It just doesn’t work like that.”
6. Contact a financial advisor
Someone suggested that you contact a nonprofit financial advisor. They can negotiate credit card rates. In addition, they help people create long-term wealth accumulation and risk management strategies.
7. Don’t Use Your Retirement Savings to Pay Your CC Debt
Several users have commented that it’s terrible to empty your 401(k) or IRA accounts to pay off your credit card obligations because you need them in your old age. In addition, you will need to pay regular income taxes on anything you take with you until age 60 (in the US). One repeated: “NEVER dig into your retirement accounts to pay off consumer debt.”
8. Find a Certified Nonprofit Loan Counselor
Many in the thread have mentioned that you should find a certified non-profit loan counselor. They are different from your regular debt consolidation provider. They will work with you to make an aggressive repayment plan.
9. Find a therapist
In addition to a financial advisor and a non-profit loan counselor, you should consider therapy. Many have explained that something more is going on and that the original poster (OP) should get to the bottom of the problem. Otherwise, they are likely to end up in the same place, even after they pay off their debts.
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10. Cut costs to a minimum
Someone explained: “Been there twice, once at the level of your debt and once at a much higher level. So the only practical plan is to cut your expenses to a minimum and pay off your debt, first at the highest interest rate.”
What do you think? Did Reddit get it right, or is there something important missing from this list? This article is inspired by the Internet and does not necessarily represent the views or opinions of Wealthy Nickel.
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