If you have tons of credit card debt, you should know that it won't disappear overnight.
You will have to tighten your budget and look for savings opportunities to make the necessary payments and get rid of credit card debt.
1. Increase Your Monthly Payments
You might think that paying 2-3% over your minimum will eventually get you out of debt but it won't. You'll need to increase your minimum payments significantly.
If you usually pay $100 per month, try upping it to $200.
Not sure where the extra money is going to come from?
As you evaluate your credit card debt, also take a look at where all your money is going. If you're spending tons on food or entertainment each month, you need to start reconsidering your costly habits to make up for higher credit card payments.
Using a debt payoff calculator can help you come up with a strategy that's tailored to your circumstances.
2. Transfer the Debt
If you think you can pay off your credit card debt in 12 to 18 months, consider opening up a balance transfer credit card.
We know, sounds counterintuitive.
Many balance transfer credit cards will allow you to transfer existing debt for an introductory 0% APR during a promotional period of 12 to 18 months. You won't pay any additional interest on the debt, meaning you can start to dig yourself out of it.
This is a good option for borrowers with good credit scores and the funds to pay off their credit card debt in the allotted time span.
To see if this is feasible, play around with the debt payoff calculator. Set your interest rate to zero and see how long it takes to eliminate your balance in the payoff schedule.
3. Borrow from Yourself
Before thinking about borrowing from family, friends, or the bank, try borrowing from yourself.
If you have substantial funds in your 401(k), you can borrow from that account to make enough payments to pay off your credit cards. You'll be allowed to take out 50% or $50,000, whichever is less, from your account.
401k Loan Basics
There are some things to know about borrowing from your 401(k) that might influence your decision:
- You will still pay interest on the amount you borrow, but it all goes back to you.
- The interest on these funds will be paid with after-tax dollars.
- When you retire and use the funds, you'll pay tax on the interest again.
- You will have only five years to repay your 401(k) plus the interest.
- If you cannot repay yourself in five years, the amount withdrawn will be taxed if you're under 59 1/2 years old. You'll also pay an excise tax of 10% as a penalty.