If you had to name the most frustrating thing about debt, what would it be? The cost? The stress? The shame that can so easily (and unnecessarily) accompany debt? My answer is a little bit different:
How long it can take to pay off debt if you don’t have a plan of action.
When I was in credit card debt, I was almost convinced that I’d never pay it off. No matter how much extra I paid every month, I didn’t see any progress. It left me feeling frustrated, angry, and hopeless.
The thing I didn’t anticipate was the realization that came about after payoff: I didn’t have to be in debt as long as I was. In fact, I was in debt for years longer than necessary. All because of one simple formula:
Balance Transfer Credit Cards - A Payoff Plan - An Emergency Fund = Never-Ending Cycle of Debt
This may sound obvious — it certainly was to me after the fact, but avoiding this formula is easier said than done. Here’s how you can.
Balance Transfers Without a Plan = Danger
There are some things in life that come as such a relief that it’s easy to forget about the work that has to be done afterwards. This is the double-edged sword of balance transfer credit cards. They feel like a lifeline after a long journey of debt so we bargain with ourselves in relief.
Have you ever bargained with yourself before? What I’m referring to is the act of making promises to do something with no real plan to do it. In my case, I promised myself that this would be my last time ever dealing with debt.
But I didn’t create a plan. I simply paid as much as I could over the minimum and somehow assumed that would be good enough. I say somehow because I’m not sure I thought about it long enough to have made an assumption in the first place.
What happened next? The rate went up after six months (as expected), I was charged retroactively on the remaining balance with that new rate (not expected), and I stayed in debt for several more years.
Making Sure Your Balance Transfer Doesn’t Lead to a Lifetime of Debt
That was my first balance transfer. Luckily, when I took on another one years later, I had learned my lesson. That time I did pay off my credit card debt for good. Here’s how:
- I created a plan
- I kept an emergency fund
- I documented my progress
This is crucial. Divide the amount of debt you have by the amount of months there are until the rate goes up (all balance transfer credit cards have an introductory rate that will eventually expire). That’s how much you should pay every month. Forget the minimum payment — that won’t get you nearly close enough.
If that number is out of your reach, do the best you can. Create a new budget, find ways to earn extra money. Shoot for the moon and you’ll land among the stars! You could still make a huge chunk of progress — but you’ll need to take on a new balance transfer to keep your interest rate low (think of balance transfers as being similar to debt consolidation loans for this purpose). Rinse and repeat and hopefully you’ll get it done in two or less tries.
The emergency fund
Without an emergency fund, a balance transfer won’t much help you get out of debt. First you have to make sure you’re not using your credit card anymore — not just because that could cost you more (you’ll be charged a separate purchase interest rate), but also because more credit card purchases can too easily lead to more debt.
Create a budget. Maintain an emergency fund. Ensure that you never have to dip into credit cards for expenses.
With all plans, you won’t get far if you don’t know where you’re going or map your progress along the way. In my second balance transfer, I used ReadyForZero to track my progress. This helped me stay on track and stay motivated.
Prefer a spreadsheet? That’s fine too! Just make sure you always know where you stand, celebrate your wins, and never lose sight of your goal.
With this strategy you can make sure any tool you use to optimize your debt payoff will actually help (not hinder) your progress. Here’s to a lifetime free of debt!
Shannon McNay is a member of the DailyWorth Connect program. Read more about the program here.