Getting Out of Credit Card Debt – The 2nd Financial Commandment for Millennials

Part of Oak Street Advisors’ 10 Financial Commandments for Millennials series, getting out of credit card debt is a crucial component for younger investors to get ahead. Interest payments can absolutely destroy your personal finances while often draining a debtors’ mental well-being as well.
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When used responsively, credit cards can offer convenience, flexibility, and lucrative rewards. When used inappropriately they can lead to life-changing negative consequences including bankruptcy and divorce. Therefore, getting out of credit card debt is the second step in our 10 Financial Commandments for Millennials series.

Americans topped $1 trillion in credit card debt in 2017. At a 15.5% average interest rate, you don’t need to even run the numbers to know that’s a lot of money paid to the credit card companies. Average credit card debt is around $6,500 and climbing. Needless to say, if you’re in an uncomfortable situation with credit card debt just know you’re certainly not alone.

So, how do you start to dig your way out of credit card debt?
First and foremost, move as much debt as you can to a 0% card or account. You may have to open two 0% APR cards to do so, but you want to ensure you pay the least amount of interest on this debt as possible. Preferably you can find a card or transfer offer that doesn’t include a balance transfer fee. However, if you have to pay that fee understand that the money you’ll save on interest payments alone will more than make up for the 3% or so balance transfer fee.

If you’re able to move the debt to a 0% card then calculate how much you need to pay each month to pay off the card by the time the zero interest period ends. If you can’t pay off the card in the allotted time frame, you still may be able to roll that balance onto another 0% card in a year or two when your current card’s 0% introductory rate expires.

If you can’t get everything moved to an interest free credit card, you’ll need to start paying down your debt the old-fashioned way: being disciplined in your spending and allocating as much monthly income to your credit cards as possible. To do so, you can choose from one of the following methods:

1) Avalanche Method
​This method is best mathematically. The Avalanche Method dictates you pay all the minimums on your credit cards. Next, you throw as much extra money as possible at the highest interest rate account. This saves you the most money over time, but often can take a long time to pay off a single account which can be mentally and emotionally taxing. If you’re dedicated to crushing   debt, saving the most on interest payments and will be extremely disciplined in tackling this problem then the avalanche method should be considered.

1) Snowball Method
This method suggests that you pay all your credit card minimums just as the previous strategy, only instead of paying everything you can towards the highest balance account you take all extra payments and send them to the smallest account balance. You will pay more interest than the latter method, but eliminating the little accounts first provides debtors with small mental and emotional victories when an account is paid in full. In our experience this leads to a more motivated client who gains momentum with every account that is erased.

While mathematically inferior, our advisors recommend clients utilize the Snowball Method. The small mental victories really power people through their debt elimination strategy and generally tend to keep people better on track.

Of course, you can sit down with an independent advisor at Oak Street Advisors to discuss the best option to achieve your personal financial goals.