We’ve had a lot of interesting discussions lately about what is and isn’t the best way to get out of debt. But, it’s occurred to me that even though I have vocally disagreed with certain financial experts and their way of doing things, I haven’t given you any insight into what I recommend for my clients. Allow me to rectify that, now.

What follows is a detailed, “how-to” that I walk my clients through when they come to me overwhelmed by credit card debt.

Understand up front that you don’t have to agree with this and I certainly encourage you to take what works for you and make it your own; however, I do not recommend the Dave Ramsey debt snowball, so if you’re a fan of that, you won’t find it here. Let me also preface everything with the fact that while you are working on lowering your debts, you should not neglect your retirement and emergency funds. I won’t be including advice on dividing up your net disposable income between savings, investments and debts. This guide is strictly on how to get out of credit debt. However, it is very important that you do NOT neglect these things while working towards being debt free.

So, with all of the prefaces and disclaimers out of the way, let’s move in to how to get out of credit card debt, shall we?

Step 1: Stop spending on your credit cards.

It should go without saying that when you’re trying to get out of debt you don’t add more to it; however, we live in an imperfect world. People continue to spend on their credit cards and then wonder why they can’t get out of debt. Stop it! Put the cards in a safe place where it’s difficult for you to get to if you feel compelled to use the card. You can even try something zany like freezing your cards, or something a little more brutal like slicing them up!

The bottom line is that you’ll never get out of debt if you keep spending money you don’t have. If that sounds simple, it’s because it is!

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Step 2: Assess your situation.

The first thing you must do in order to get out of debt is figure out how far in debt you are. Grab all of your most recent statements, pen(cil) and paper, a calculator, and have the internet readily available. You should free up a couple of hours one evening to go over all of your financial information. You don’t need to add the pressure of feeling rushed to this already stressful process.

Make a list of all of your credit cards; include interest rates and the amount that you owe. I would even go so far as to say that you need to break down each credit card by what you owe as well. For example, if you have 0% on balance transfers, 24% on cash advances, and 12% on regular purchases then you will want to list them out. You need a complete visual of what you owe for each card.

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Step 3: Make a budget

You need a budget, plain and simple. How you do it is up to you, but you may consider putting your budget down in writing and using a budget worksheet. Use any worksheet you like, but I happen to be a fan of this one. It’s simple, yet very detailed and includes everything from your income to miscellaneous expenses that most people forget to include in their monthly budgets. By filling out one of the pre-made budget worksheets, you take a lot of the guesswork out of the process. You just fill it in based on your particular financial situation.

Make sure you’re thorough, honest and realistic when you create your budget, otherwise you’ll just be wasting your time.

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Step 4: Determine what your net disposable income is.

This is the amount of money you have left over after all of your bills have been paid. To get this number, you’ll subtract your total monthly bills from your total monthly income – which should be listed on your budget sheet for you if you did one. If your net disposable income is a negative number, then you need to rework the budget. That usually means you’re living beyond your means and have been relying on your credit cards to get you by. Well, guess what? That’s why you’re in debt! Focus on your budget and find out where you can cut costs and learn to live frugally.

If you’ve got a positive number, congratulations! You’re already ahead of the game and well on your way to getting out of debt! If you’ve been realistic in your budget and included everything that you should have, this number will be what you can divide between your retirement and your debt.

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Step 5: Contact your creditors to do a little negotiating.

This requires some research on your part, but it will be well worth it in the end if you can reduce your rates. Find out what rates are out there for people in your score range. Check out if other companies have any special promotions or deals and if they do, how long they plan to run them. Armed with that information, call your credit card companies and begin negotiations (you’ll usually be able to find their customer service department on the back of one of your statements).

First and foremost, be polite. Don’t beat around the bush about the call either, just come right out and tell them what you want. If they decline your request, ask for an explanation. If you don’t agree, ask to speak to a supervisor. Explain to the supervisor what you qualify for with their competitors and let them know that you intend to move your business if they can’t at least match the offer. ***Note: Be prepared to follow through if you use this tactic. Some supervisors will just call your bluff and then it doesn’t do you any good if you had no intention of leaving.

Do your best to get your rates lowered, but don’t get discouraged if it doesn’t work out. Right now, credit card companies are tightening their credit guidelines so it may be that no one gets their rates lowered unless they have pristine credit.

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Step 6: Consider your alternatives.

Some people find it helpful to consolidate their debts into one, lower interest payment. This will work well if you have the discipline not to use the credit cards once they’re paid off. It doesn’t make sense to combine the debt into one and then run the cards up again, so really think about your actions before doing anything. A couple of things you can do to consolidate are to consider a balance transfer to a lower interest credit card or a home equity. The Federal Trade Commission has an excellent page on debt consolidation that’s well worth checking out.

If you go the lower interest credit card route, be sure you check into any fees and make sure any specials on interest rates apply to balance transfers. It can be extremely deflating to think you’ll get 0% interest for six months when you transfer over your debt only to find out that it doesn’t count on balance transfers. Always read the fine print before committing to anything. If you plan to go the home equity route, make sure that you do your homework and understand the rules of your state. Home equities can be a great tool in helping to reduce your debt, but you still have to be sensible about them.

Photo by Stephane O

Step 7: Organize your list.

Once you’ve gone through all of your options, you’ll need to organize your list. Personally, I always recommend that you list your debts in descending order from the highest interest rate to the lowest.

Here’s the kicker, though: If you have three different interest rates on your card, it can be hard to organize them based on interest rates alone because any payments you make are applied to the lowest interest rate first. This is where your internet connection comes in handy. Use the Bankrate.com calculator, or any others that you prefer, to calculate what would be the most cost effective card to pay off first. The idea is to reduce your debt without paying any more interest than you have to. If you don’t have cards with different interest rates, then just list them as stated above.

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Step 8: Set your goals and make a plan.

By this point, you should have all of the numbers worked out. Now you’re going to set some goals for yourself and make a plan to pay off the debt. Your goals should be small and specific. For example, a credit card at the top if your list with $10,000 at 17% on it may have goals that look like this:

- I will pay $2400 in 6 months.

- After 12 months, my debt will be below $5000.

You get the idea.

Having small goals like this can really help you see how well you’re doing. A debt of $10,000 at 17% can take some time to pay off and when looked at overall, can often be overwhelming. Small goals are easier to achieve and can offer motivation along the way when you feel discouraged.

Once you have your goals in mind, make a plan of action to achieve those goals. Make minimum payments on all of your cards except the one at the top of your list. You’re going to apply the additional money towards the card at the top of the list until it’s paid in full. Once the card is paid off, move to the next one, but don’t change the amount of money you’re applying to the debt. So, for example, that $10k at 17% probably had a $200 minimum payment to it. You’ll want to move that plus the $500 you applied to the $10k debt over to the next highest interest rate card until it’s paid off. As you continue to pay off your credit cards, you’ll have more and more money that can be applied to your debts until you’re finally able to wipe them out. What a day that will be, huh?

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Step 9: Don’t forget the rewards!

Most people need some sort of incentive to keep doing something they don’t particularly like. There’s nothing wrong with rewarding your efforts when you reach a certain goal. Each time you reach one of your goals, give yourself a reward, something that really motivates you.

I’m a big movie buff and tend to be a collector of DVDs. So, for me, when I reached a goal I allowed myself to purchase two DVDs or one DVD box set, whichever was cheaper for what I wanted. This particular reward worked well for me. I wanted more DVDs so I was really motivated to pay off that debt.

I once had a customer who was looking for an inexpensive way to keep track of her progress and reward herself. She was a kindergarten teacher at the time and used gold stars to motivate her kids. She decided to give it a whirl, not thinking it would work. She made up a chart that listed her debts and her goals and when she reached a goal, she’d give herself a gold star. After so many gold stars, she treated herself to a day at the spa. To her utter surprise, that motivated her and she paid her debts off even sooner than she planned.

Your rewards can be whatever you want them to be. Have a small party in celebration of reaching your goals, go out to dinner and a movie, or treat yourself to a day at the spa or a round on the golf course…whatever you think will help keep you motivated. If you’re a list kind of person and like to see stuff crossed off, put your list of goals on the fridge and start marking them off as you complete them. That’s the beauty behind breaking your goals into smaller sections – you can cross them off and feel motivated along the way.

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Step 10: Don’t give up!

Just remember that you can get out of debt. It’s not going to be an easy road, but if you put your mind to it, you’ll find the right path. I don’t advocate spending more money than you have to, but I’m a firm believer in doing what’s right for you. So, if my method and advice isn’t really your style, then find one that is.

One final word: If you decide to go the credit counselling route, make sure you use a not for profit organization. The NFCC’s website is definitely worth checking out, and the Federal Trade Commission has an excellent write up on picking a cousellor that’s right for you.

Related posts:

1. 7 Ways to Stay in Debt Forever
2. 10 Ways To Permanently Stay In Debt
3. Sun Tzu’s guide to defeating debt
4. The ‘Credit Card for Newbies’ Guide (Part 1)
5. The Credit Card Newbies Guide (Part 2)