The Ultimate Guide to Credit Card Debt Payoff

0:00Tiffany Aliche:The reason credit card debt feels impossible to get out of isn't that you're doing it wrong. It's that you don't know exactly what you're up against. Here's something that credit card companies are counting on you not knowing. The interest on your credit card isn't just high. It compounds every single day, meaning yesterday's interest earns interest today, which then, of course, earns more interest tomorrow. It's not a hole you're digging. It's a hole where the walls are actively caving in on you. Today's episode is one of the most requested topics we've ever covered. credit card debt, exactly how it works, why it feels so impossible to get out of, and the step-by-step strategies to actually pay it off.

0:33Tiffany Aliche:We're talking about the snowball versus avalanche methods, when a personal loan might make sense as a debt payoff tool, hint, most times, how to call your credit card company and negotiate a lower interest rate, and why shame is the single worst strategy for getting out of debt. It is not your fault no one taught you this, but now you know. Let's get into it.

0:53Tiffany Aliche:But first, a word from our sponsors. This podcast is brought to you by Squarespace. One of the things that so many business owners believe they need is a custom bespoke website that they have hired somebody to code for them. And I'm here to tell you that, yeah, you need a website that's functional and beautiful, but you don't need to pay somebody to code. This is where Squarespace comes in. When I first started Her First 100K, I turned to Squarespace. They were the first investment I ever made in our business to start and grow. And they had so many incredible tools baked in. You can buy domains on Squarespace.

1:26Tiffany Aliche:They have SEO tools that you can use to get seen, and they have cutting-edge design tools that don't require you to know anything about code. Head on over to squarespace.com for a free trial, and when you're ready to launch, use offer code FFPOD to save 10 % off your first purchase of a website or domain.

1:55Let's first talk about generally how debt works. I actually know from research for my book, Financial Feminist, that the number one reason women go into debt is that they don't understand how a loan works. It's not that they're dumb. It's not that they're uneducated. It's that literally no one's ever sat down and taught them. And so I need to explain to you first how any kind of debt works in order for you to get a plan. We can't create a plan until we understand what's actually happening. So debt is made up of two basic components. The first is the principle. That is the original amount of money that you took out.

2:34So if you get a student loan, for example, and that student loan is$30 ,000, that is the principle. If you put$1 ,000 on a credit card and you do not pay it off, that is the principle, right? The principle is the original amount of money that you took out as a loan or took out in debt. The second component of debt is what's called interest, right? Because they're not just going to give you this amount of money for free. So they're asking for, in exchange for this lending of money, they're going to charge you interest on top. Now, this is the part that most people don't fully understand, is that if you put$1 ,000 on a credit card, for instance, that interest is going to accumulate in a different way than your interest on a student loan or your interest on a car loan or a mortgage or something else.

3:26There's three basic components of interest. First is the rate of the interest. So your average student loan is anywhere from 4 % to 7%. We're seeing more on the 7 % as of this recording. But the average credit card interest rate is 22 % and it caps at about 30%. So that's a lot more expensive, right? There's some debt like mortgages, student loans that have lower interest rates. It still seems overwhelming, of course, right? So it makes the debt seem less overwhelming, or at least it's more manageable because that interest rate isn't as high. But when it comes to credit cards, that interest rate being 18%, 20%, 25%, 30 % is really, really high.

4:15And that interest rate is getting charged for any type of loan against that principle, right? Because that is the cost of getting that loan. That's the cost of getting that money. The second thing you need to think about when it comes to interest is how this interest is accruing. So like what is the rate that this interest accrues at? For some loans, this interest is every year. For some loans, like credit cards, this interest applies every single day. So your interest is not just applied once a month, once a year. Every single day that you owe a credit card company money, you are going to pay interest.

4:59And finally, you need to understand how the interest accrues. So not just what the interest rate is, when it happens, but also how often it happens. There's some debt, usually a mortgage, for example, that has what's called simple interest. Simple interest means, for easy math, right? $1 ,000, 10 % interest, you're only paying$100. But compound interest is where debt starts to get really, really sticky. Compound interest, just like compound interest with investing, which is positive, it accrues every single time. So it could be great if you're investing, which means your interest is earning interest is earning interest.

5:43But if you have debt that is compounding interest, that is a fucking slippery slope because your interest is earning interest is earning interest. The best part, and I mean best as sarcastically as possible here, about credit cards is that the interest is high. It's a high interest rate. It is a daily interest rate, and it's compounding. So every single day, your interest earns interest on yesterday's interest. Take a shot every time I say interest, but you get it. Now, I'm saying this to you not to freak you out, not to scare you, not to shame you, but because you might not understand that this is what's going on.

6:27In fact, again, back to the research I did for my book, most people don't. Most women don't. So we have to start understanding why credit card debt can be so dangerous and also why it feels so insurmountable. Because it's not just interest getting charged once a year. It is interest getting charged every single day that earns interest off of yesterday's interest. And it's a really, really high rate. So one of the things I talk about with paying off any kind of debt, and we have a whole chapter in my book about paying off debt, is that if we can pay down the principal, you're going to spend less money in interest, right?

7:05If we can pay down, let's say, that original$1 ,000 that we put on a credit card, well, then we're not getting charged as much interest. The interest doesn't have the ability to accrue at the same way or in the same way so that your overall balance gets to go down. So one of the tips I have in my book, and we have a whole script on how you can do this, is calling whoever your debt is through, whoever your debt provider is through, and seeing if you can apply additional payments just to the principal. So if you can lower the principal, right, that means you're paying less debt overall. However, a lot of credit cards don't let you do this.

7:43They don't let you just pay to the principal, and especially not your monthly or your minimum payment, right? That's going to the general pot. That's going to your principal and your interest. So this is why, another reason, why credit card debt can be so, so dangerous and also feel really, really overwhelming. You might be asking yourself, why do I have a credit card at all then? Or maybe I'm listening to this and I'm so scared of going into debt that I've never signed up for a credit card. Well, there's many reasons to have a credit card. And again, a metaphor I use in my book is a credit card is a really great tool.

8:21It's like a knife. Like knives, we use every day to cut vegetables for ourselves, right? But they can also slice your finger if you're not using them properly, if you don't have the proper knife skills. So credit cards, when used responsibly, are a fantastic tool to build credit. They are the best tool available for you to build your credit score when you are using your credit responsibly. They're also more secure than a debit card. The credit card provider is actually paying for that security as well as the merchant is paying to have a more secure transaction for you. And also, let's say somebody gets access to your checking account or knows your PIN, they can hypothetically completely wipe out your account.

9:04Credit cards have so much fraud protection and security built into them. So if I get a charge that wasn't mine, all I have to do is dispute it and I don't have to pay for it. And finally, and I've talked about this a lot on my social media and on Instagram and TikTok is that I get so much free shit with credit cards. I have traveled and lie down flat business class seats to Europe. I have stayed in incredible five-star hotels for free. I can get upgrades at hotels or on airlines using these points. I get TSA pre-check. I get lounge access. I get additional car insurance when I rent a car. So there's so many incredible uses for credit cards.

9:51However, when not used responsibly, when mishandling the knife, it can cut you. And so when we're thinking about properly using a credit card before we even get into credit card debt, we need to be spending within our means and paying it off every single month, making on time in full payments. This is going to be very obvious to some of you, but I literally saw a TikTok the other day where this girl, she was probably in her early 20s, and it clearly never had somebody sit down with her and teach her how her credit card works. And that's okay. Most people don't. She was like, how am I in credit card debt?

10:27I've been paying my minimum payments every single month. But it's saying now that I'm in credit card debt and have been for a year. If you put$1 ,000 on a credit card, your credit card company, and this is where the sneaky thing comes in, is going to say, oh, you just have to pay a hundred bucks of that. Don't worry. Just minimum payment, a hundred bucks. You put a thousand dollars on it, but no, we're only going to ask you for a hundred bucks. Okay. Let's say you pay a hundred bucks. Well, you're in$900 of debt now. That's the thing that they don't necessarily completely tell you, at least not explicitly like that, because they make money when you're in debt.

11:06they make money by being a little bit veiled and a little bit sneaky. So for those of you listening, you're like, yeah, that's pretty obvious. I can't just like put$1 ,000 in and only have to pay for 10 % of it. But a shocking amount of people believe, cool, this is a great tool. I'll just use this. And then you go into debt. So pay off your credit cards in full, so that full$1 ,000 and pay them on time to avoid late fees. We also want to look for credit cards that we're actually going to use. Even if it's the best deal you've ever seen with a credit card, like Southwest has a great deal on their credit card, but you never fucking fly Southwest.

11:46That is a waste of a credit card. We have the favorite credit cards I use and recommend at herfirst100k.com slash tools, the travel credit cards I use, the cash back credit cards I use. So you can head on over to that link and see and maybe sign up for yourself. Finally, the other responsible thing we can do with credit cards and as a way to increase our credit score is by keeping debt under 30 % of our credit utilization across all your cards. Credit utilization is exactly what it sounds like. How much credit are you using? And if you can keep that under 30%, but really if you can swing it under 10%, you're going to have a very, very good chance at getting a higher credit score.

12:31And fun fact that even Kristen doesn't know, Kristen, my credit score dropped 60 points in the past month. You know why? Because my credit utilization went up. And it dropped like maybe 80 points. It was something crazy. My credit score is now at like 706 when it was like 780, 790. And it was because I did a bunch of donations and was just like, boom, boom, boom, boom, boom, bunch of money. And then my credit score was like, what are you doing? You're using way more of your credit than you used to. So a whole other episode about it. We've done episodes about credit score. We have a section in my book about it.

13:13But this is the importance of monitoring your credit, right? Because if I were to, let's say, decide I'm going to buy a house right now, I would be paying more in interest because my credit score isn't as high. So we've talked about how debt works, how credit card debt works, how to use a credit card responsibly. Let's talk about how we actually get out of credit card debt if we do find ourselves here. If we are the person who is overwhelmed with credit card debt, it was the slippery slope, and we were riding that sled, and suddenly we're at the ground and going, oh my God, how do I get out of this?

13:48Let's talk about what you can do.

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16:08When it comes to actually paying off your card-to-card debt, one of the most common mistakes I see is this. Because you're overwhelmed and because you're freaking out about your debt, you make one of two mistakes, or maybe both of them. One, you focus on debt payoffs before saving your emergency fund. Or two, try to like half-ass a bunch of things as opposed to whole one. So let's talk about the emergency fund versus debt thing first. Why, Tori, do you believe that you need an emergency fund first? Well, a couple things. One, I need you to have a safety net should an emergency happen because I don't want you going into debt or into more debt trying to pay for an emergency.

16:59This is where the debt cycle becomes really, really gnarly is if you're in debt already and you're trying to pay it down and you don't have anything in savings or even like a small amount in savings that you know is not going to cover you. And then you lose your job or you get laid off. Your dog gets sick. You have an unexpected medical bill. Your car gets impounded. Something crazy happens that you did not expect. And always something crazy happens that you do not expect. Then what's happening is that you are continuing the debt cycle. You are going more into credit card debt or going into even more expensive credit card debt on a different credit card with a higher interest rate because you don't have enough money to cover that expense, that emergency.

17:46So that's the first thing. We are prioritizing an emergency fund to, duh, but protect ourselves in case of emergencies. The second reason we're prioritizing that emergency fund is because we believe in prioritizing your mental health here at Financial Feminist. and there is something so peaceful about going to bed at night, knowing that no matter what happens tomorrow, you are financially covered at least for a period of time, right? And it is so important to think about your mental health and think about you making sure that you know you're good because you're more likely to overspend if you don't feel secure.

18:29You're more likely to make poor decisions if you don't feel secure. So we need to make sure that our head can hit the pillow at night and we're sleeping good knowing that we're covered. And finally, women especially, I need you to have fuck off money. If you are in a relationship that no longer respects you, if you are in a job that no longer respects you, if you're in an apartment that no longer feels safe, if you need to get out of a situation, I need you to have the money to do that. The reason that I was able to quit my second toxic job was because I had an emergency fund. I was so anxious.

19:16I was crying every single day. This is the boss who told me 10 days in that she was worried she regretted hiring me. I talk about this in the intro of my book. It was awful. It was terrible And the day I walked out there Walked out of the job And had quit Oh my god, it was the best day ever I spent all of Christmas I remember staying We were away for Christmas, me and my family And I was like in their computer room At the hotel Trying to do this like task This huge project that she had assigned me On Christmas Day And I remember thinking this I just felt awful. I felt awful about myself. I felt awful about my situation And I realized oh shit.

20:02I have enough money to leave. I have an emergency fund I didn't have millions of dollars at that point not even close I didn't even have my first 100k yet, but I had enough money to leave that situation and it felt incredible And I never want you to be in a situation that you don't want to be in because you can't afford to leave So that's one mistake I see is people get stressed out with debt and they just dive right in. But then when an emergency happens, they don't have anything to cover themselves with. And the other mistake, that half-assing a bunch of things as opposed to whole-assing one, is if you have multiple kinds of debt, even multiple credit cards with debt on them, it is very easy to say, okay, I'm going to take my limited resources and I'm going to do a little bit here and a little bit here and a little bit over here.

20:48The problem with doing that though is, to quote Ron Swanson, you're half-assing a bunch of things as opposed to whole-assing one. We want you whole-assing one. We want all of your focus on one thing so that you can check that box and you can move on to the next. So how do we actually pay off debt? And specifically, how do we actually pay off credit card debt? Well, there's two strategies. And yes, they were coined by Dave Ramsey. I hate it. I hate that I get to credit him and get to use his little nomenclature, but this is where we're at. The two methods are snowball and avalanche. Snowball means that you are focusing all of your effort on paying down the debt with the lowest balance.

21:34Let's say we have one credit card with$10 ,000 of a balance on it,$10 ,000 in debt, at 25 % interest. And then let's say we have an additional credit card at 18 % interest, but$5 ,000. So the snowball method would say, pay down the 18 % interest credit card first, because it only has a$5 ,000 balance. Now, you can do whatever the fuck you want. Personal finance is personal. If you feel like, you know what, that's better for me because it's going to get me that W under my belt, it's going to feel good. And that's going to be the dopamine and the motivation to keep going is getting that done faster, great.

22:17That's okay. However, I personally like the avalanche method better. The avalanche method is paying off the one with the highest interest rate first. Why? Well, because that's the one that's costing you the most money. That 25 % interest is costing you more money, especially because it has a higher balance in this case, than the one with 18 % interest. And if we can save money in interest, great. That's fantastic. You get to save money. So no matter which one you choose, just focus on one. Don't try to dilute your efforts. Don't try to, again, half-ass two things, whole-ass one thing. The how to pay enough debt is shockingly simple.

23:04It is. It's the consistency that's difficult. The how is not just putting money towards your monthly or your minimum payments, but putting any additional money that you can towards your debt. And especially if you can just do it toward the principal, amazing. That's it. But the hard part is the consistency. The hard part is doing it every single month, potentially for years. When people talk about drowning in debt, it's not because they don't have the manual to pay it off, although I think, of course, education helps. It's probably why you're listening to this. That's why you engage with my work.

23:47But it's really about the consistency. It's about staying inconsistent. It's about progress over perfection. And it's about just slowly, slowly chipping away at your debt balance. And preferably without going into more debt while you're trying to do it. Because like I said before, really hard to dig yourself out of a hole that sand is also still falling into. So if you're right in the midst of that feeling, the, you know what, I am so overwhelmed by this and I feel like I've tried everything and I'm slowly chipping away, but it keeps accumulating, it keeps compounding, and it doesn't feel like enough, I do have a solution for you.

24:29Let's talk about personal loans. Personal loans allow you to borrow a lump sum of money to pay off multiple debts. You then pay off the loan in fixed monthly installments over a set period of time. This is usually two to five years. So it is another kind of debt, but let me tell you why and how it's different. The incredible thing about personal loans is, one, that fixed monthly payment. It is fixed. It is digestible. And folks from our community who have already done this, who have taken out personal loans to pay off their credit cards have cited that they finally feel like they can breathe again because it's digestible, it's specific, and they have a plan.

25:23The second incredible thing about personal loans is that you can take a bunch of different debt, right, if you have multiple credit cards with debt on them, and you can combine it into one monthly rate. So we can whole ass many things as opposed to just whole-assing one or half-assing many. It's Ron Swanson's dream. But the best thing for me about personal loans is that the interest rate is different and better than credit cards. Remember at the top, we explained credit cards. The interest rate is not only compounding, but it compounds every single day. That means if you are in credit card debt, every day that goes by, you are earning interest on that debt.

26:09You are spending more money being in debt. Personal loans, however, charge you simple interest. That's the take out$1 ,000, only pay 10%. That's what we're talking about here. It does not compound, and it's one simple interest rate. It's one fee. Personal loans make your debt a hell of a lot more manageable, a hell of a lot more focused for your debt payoff journey, and a hell of a lot less expensive. The final thing that we love about personal loans for people with credit card debt is that the interest rate is usually way lower. So as opposed to 25 % interest on your credit cards, you can pay 10 % interest or 12 % interest.