In this post, we’ll look at some concrete steps you can take to find out all the debt you owe and get a plan to pay it off. I’ll also share stories of two couples from my podcast who let their debt get out of hand so that you can learn from their mistakes as well.
Figure Out How Much Debt You Owe
One of the worst credit card mistakes you can make is paying off your bills without a strategic plan – this is exactly what the credit card companies want because you’re essentially just dumping money into their pockets.
You can’t make a plan to pay off your debt until you know exactly how much you owe.
In fact, you can get credit card companies to help you: Look at the back of your credit cards for their numbers, call them, and put their answers into a simple spreadsheet like this one.
| Name of Credit Card | Total Amount of Debt | APR | Minimum Monthly Payment |
|---|---|---|---|
|
Amex |
$4,900 |
19% |
$250 |
Congratulations! You’ve taken your first step to finding out all your debt and have a definitive list of exactly how much you owe.
What Debt Should I Pay Off First
Not all debts are created equal. Different cards charge you different interest rates, which can affect what you decide to pay off first.
There are two schools of thought on how to go about this.
- With the avalanche method, you pay the minimums on all cards but pay more money to the card with the highest APR because it’s costing you the most.
- With the snowball method, you pay the minimums on all cards but pay more money to the card with the lowest balance first – the one that will allow you to pay it off first.
| Snowball Method: Lowest Balance First | Avalanche Method: Highest APR First | |
|---|---|---|
|
How It Works |
Pay the minimum on all cards, but pay more on the card with the lowest balance. Once you pay off the first card, repeat with the next-lowest balance. |
Pay the minimum on all cards, but pay more on the card with the highest interest. Once you pay off the first card, repeat with the next-highest-APR card. |
|
Why It Works |
This is all about psychology and small wins. Once you pay off the first card, you’re more motivated to pay off the next one. |
Mathematically, you want to pay off the credit card that’s costing you the most first. |
This is a source of fierce debate in credit card circles. Technically, the snowball method isn’t necessarily the most efficient approach because the card with the lowest balance doesn’t necessarily have the highest APR.
But on a psychological level, it’s enormously rewarding to see one credit card paid off, which in turn can motivate you to pay off others more quickly.
Bottom line: Don’t spend more than five minutes deciding. Just pick one method and do it. The goal is not to optimize your payoff method but to get started paying off your debt as quickly as possible.
Negotiate Down Your Debt APR
I’m a huge fan of taking fifty-fifty odds if the upside is big and it takes only five minutes of my time. Accordingly, try negotiating down your APR. It works surprisingly often, and if it doesn’t, so what? Just call your card companies and follow this script:
YOU: Hi. I’m going to be paying off my credit card debt more aggressively beginning next week, and I’d like a lower APR.
CREDIT CARD REP: Uh, why?
YOU: I’ve decided to be more aggressive about paying off my debt, and that’s why I’d like a lower APR. Other cards are offering me rates at half of what you’re offering. Can you lower my rate by 50 percent, or only 40 percent?
CREDIT CARD REP: Hmm . . . After reviewing your account, I’m afraid we can’t offer you a lower APR. However, we can offer you a credit limit increase.
YOU: No, that won’t work for me. Like I mentioned, other credit cards are offering me zero percent introductory rates for twelve months, as well as APRs of half what you’re offering.
I’ve been a customer for X years, and I’d prefer not to switch my balance over to a low-interest card. Can you match the other credit card rates, or can you go lower?
CREDIT CARD REP: I see . . . Hmm, let me pull something up here. Fortunately, the system is suddenly letting me offer you a reduced APR. That is effective immediately.
It doesn’t work every time, but when it does, you can save a significant amount of money with a five-minute conversation. Make the call, and if you’re successful, don’t forget to recalculate the figures in your debt spreadsheet.
See What Happens When You Neglect Your Debt
Ignoring your debt and finances can be dangerous for your financial future and your relationship.
In episode 116 of my podcast, we meet Carry and Taylor, an unmarried couple with no kids who are divided about finances and desperate to find common ground.
[00:22:25] Ramit: Cool. All right. So Carrie, how would you characterize your role when it comes to money in your relationship?
[00:22:37] Carrie: Historically, I have been the breadwinner, the main money maker of the family, which has truly never been a contentious point between us.
[00:22:49] Ramit: Who manages the money?
[00:22:51] Carrie: I manage the majority of household things and have slowly asked him to, over the recent years, take on some of that.
[00:23:04] Ramit: Okay, great. All right. So you would characterize your role as the breadwinner, as the primary money manager. Any other ways you would describe your role with money in your relationship?
[00:23:17] Carrie: The planner. The one thinking ahead about what comes next. How do we get there?
[00:23:24] Ramit: Mm-hmm.
[00:23:25] Carrie: Do we set aside this much money? Do we not buy this? Do we do that? Do we get this cheaper thing?
[00:23:32] Ramit: You read my book?
[00:23:34] Carrie: Yes.
[00:23:34] Ramit: Okay. All right. Uh, now let me ask Taylor. Taylor, I already know you didn’t read my book, so let’s just get that out of the way. He’s laughing. All right. Check. Taylor, how would you characterize your role in your financial relationship with Carrie?
[00:23:51] Taylor: Um, I’m very much so the southern man.
[00:23:56] Ramit: What’s that?
[00:23:57] Taylor: Outdoor guy, physical labor, things like that. Carrie’s the planner. I mean, that’s just as nutshell as I get it.
[00:24:03] Ramit: Okay, got it.
[00:24:04] Carrie: He’s a helper.
[00:24:05] Taylor: Yes. Helper.
[00:24:06] Ramit: Taylor, if you are the helper, then what is Carrie?
[00:24:10] Taylor: My boss. I’m just kidding. Uh, I would say, I–
[00:24:15] Ramit: She’s got a hand over her face right now.
[00:24:16] Taylor: Oh God. I know. The doer. She’s an action person, not a words person. And I’m the exact opposite.
[00:24:23] Ramit: What are you, Taylor?
[00:24:24] Taylor: I’m words. If you look at me and tell me that everything’s going to be okay, and you just look me in the eyes, it’s all right.
Carrie’s role as the financial planner contrasts sharply with Taylor’s more hands-off approach. But how long can this imbalance last before it starts affecting their relationship?
[01:02:25] Ramit: Let me put it this way, Taylor. Right now, the level that you’re operating at is not enough for Carrie. Whether you’ve gotten better or worse is irrelevant. The level you’re performing at right now is not the level that Carrie needs in a partner. So you have options. What are those options, Taylor?
[01:02:49] Taylor: I think I have one option, and that one option is to perform better to be that equal–
[01:02:55] Ramit: But how? That’s just a word. How?
[01:03:00] Taylor: By any means necessary.
[01:03:02] Ramit: How? Specifically, tell me, how are you going to get better?
[01:03:06] Taylor: By talking to her more, coming to her more.
[01:03:09] Ramit: Okay.
[01:03:09] Taylor: Establishing an equal partnership in a way, by communicating of what I need to do. Via her mouth, being fully present and attentive. Nothing else on my mind except for what is she saying and what I need to do to become that.
[01:03:25] Carrie: I think it could be good for us to decide, because I mentioned talking regularly, so decide on maybe a regular time that we sit down and talk about if anything has changed with what we’re working towards.
[01:03:42] Taylor: I really like that because all my jobs and everything I’ve ever done has been schedule-oriented.
[01:03:48] Ramit: Okay.
[01:03:48] Taylor: If I know I’m supposed to be somewhere at a certain time, I don’t miss appointments.
[01:03:53] Ramit: Taylor, you’ve been together for eight years. You clearly love Carrie. That’s obvious. Can I just say that I think if you had the ability to do this, you probably would’ve already done it. What about getting a little help? I mean, that’s what you’re doing talking to me, which is awesome. I’m glad you’re here. You’re both showing a lot of candor and courage. But Taylor, I’m going to suggest that it’d probably be a really good idea, maybe for the two of you, maybe individually, to get a little coaching, a little help, maybe a therapist help you communicate more effectively. How do you receive that? You open to that? Okay. He’s saying yes.
[01:04:35] Taylor: I want to do anything.
[01:04:37] Ramit: Love that. So to me, that’s a really clear action step, which is, I’m going to find a couple’s therapist for us to talk to. That would be a big sign. Carrie, how would you receive that if he came to you and said, I found somebody that I’d likes us to go to once a week, etc?
[01:05:00] Carrie: Lord, that was something I tried to do three, four years ago before he was ready.
[01:05:07] Ramit: Okay. Taylor, you ready now?
[01:05:11] Carrie: Absolutely.
[01:05:12] Ramit: All right. Carrie, would you like to respond right now? You look like you got something to say.
[01:05:19] Carrie: Yeah. That would make me feel like he cares deeply about the importance, or our future.
[01:05:34] Taylor: I’ll be the one to do that. And if I don’t know how to do something, I have all the resources necessary and accessible to me to figure that out. And if I don’t, that’s just a sign of laziness.
Taylor’s willingness to step up and seek help is a positive step, but it underscores the importance of addressing financial roles before they become sources of conflict.
In your own journey to manage debt, communication, and planning are crucial, just as Carrie and Taylor are learning. It’s never too late to make a change.
Another conversation I had was with Jennifer and Andrew, a married couple with two kids. They also struggle with a mismatch of money dynamics, and their debts are adding up fast…
[00:11:44] Jennifer: I would say that we’re not speaking the same language and we just don’t see money the same way. So we can’t manage it together.
[00:11:51] Andrew: I am very analytical when it comes to money, um, and she sees it differently. It’s more fluid. It’s loose. She can look at money a month out, and I’m stuck looking at money like, this is this paycheck, this paycheck goes to this paycheck. My money constraint is very tight.
[00:12:20] Jennifer: I think that’s where some of the tension comes in because when we’re talking about money, it’s like we’re talking about it in different ways. He’s looking at exactly what has come into his account that day from his paycheck, and I’m thinking, I have a client that’s going to pay me next week, and I know that for next month I’m projected to make this much, and I could make more. And that means we could actually take– maybe we don’t have to pay this specific bill right now and drain our– we can actually pay this bill in this chunk, in this way. We have this much for groceries. We don’t have to worry. We’re okay.
[00:12:51] Ramit: Oh, are you seeing Andrew’s face right now?
[00:12:54] Jennifer: I was looking at you so I wasn’t.
[00:12:56] Ramit: Andrew, can you just– I mean, what’s going through your mind right now? I see your face.
[00:13:01] Andrew: Oh, it’s the late fees. It’s the higher interest rate. It’s, we’re going to end up spending more money because we didn’t pay it off when it was due. It’s the fact that our credit’s going to take a hit.
[00:13:17] Ramit: Which means what, if your credit takes a hit?
[00:13:20] Andrew: It means we can’t get a better credit card. We can’t move if we need to. If we need to make a big purchase, we can’t do that because our credit’s shot. Our credit is already not good.
Their financial struggles aren’t just about poor management; they stem from a history of survival mode living that has carried into their current relationship. As they reflect on their early challenges, the impact of these habits becomes even more evident.
[00:20:07] Jennifer: We started off our relationship, essentially, in survival mode. Neither of us was, um, really making any money. I was living in a Buddhist monastery as a live-in chef, so I was basically just working to live there. And he was a student. And, um, blessedly, his mother was able to pay for him to just go to college. So that was great. But his whole job was to be a student, so we were not making any money.
[00:20:29] Ramit: So that’s how you started off your relationship? Were you married at the time?
[00:20:33] Andrew: No.
[00:20:33] Jennifer: We were engaged, so we had a baby really early in our relationship. Um, had a premature baby at home, and he right away went and got that job, and, um, we had to get on food stamps. And I had $200 to try to figure out gas, diapers, food, and we’d take that other 800, put it to rent. And we did that for a little while until we finally got a raise, which I think then got to about, um, maybe that 2,000 you’re thinking of.
[00:21:01] Andrew: Yeah.
[00:21:01] Ramit: Hold on a sec. I have so many questions. So I have to ask, you’re on food stamps now, did you think of going back to your family and asking for some financial help?
[00:21:14] Andrew: They helped every now and then.
[00:21:17] Jennifer: Yeah. My family, it was normal for them.
[00:21:19] Ramit: Hold on. I want to hear from Andrew. So Andrew, what do you mean every now and then?
[00:21:23] Andrew: They would still– if things got really bad, I can call and be like, hey, we need some help. Um, and they would be like, okay, here’s a little bit of money to get you through.
[00:21:32] Ramit: What does really bad mean? And how much would they give you?
[00:21:34] Andrew: Really bad is we are short 600, so they give us 600, or we have a bill we can’t cover. So here’s your bill money.
[00:21:47] Ramit: Okay. Who were you calling?
[00:21:49] Andrew: My mom.
[00:21:49] Ramit: You were calling your mom. And what is her financial situation now?
[00:21:54] Andrew: Uh, she is in debt.
[00:21:56] Ramit: Wow. And did that come about from pure mismanagement?
[00:22:01] Andrew: Mismanagement, and she got sick, so she had to deal with all of that.
[00:22:08] Ramit: How is she now health wise?
[00:22:11] Andrew: Uh, she passed recently, so not too– I guess she’s doing a lot better.
[00:22:19] Ramit: That’s one way to look at it.
[00:22:21] Andrew: She’s doing a lot better now.
[00:22:22] Ramit: I’m sorry to hear that. Um, okay. When she passed, in terms of your own finances, did it affect your finances at all? Was there an inheritance or anything like that?
[00:22:37] Andrew: As it stands right now, she still owes money, so we are trying to figure out how we’re going to cover that cost.
As Jennifer and Andrew reflect on their past challenges and current struggles, they realize their approach to handling finances needs a significant shift. This pushes them to think differently, leading to a hopeful turning point where they’re ready to work together on their debts and set new priorities for their future.
[00:32:02] Jennifer: Okay. I think that’s what I’m realizing, is I’m looking and hoping for you to also just take some, um, just have some excitement and take some authority and just step in and help me with this mission and help me move us forward.
[00:32:25] Ramit: Andrew.
[00:32:27] Andrew: So there’s missing pieces to this. So, um, it’s four years now. Four years ago, she had leukemia, so we’ve been dealing with that. So my–
[00:32:40] Ramit: Jennifer did?
[00:32:41] Andrew: Jennifer had leukemia.
[00:32:42] Ramit: Oh, okay. I didn’t know that.
[00:32:42] Andrew: Yeah. So she’s in remission. So, um, my goal has just been keep plowing forward.
[00:32:52] Ramit: Hmm.
[00:32:53] Andrew: If we need something, just plow forward.
[00:32:55] Ramit: Because what? Plow forward because?
[00:33:02] Andrew: If she gets sick again and we don’t have insurance, or if we don’t have enough to cover the cost of medications, or if we don’t cover the cost of a hospital bill, I just need to continue to plow forward, so the excitement isn’t there. I can’t get excited because if I get excited and something happens and we’re not prepared, it’s just going to be that much more crushing.
[00:33:28] Ramit: It sounds like you’re a soldier right now. You’re an infantryman. You’re in battle, and it’s not about excitement, it’s not about feeling good. It’s just about one foot in front of the other, over and over, up that hill. That’s all you got to do. Would that be fair?
[00:33:45] Andrew: Yeah.
[00:33:46] Ramit: Okay. So there’s a time and a place for that. Sometimes we have to go into financial battle. If your partner has leukemia, yeah, I’m not interested in how you feel about your job, uh, you just need to have a job. I respect that. And Jennifer, I’m really thankful to hear that you’re in remission. Now that you’re in remission, do you think it maybe feels like it’s time to re-characterize this from a battlefield to something else?
[00:34:21] Andrew: Yeah.
[00:34:23] Ramit: What would it be? Give me an analogy.
[00:34:27] Andrew: Planting a seed.
[00:34:29] Ramit: Okay. Talk it through.
[00:34:31] Andrew: Starting over and just trying to reestablish a barren wasteland.
[00:34:38] Jennifer: I like the idea of a garden because it takes time too, and attention, and intention.
[00:34:46] Ramit: Give me some more. I want to hear. Time. It takes time, attention, intention. What else, Andrew? What is a garden? What are the implications of a garden?
[00:34:56] Andrew: Patience. Um, you have to take care of it. You can’t just let it go wild. So it needs attention.
[00:35:03] Ramit: Yes.
[00:35:04] Andrew: It needs to be fed. It needs to be looked after. It needs to be fertilized.
[00:35:09] Ramit: Mm-hmm. Does every plant you plant grow 10 feet tall?
[00:35:13] Andrew: No.
[00:35:14] Ramit: Do some of them die?
[00:35:15] Andrew: Yeah.
[00:35:15] Ramit: And is that okay?
[00:35:17] Andrew: Yeah.
[00:35:18] Ramit: Yeah, that’s life. That’s okay. You took a great crack at it. We’ll tweak a couple things. We’ll get some different seeds and we’ll try it a different way. What do you think?
[00:35:28] Andrew: Sounds fantastic.
[00:35:30] Jennifer: I love that.
[00:35:31] Ramit: Okay. I’m getting excited. You’re getting excited. Okay.
[00:35:33] Andrew: That sounds nice.
[00:35:35] Ramit: Okay. So this is cool. We are now rewriting our story together, and each of you has the capability to do this. Sometimes we have stories that we articulate for ourselves. Uh, Jennifer, you explicitly said, “I’m changing the cycle.” That was a story you created and you made it come true.
Amazing. Sometimes we create stories that we never articulate. They just happen. Uh, I’m in battle. I need to keep moving forward. Andrew, that’s a story you told yourself, but you may not have explicitly said it out loud. And now what you two have done is you’ve created a new story together.
These real-life examples highlight the importance of facing financial challenges head-on and maintaining open communication with your partner no matter how dire the situation is. Just as Carrie, Taylor, Jennifer, and Andrew learned to reassess their strategies and work together, you can take control of your debt by understanding the full picture, setting clear priorities, and making informed decisions.
The key takeaway is that while debt can feel overwhelming, a solid plan and collaboration can pave the way to financial stability.
Decide How To Pay Off Your Debt
One common barrier to paying off debt is wondering where the money should come from. Should you pay off your debt with balance transfers? Should you use your 401(k) money or your savings account? How much should you be paying off every month? Let me walk you through a few methods you could use:
Balance Transfers
Many people begin by considering a balance transfer to a card with a lower APR. I’m not a fan of these. Yes, it can help for a few months and save you some money, particularly on large balances.
But this is just a Band-Aid for a larger problem (usually your spending behavior when it comes to credit card debt), so changing the interest rate isn’t going to address that.
Plus, balance transfers are a confusing process fraught with tricks by credit card companies to trap you into paying more. The people I’ve known who do this end up spending more time researching the best balance transfers than actually paying their debt off.
As we just discussed, a better option is to call and negotiate the APR down on your current accounts.
…but you don’t have to take the same path as everyone else. How would it look if you designed a Rich Life on your own terms? Take our quiz and find out:
Taking money from a 401(k) or home equity line of credit (HELOC)
I don’t recommend either of these options. You’re trying to reduce complexity, not increase it, even if it costs slightly more. Again, there’s the behavioral problem: People with credit card debt often find it difficult to reduce spending and get back into debt after tapping their 401(k) or HELOC.
If you use your HELOC money to pay off credit cards, you’ll risk losing your home if you run up more debt.
Reducing spending and prioritizing debt
The most sustainable way to pay off credit card debt is also the least sexy. Unlike balance transfers or HELOC borrowing, it’s not very exciting to tell people you decided to spend less on other things so you could pay off your debt. But it works.
Let me ask you a question. Right now, how much of every $100 you earn goes to debt? Two dollars? Maybe $5? What if you paid $10 toward your debt?
You’d be surprised that many people don’t even have to cut much spending to pay off debt quickly. They just have to stop spending on random items, get conscious about prioritizing debt, and set up aggressive automatic transfers to pay off their credit card debt.
Stop using credit card scripts to normalize debt and get started on being serious about paying it.
I don’t want to make this sound easy because paying off your credit card debt is challenging. But millions of others have done it.
Get Started Finding Out All Of Your Debt And Paying It
Remember the philosophy behind the 85 Percent Solution: The goal is not to research every last corner to decide where the money will come from; it’s action.
If you only skimmed through this post, here’s your action steps to getting debt free:
- Figure out how much debt you have
- Decide how you want to pay it down
- Negotiate your rates with your credit card company
- Get started.
You can always fine-tune your plan and its specifics later
You’ll notice that I haven’t offered you a simple secret or cute sound bite about how to pay off your debt with no work. That’s because there isn’t one. If there were, I would be the first to tell you. But truthfully, paying off debt just takes a plan and the patience to execute it.
It may seem like pure agony for the first few weeks, but imagine the relief you’ll feel when you see your debt growing smaller and smaller with each passing month. And sometime after that, you’ll be debt-free! Then, you can focus all your energy on getting ahead, investing, and living your Rich Life.
It’s one of the best things I’ve published (and 100% free), just tell me where to send it:
