Money Mom

How Can I Pay Off My Credit-Card Debt?

Jackie, 29, is a New York–based writer with $10,000 and change in consumer debt, spread between two credit cards. Like many of her friends, she got her first credit card in college. During her 20s, she opened three more cards for various purchases — a laptop, post-grad classes — as she worked her way up the editorial ladder. (She has now paid off two of the four cards entirely, although they’re still open.)

She recently got a great new job and is now able to cover her living expenses, but her debt seems insurmountable, particularly with the interest rates she’s up against — one card has an APR of 16.9 percent with a $6,500 balance, and the other’s is 19.49 percent and $3,000. The good news is that she’s always paid the monthly minimums (about $115 and $60 per card, respectively), has an excellent credit score, and is ready to tackle her payments more aggressively. Still, the most she can manage is about $400 per month, on top of the $129 per month she pays for student loans.

The only savings she has is an old 401(k) containing $9,000 from a previous job. She knows she’s not supposed to liquidate it, but in this case, would it make sense for her to do so to get rid of her debt? What are her alternatives?

Whenever I ask people about credit-card debt — which, admittedly, is not often — they tend to make a depressing “oof” noise that sounds like defeat. They follow it up with something akin to “I’ve always kept my distance from the devil’s plastic,” or “I only use it for groceries, and I pay it right away.” One friend told me she didn’t even know anyone with credit-card debt (bless her), which is statistically impossible but goes to show how little people talk about it, and how easy it is to pull the wool over our own eyes.

The truth is, consumer debt — particularly in your 20s, and particularly in a pricey city like this one, with its pretty cocktails and highfalutin exercise classes and ever-increasing rents — is very common. To live in New York is to stagger along the line between impossibly expensive and completely worth it. Those soaring, on-top-of-the-world moments that come with working and playing here (emphasis on “working,” in your case, as there are better writing jobs here than anywhere else) usually outsprint the creeping anxiety of not quite living within your means.

But just barely. And eventually, it catches up.

Jackie, it seems like you’re in a good mental space when it comes to your debt: You’re not wallowing around in guilt or self-pity, but you’re aware that you need to get after it urgently, right now, tout de suite. And while I like your gung-ho attitude, liquidating your 401(k) savings to jump-start the process is a bad idea, as I’m sure the wider internet has told you as well. There are much smarter ways to go about it without nuking your retirement savings and getting your tail blown off with taxes.

Unfortunately, no matter what kind of financial hoops you’re poised to jump through, wrestling your balance to zero will involve old-fashioned belt-tightening — there are no hacks here. I won’t waste words lecturing you on the toxicity of “revolving” debt (the term for debt that holds over from month to month, spawning interest), but do bear in mind that yours is well above the average for your age group (somewhere between $2,700 and $3,700, depending on whom you ask), even if it’s normal among your friends. Still, people far less resourceful than you have managed to dig themselves out of much deeper holes. As someone who’s managed to claw your way up in a saturated (and not always lucrative) field, you’ve certainly got the discipline it takes to shovel your way through this.

On that note, I called up Beverly Harzog, a consumer-credit expert and author of The Debt Escape Plan. Her own story might make you feel better off the bat: During her 20s, she racked up $21,000 in credit-card debt, Shopaholic style, then saw the light and paid it off in two years. Now she writes books and leads workshops on the subject. She’s sort of like the Tony Robbins of debt counseling, only with more hard numbers and a warm southern accent.

As for your situation, Jackie, Beverly advised getting something known as a balance-transfer card, which is a credit card with no APR (or interest, as you probably know) for a limited period of time. Since your credit is great (bravo), there’s a strong chance you can get a big enough limit on this card to hold the full ten-grand balance from your other cards. Beverly recommends the Chase Slate card, which offers a 0 percent APR for 15 months, or the Citi Simplicity card, which offers a 0 percent APR for 18 months but comes with a balance-transfer fee of 3 percent. Once you move your debt onto one of these cards, you’ll need to hit it with everything you’ve got before your time runs out and the APR goes back up (it’ll probably land somewhere between 16 percent and 24 percent, so about what you’re paying now).

You can set up the transfer online (just call a customer-service rep if you get mired in jargon). However, it will take a week or so to settle, so stay on top of your current bills until the whole balance goes through. “Some people mess that up and end up with a missed payment,” Beverly cautioned. “Keep paying until you’re sure that your other two accounts are both at zero.”

And, of course, there’s a caveat. “This might mess up your score for a short time,” said Beverly. “Seriously, though, I would not worry about it for the first six months. The goal is just to get out of debt.” Credit scores are tricky, non-intuitive beasts, calculated by the amount of credit you’ve got available versus the amount you’ve used, and yours will rebound after you make a significant dent in your balance. Meanwhile, Beverly advised that you not shut down your other cards yet (unless, of course, they have annual fees, in which case ditch them). It helps your credit score to have open lines of credit, so they’re actually doing you a favor by sitting at zero. If you can, use them every couple of months for something small and then pay the bill immediately (otherwise, sometimes they’ll close automatically if left stagnant for too long).

Jackie, if you contribute the $400 per month that you mentioned, 15 months on the Chase Slate card will bring your debt balance down to $4,000, and 18 months on the Citi Simplicity card will get you to $3,100. Then, when you bump up against the time limit, you can repeat the same song and dance with a new card as long as your credit score is still high (which it should be, if you’ve stayed consistent with your payments). “If she needs to do another credit transfer to finish paying everything off, there’s a good chance she can do so,” said Beverly. “I would only recommend this to someone who understands the system. You can’t do this too many times, and it takes organization.”

It takes bullet-biting, too. “I got out of debt by massively cutting my expenses,” Beverly explained. “I mean, I ate peanut-butter-and-jelly sandwiches. Do whatever you have to do.” She also created visual reminders of her progress. “When I could watch the numbers going down, I got such an adrenaline rush. It feels awesome. It’s very empowering.”

And don’t worry — no one is advocating for extreme asceticism. You live in New York, so be realistic; if you can’t go out and enjoy it, what’s the point? Decide what your “thing” is (yoga classes, a few drinks with friends, etc.), and savor it. Hokey as it sounds, a rewards system for hitting certain goals can be helpful, too. “Whether it’s a manicure or a nice bottle of wine, treat yourself every once in a while so you don’t feel deprived,” said Beverly.

You can also find extra money by going through your current statements to ferret out “gray” charges, i.e., random old subscriptions that suck down $9.99 every month (I’m looking at you, Dropbox). Financial planning websites like Mint and Bills.com can help you plug these leaks, as well as keep track of where your money is going. Personally, I’d rather see my stupidly large restaurant expenses in the form of colorful pie charts than dry figures, and getting push notifications about funds coming to and fro has eradicated those stomach-dropping “surprises” at the ATM. I used to get clammy palms every time I looked at my bank balance, and now that I get daily reminders about it, it’s like brushing my teeth.

Another way to funnel money toward your debt could be to defer or reduce your student-loan payments for a year or so. This depends on your particular student-loan setup, but it’s worth a few phone calls to investigate. Student debt typically has much lower interest rates than consumer debt (as one of my friends puts it, “It’s the best debt you’ll ever have”), so it’s better to let it sit while you siphon that monthly $129 toward your credit-card balance instead.

In the meantime, you could also look into simple ways to increase your income, and for that I have one word: babysitting. New York parents will pay bank for someone smart and responsible to stay with their sleeping children while they escape for a few hours, and they often have relaxing apartments with fast Wi-Fi and every snack imaginable. It’s a goldmine — and you can even get your own writing done while you’re there.

As for a Plan B: If, for some reason, you can’t get approved for a balance-transfer card, your best alternative is to get a loan at a lower rate than your cards’ APRs, use it to pay off the balance, and then proceed with paying off the loan. This is known as debt consolidation; Beverly suggested sites like Lending Tree to check out next steps.

Finally, roll over your old 401(k) into an IRA and leave it be. According to Sallie Krawcheck, the founder and CEO of Ellevest, you should also hold off on contributing to any other savings plans for the time being, even your current company’s 401(k) program, until your consumer debt is done and gone. “I keep hearing this notion that we women should establish an emergency fund even if we have credit-card debt, and that is terrible advice,” Sallie told me. “Get rid of your credit-card debt first, and then start saving and investing. Credit-card debt should never, ever be left outstanding. It’s poison.”

Look at it this way: Paying this debt guarantees a higher return rate than any other investment you can make, period. Even a shrewd stock buy is very unlikely to net the equivalent of what you’ll owe with current APRs over time. And once you’re free and clear of this, your next financial steps will be a piece of cake, comparatively. Best of all, your money will be entirely yours

How Can I Pay Off My Credit-Card Debt?