Your 2016 New Year’s resolution was to finally pay down all your debt. But it’s now May, and your balance has hardly budged. What’s going on? Here are the top 10 reasons why your debt isn’t dwindling — and what you can do to get debt-free by the end of the year:
1. You Are Still Using Your Credit Card
To quote my old sailing instructor: “The boat is taking water, Missy. You might want to plug that hole before you start bailing. A’yup.”
Don’t add to the debt you are trying to pay down. Leave your credit card at home, freeze it, or even cut it up. Just. Stop. Using. It. If you cannot pay cash for something, then you cannot afford it.
2. You Don’t Have an Emergency Fund
Your car breaks down. Your computer breaks down. You break down. If you don’t have an emergency fund in place, all those unplanned costs go right back onto your credit card. Before you start reducing debt, you should first put $1,000 into a savings account.
Life happens. Think of your emergency account as the financial equivalent to your car’s air bag. It’s more likely that you’ll walk away from an accident if you’ve got something to cushion you against the crash.
3. Your Income Is Too Low
If you are using your credit card to pay for necessities like groceries or utility bills because you are short on cash, you will be in debt for a long time. Credit cards are a very expensive method of borrowing money.
If you are in this situation, you need to raise your income by any (legal) means necessary. Can you get a part-time job? Can you save on housing by renting out a room in the house, even if that means you have to sleep in the living room or share a bedroom with your kids? Can you apply for food assistance? Now is not the time for vanity. Vanity is for rich people. (See also: 100+ Ways to Make More Money This Year)
4. You Are Keeping Up With the Joneses, and the Joneses Are Stupid
Peer pressure keeps you poor. It’s true. Many people would rather struggle to pay their huge credit card bills than admit that they can’t afford lunch, concert tickets, private school for the kids, car insurance, etc.
The people who make you feel bad about not spending money that you don’t have are never the people who will help you get out of debt. Don’t let other people dictate how you spend the money that you earned.
Shut down the Joneses by telling them that you are saving up for your dream. For example, anytime anyone pressures me to spend money that I don’t have I say, “That sounds lovely, but I can’t afford that because I am saving up for a camera body so I can work professionally as an architectural photographer.” What’s your dream? A home? A vacation? An education? Early retirement?
Your dream is also a great motivator to get out of debt. My husband really wants to go to Easter Island for his 50th birthday (he’s currently 48). He got serious about paying down our line of credit when he realized that we won’t have the time to save up for that vacation if we don’t pay down our debt by the end of this year.
Read More: How to Manage Your Debt in 10 Minutes a Week
5. You Are Only Paying the Minimum Balance
Banks love it when you only pay the minimum balance. The longer you take to pay down your debt, the more money they make by charging you interest. Even if you can only pay $20 more than your minimum balance per month, every little bit helps.
For example, say you are carrying a $5,000 balance on a credit card with a 12% APR. If you pay the minimum monthly payment of $100, it will take you 70 months to pay off the card and you will pay an additional $1,966 in interest! But, if you raise your monthly payment to $120 per month, you can pay off the card in 50 months and pay $1,500 in interest. Just about anyone can create a side hustle to make an extra $20 per month. That little bit of extra work will save you $466 in interest!
6. You Aren’t Paying Off Low-Balance or High-Interest Cards First
According to a Gallup survey, the average number of credit cards Americans carry in their wallets is at an all time low. (Good job, Americans!) Although 33% of Americans only have one or two credit cards, 18% of Americans have three or four cards, and 7% of Americans have more than seven cards. So, if you have debt spread over multiple cards, how do prioritize which card needs to be paid down first?
There are two main schools of thought when it comes to paying down debt quickly: Pay off the loan with the highest interest rate first (the Avalanche Method) and pay off the loan with the lowest balance first (the Debt Snowball). (See also: Snowballs or Avalanches: Which Debt Reduction Strategy Is Best for You?)
When budgeting for either method, remember you will still have to pay the minimum balance each month on your other cards.
With the Avalanche Method, you devote all your extra funds to paying down your credit card with the highest interest rate first. Obviously, the higher the interest rate, the more expensive it is to borrow money using that card. So, you will pay less interest in the long run, if you pay down your high interest rate card first. Once you pay down your card with the highest interest rate, you move on to throwing all your extra cash against the debt on the card with the next highest rate. Repeat until all your debt is gone.
The only downside to this method is that your highest interest rate might also be the card with the highest balance. If this is the case, it will be a marathon, not a sprint, to pay down that debt. (See also: How to Use a Balance Transfer to Cut Out Interest Fees)
The Debt Snowball is similar to the avalanche method except you use all your available cash to pay down the card with the lowest balance first. With this method you get the sense of accomplishment by paying off a card quickly, which can give you the motivation to continue throwing money at your debt.
Both methods work if you are diligent. Use whichever method works best for you.
7. Your Payments Are Going Toward Fees
The best card is the one that combines the lowest APR and annual fee with the greatest perks for your life. In order to compare cards and loans, you need to know how much you are paying in interest and fees on each tool.
Speaking of fees. Don’t be late with your payments. Late fees are a totally unsatisfying way to spend your money. If you get dinged with a late fee, call your lender and see if they will waive the fee for you. Lenders often have secret grace periods for late payments, but you have to ask. Pro tip: ask nicely.
Banks also love to charge extra should you happen to use the wrong ATM. I have seen ATM fees as high as $3 per transaction! If you are like me and live far away from where you bank, make sure that you withdraw enough cash to pay for your life between bank runs, and be crystal clear about what ATMs you can use without getting dinged.
Before you travel, make sure that your debit or credit card doesn’t charge you an additional money exchange fee on top of the ATM fee.
8. You Are Buying for Reward Points
Many reward cards are more expensive than cards that don’t have perks. Not only do reward cards generally have higher APRs, they also tend to come with a yearly fee. Are your rewards worth the extra cost? Do the math. (See also: How to Decide If an Annual Fee Credit Card Is Right for You)
It’s important to note that most reward card perks are only perks if you don’t pay extra interest costs. If you cannot zero out your card balance every month, it might be less expensive to just buy discount airfare instead of trying to use mileage points to travel on the cheap.
Even if you are one of those rare birds who pays off their card every month and never accrues interest, you can still fall victim to purchase acceleration. People often buy things on credit that they would not have bought with cash if they know they are close to “earning” a reward.
9. You Don’t Understand the Scope of Your Debt
A recent study showed that people have a pretty good idea about how much they owe on their homes and their cars, but are terrible at estimating other types of debt. Researchers found that people estimate their credit card debt to be 40% less than what lenders report, and families underestimate their student loan debt by 25%!
I have more than one bank account. I have more than one loan. I have more than one retirement fund. I use Mint.com to get a snapshot of all my banking on one page. This kind of finance app is good for keeping track of all your accounts.
10. Your 0% Balance Transfer Period Has Expired
Obviously if you go from paying 0% interest to paying anything more than 0% interest for the privilege of using credit, it is going to cost you. But before you move your debt, do the math. Is it cheaper to pay the fee to transfer your debt to another credit card with a 0% balance transfer period, or is it cheaper to just pay down your existing debt quickly?
It’s important to note that every time you open or close a card, your credit score will take a hit. Even if you are turned down for credit, just the act of having your credit checked by a lender will ding your credit. The lower your credit score, the harder it will be for you to get the best home or car loans. Think strategically.
11. You Are Not Talking to Your Lender
Have you called your credit card company recently and asked them to lower your APR? If you have been a longtime customer or have received a better offer in the mail, call your credit card company and ask for an interest rate reduction.
While we are on the subject of lenders, have you talked to your bank or credit union about a debt consolidation loan? The interest rates on a Home Equity Line of Credit or a debt consolidation loan are often much lower than credit cards.
12. You Lack a Plan
Only one out of every three Americans has a detailed household budget. This means that the majority of Americans have no clue where their money goes. It is impossible to make smart financial decisions if you are only guessing how and where you spend your money.
People that successfully pay down their credit cards quickly throw every spare dollar at their debt. The only way to find every spare dollar is to create a budget. If you have never created a budget, don’t stress. It is way easier than you think.