Credit card debt can be expensive. Just think about what it means to make a purchase and not pay it off in a year. If you spent $100 on a credit card and that card had a 25% APR, you now owe $125 at the end of the year. But learning how to pay off credit card debt can also be hard to do. That's really challenging when you do not have a lot of extra income to put toward your debt.
You can learn how to pay off credit card debt. The key is to understand why you should prioritize paying off this debt and then choose the right method to help you to do so.
Why You Should Pay Off Credit Card Debt
Credit cards have an interest rate. The higher that rate is, the more you have to pay the lender to use those funds. Credit card companies work hard to keep you hooked, though. They want you to pay the minimum each month and nothing more because that gives them more time to apply interest to the credit card debt.
Here is another worrisome figure to keep in mind about credit card debt. Let's say you have a large credit card with a balance of $5,000. That credit card has an interest rate of 16%. You have to make a minimum monthly payment of $100. If you only make that minimum payment each month – and you don't miss any payments, it will take you 6 years and 11 months to pay off that debt! By the time you pay off that debt, you will have paid $8,294.
Now, if you were to pay $150 per month instead of just the minimum due, you would pay off the debt in 3 years. And you will have paid a total of just $6,656 instead.
It saves you money to pay off high interest debt like this. You may know that, but you may be unsure how to make it happen. What can you do to get out of debt for good?
Choose the Best Way to Pay Off Credit for You
There is not just one way to pay off credit card debt. Rather, there are a lot of different methods that could work for you. Here, we'll take a look at some of the options available to you. Even if you do not have a lot of income or you have a significant amount of debt to repay, one of these methods is likely to help you. Sometimes you can use more than one to help, too.
Debt Consolidation Loan
One of the debt repayment strategies that may work for some people is the use of a debt consolidation loan. This type of loan is typically a personal loan, which means you do not have to have collateral or assets to obtain it. You set up a payment plan with the lender to repay the debt.
Then, you use the proceeds from the loan to pay off your credit card debt. That way, you have one monthly payment to make instead of numerous credit cards. More so, you may be able to get a fixed payment for the loan. That would mean you know how much to pay each month, and you know how long it will take you to pay off the loan.
If you have good credit, you may be able to get a debt consolidation loan with a low interest rate. If the interest rate is lower than what you are paying on your current credit cards, this will help you to save money. The interest rate you qualify for will depend on your credit history and income. Sometimes those who have fair or poor credit may not qualify for this loan at all.
To find out if you may qualify for credit card debt consolidation loans, talk to your lender. Before you apply for one, ask them to do a soft credit pull. This way, they can tell you how likely you are to get a loan without damaging your credit score.
If you qualify for a debt consolidation loan like this, make sure the monthly payment fits within your budget. Be sure to create a budget if you do not have one to help you to pay down your debt over time, too.
Who should use it:
- You have numerous smaller credit cards with different interest rates and minimum payments
- You make late payments because you forget about paying them
- You have good credit or fair credit with a co-signer
What are the benefits:
- Combine all of your debt into one payment each month
- You may qualify for a lower interest rate than what you are paying now
- You could improve your credit score if you make payments on time on a consistent basis and do not use your other credit cards (that do not have a balance) excessively
Balance Transfer Credit Card
A balance transfer credit card is another debt repayment strategy. It allows you to move all of your smaller debts into one new, larger credit card. If you qualify for it, this could help you make monthly payments on a consistent basis and without as much frustration.
One of the benefits of a balance transfer card is that you may qualify for an introductory offer. Some introductory offers have a very low or 0% APR for a set period of time. If you have good credit, you may qualify for this type of card. This would allow you to move the debt you have on several cards to a new credit card and have 0% for a set number of months. If you pay off the debt in that time, you'll save yourself a lot of money.
There are some limitations here. For example, some of these cards require you to pay off the balance within the interest free period, or all of the interest is tacked on after it ends. Also, it can be hard for you those who do not have a good credit score to qualify for this type of credit card offer.
The key to making this work for you is to be aggressive about paying off your debt during the introductory rate period. However, don't fall for a common mistake. Some people obtain a new card like this, transfer their other credit card debt to it, and then continue to use their other cards. This creates more debt, and it becomes even harder for you to pay it off.
Used wisely, it could increase your credit score if you pay down your debt. That could help your credit utilization – the amount of credit you have compared to how much debt you have.
Who should use it:
- You have a good credit score that may help you qualify for a balance transfer credit card.
- You qualify for a low APR introductory period.
- Combining your debt will help you to pay it off faster.
What are the benefits:
- You may qualify for a lower interest rate which saves you money.
- Over time, it could help you to increase the amount of available credit you have, which could help boost your credit score.
Debt Snowball Method
If you have numerous credit cards with balances and making those minimum payments is hard to do, but you do not qualify for personal loans or a balance transfer card, you may wish to try the debt snowball method.
The debt snowball method allows you to focus on paying off the credit cards you have with the lowest balance first. This way, you are paying off your debt quickly, and that can help you stay motivated to continue to do so.
A debt snowball works like this. Determine what the lowest credit card balance is. Pay the minimum due on that credit card as well as whatever is extra money from your budget. Keep paying just the minimum due on the other credit cards. Once you pay off this first card, you then take your extra money (which should include the minimum amount due from the first credit card and the extra you've been putting towards it) and apply that to the next credit card.
Here's an example. Let's say you have 3 credit cards. One has a balance of $600, another $1700, and the third $1800. The first credit card has a minimum amount due of $25. You find an extra $50 in your budget to put towards paying off debt. For the first few months, you'll pay $75 towards the $600 credit card. Then, once you pay that loan off, you'll take that $75 plus the minimum amount due for your next lowest credit card and pay towards it until you pay it off.
This debt repayment method will take time, but it will allow you to continue to work to pay down your debt over time and does not hurt your credit score in any way. Because you are paying debt faster than making minimum payments alone, this method can be highly effective for many people.
Who should use it:
- You have numerous credit cards to pay off with limited amount of extra money to put toward your debt.
- You find it hard to stay motivated on any debt repayment plan.
- You don't qualify for balance transfer credit cards or debt consolidation loans.
What are the benefits:
- You'll be paying off debt on a consistent basis.
- Seeing a paid off credit card can help you stay motivated to continue on track.
Debt Avalanche Method
Another way to pay down your debt is to focus on the debt with the highest interest rate first. This method, called a debt avalanche, works in much the same way as the debt snowball, but what you tackle first is different.
For example, take a look at each of your credit card bill statements. There, you’ll see what the APR is on each of your credit cards. These are the interest rates you’re paying. The biggest ones add the most debt to your balance on credit cards each month. In this repayment option, you start with the one with the largest balance.
You’ll apply the minimum amount owed to all of your credit cards each month, but you’ll put extra money towards the credit card with the highest interest rate. Once you pay off the entire balance of that card, you then move on to the next credit card with the highest rate.
This method allows you to become debt free over time and helps you to reduce what you end up paying. Your goal is to pay off the most expensive debt first, so there is less time for interest rates to build on that balance. With lower interest charges, you’ll be paying off your debt for less per month.
This repayment process is best for those who have the willpower to focus on repaying their debt and who want to ensure they are paying the least amount possible. You do not need to consolidate debt here, as long as you can make your payment each month and pay a bit extra towards it. It may take some time, but it could help you to build your credit if you make payments on time and do not continue to use your credit cards.
Who should use it:
- You want to pay the least amount to pay off your credit cards.
- You do not qualify for other loans because you do not have good or excellent credit.
- You want to be debt free, and you’re committed to it.
What are the benefits:
- You end up paying back less money because you pay off the credit cards with the highest interest rate first.
- You can work towards repaying your debt without negatively impacting your credit scores.
Credit Counseling Agency Solutions
For many people, the plan to repay their debt revolves around the ability to make their payments each month on time. If you have too much debt and you just cannot pay everything, you may find yourself in a very big hole. In these situations, it may not seem possible to use other methods because you do not have extra cash to put toward your debt. This is where you may wish to speak to a credit counseling agency.
The credit counseling organization, which may be a for-profit or a non-profit organization, will work with you to create a debt management plan. Here is what typically happens.
First, they will work to understand all of the debt you have. They will verify all of that debt with each credit card issuer. Then they work with you to create a comprehensive budget for your household. This budget will help you to allocate money towards your rent or mortgage first, utilities, food, and other essentials. Then, it looks at how much is left over.
When possible, the counselor will then contact the creditor, one at a time, and work out a plan. This could include two potential outcomes:
- A debt settlement is offered. This is unlikely unless you have extra cash available right now that could help you to pay off your debt. If you do, the counselor tries to get the credit card company to agree to a lower amount than what you owe, but that would pay off the entire balance – settling the debt for less than you owe.
- More often, the counselor will work with you to consolidate the debt that remains. That means they will create a debt management plan with each lender that may focus on paying off your debt as quickly as possible. The lender may agree to lower your interest rate.
Once a plan is in place with each of your lenders, the counselor will create a repayment plan in which you will pay the credit counseling organization a set amount each month, and they will pay off your debts according to the agreements settled. Often, this method will mean lower interest charges, and it could mean that you can consolidate debt into one single payment.
You’ll continue to make payments on this plan over time until you pay off all of your debt. However, there are limitations to this.
- Your credit cards are typically frozen, which means you cannot use them.
- This method could hurt your credit scores until you pay off your debt over time and rebuild them. It will be noted on your credit report, which means it may be hard for you to get new loans.
- Some lenders may not be willing to work with you.
Who should use it:
- You are struggling to make payments on multiple debts and can make at least the minimum due on some.
- You are behind on your debt.
- You have a large amount of cash on hand, such as from a tax refund, that you want to try to use to pay off multiple balances for less.
What are the benefits:
- Credit counselors focus on debt reduction, which means they will try to lower the amount of money you owe to each lender.
- This plan helps you to get caught up on debt with just having to make a single monthly payment to manage the process.
Which Option Is Best for You?
These are the most common methods for paying off credit card debt. Yet, that doesn’t mean any one method is better for everyone. Before you move forward with any debt repayment strategy, determine what you can do to make any method work better for you.
Increase your earnings
Often, the debt repayment strategy you choose has to be based on the amount of money you have to put toward your credit card accounts each month. If you do not have at least the monthly payment, then you may want to consider working to earn extra cash.
- Take on a new job or some side work.
- Consider asking your employer for a raise.
- Determine if you can work a second job for a few hours on the weekend.
Work to cut back on your expenses
Take the time to go through all of your expenses to find areas where you can cut down on the costs. Here are some of the best ways to do this if you have a low income:
- Call your credit card companies and ask for a lower interest rate.
- Determine if you can pay less for cable and TV services – including canceling some of your monthly subscription services.
- Find out if you qualify for a free phone and plan from organizations like EASY Wireless.
- Eat out less than you are now and put that towards groceries.
- See if you qualify for more affordable car and home insurance.
Tackle What’s Limiting You
Take some time to figure out what’s holding you back from getting out of debt. Most people will find that there’s more to the picture than just making payments each month. Here are some tips to help you.
Do you have a bad credit score?
Is your credit score poor or fair? If so, that could mean you are paying a lot more in interest charges each month. Work to determine what the underlying problem is, such as making payments on time, owing more money than your credit limit, or not having a lot of credit history. If you don’t have a strong credit history, you may be able to use a secured credit card to build it.
Analyze your spending habits
Do you buy what you want and not just what you need? If you have one or more accounts that you use for recreational purchases, clothing, and unnecessary items, that’s going to raise your debt quickly.
Consider taking a closer look at what you are spending money on each month. Then, make a budget where you allocate a specific amount of money toward each one of your obligations. Then, put some money aside for entertainment and other spending.
This way, you don’t feel like you cannot spend money, but you have a goal to reach each month. Don’t spend more than you put towards that amount. Over time, that’s going to help you build your savings and create a debt free life.
You aren’t sure how to get a lower credit card interest rate
Some people may find that they can transfer balances and even secure balance transfer cards with low interest rates, but they never attempt to find out how to do so. How much interest are you paying? If it is high, consider applying for a new credit card, one that has a higher credit limit and a lower rate. If you have worked to build up your credit score over time, you may qualify. This would allow you to transfer all your debts to one card at a lower rate and improve your credit score over time.
You don’t know what your credit card balances are
Unfortunately, many people don’t spend much time managing their financial situation, and that means you may not know what your credit card balances are or how much you owe. It could be time to take a closer look.
- Write down all of the credit card balances you have, along with the interest rate on each one and the monthly payments on them.
- Include all personal loans. These are sometimes the highest interest rate debts people have, and they get forgotten about.
- Look at all of the statements for your card debt. This way, you can see where you are spending money and why.
As you look at these factors, consider what changes you may need to make. You can choose the debt snowball or debt avalanche method to help you to start paying down these debts, but what’s most important is to stay knowledgeable about how much you owe. That way, when you go to make a purchase, you second guess it. Ask yourself:
- Do I need this item?
- If you really want the item but do not need it, give yourself a 24-hour hold. After that time, if you still want the item, you can buy it.
- How much will the item cost when you add in the added interest rate?
When you work towards this process, you create a payment strategy that is not just good for right now but a good option for the long term. That is, you are building a financially healthy future for yourself.
Recognize the Benefits of Paying Off Credit Card Debt in Your Life
Before you start working on your payment strategy and securing the best option for your future, consider what paying off your debt could mean for your future. It could mean building a savings account that grows interest over time, making you money. It could mean having more available funds to buy what you want to later, because you do not have to pay finance charges. It may also mean a higher credit score that could help you to buy a car, buy a home, or pay less when you do borrow money.
Take the time to analyze several options here to find the debt management plan that is best suited for your situation. Then, work closely on your plan to pay off your debt as fast as possible. Over time, that is going to create financial security for your future.
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