How to Pay Off Credit Card Debt Fast (and Wisely)
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Balance transfers can help you pay off credit card debt faster. Read on to learn how to shrink your balance while paying less interest.
How to Pay Off Credit Cards Quickly and Save Money
|How to Pay Off Credit Cards © CreditDonkey|
Credit card debt is not a fun topic. But it's okay, you're not the first person who has taken on more than they can handle.
Maybe you borrowed too much for a giant purchase or you went on too many shopping splurges. Or you were in-between jobs and got into a cash bind. Somehow, you put too much on your credit card and now the interest charges keep piling up every month.
But you know what? It doesn't matter how you got here, we're only here to focus on how you can get out of it.
When your cards are carrying high interest rates, making a dent in what you owe can seem impossible. But all it really takes is the right strategy and some dedication. It is entirely doable even if you're on a tight budget.
If you're not sure where to get started, we are here to help with our step-by-step beginner's guide to banishing your credit card balance for good.
1. Fastest Way to Get Out of Debt: Balance Transfer
This may seem counterproductive, but you can actually make a really significant dent in your debt by taking on a new credit card.
A balance transfer is basically moving your debt from one card to another card. You can even consolidate debt from multiple cards. If you have a big balance (at least a couple thousand dollars), this is the smartest move to catch up with your debt.
The trick is to look for a card that has an introductory 0% APR for balance transfers. That way you can focus your payment toward your actual debt (instead of interest charges).
Most 0% promotions have a balance transfer fee (usually 3% of the amount you're transferring), but the savings in interest charges could far outweigh the transfer fee over the long run. While rare, a few banks do have no fee balance transfers, but the best deals available are usually reserve only for those with a good credit score.
Before you take this step, come up with a realistic payment plan to pay off your new balance before the promotional period ends. Even if there's no fee, it's smart to run the numbers through a calculator.
|Infographics: Balance Transfer Game © CreditDonkey|
2. Pay More Than Just the Minimum
The tricky part about debt is that it's easy to get in denial about how long it will take you to pay it off.
It can be awfully tempting to only pay the minimum you see in every statement, but that adds up to a lot of money in interest over time. Also pay attention to the charts in your statements that tell you how long it will take to pay off the balance if you pay only the minimum balance.
Never pay just the minimum payment if you can help it. Putting in just a little more each month can drastically reduce the interest and payoff time.
Payoff calculators like this one will give you a sense of reality. Play around with amounts to see how putting more toward your balance every month will mean paying less in interest charges over time.
For example: if you have $5,000 in debt with 13.5% interest rate, paying $100/ month will take you 74 months to pay off and you'd pay $2,390 in interest alone (almost half of the debt!).
But even if you just put in an extra $50 a month toward the payment, it'd reduce the payoff time down to 43 months and shave $1,088 off of interest.
What can you do to find an extra $50 a month?
- Avoid the Minimum Payment Trap
- Calculate How Long It Will Take to Pay Off Debt
- 10 Signs You're in Debt Denial
- How to Get Out of Debt
3. STOP USING YOUR PRICIEST CREDIT CARD
One of the first things to do when you're trying to pay off credit card debt is to take an inventory of the cards you have.
Cash back and rewards are great, but the interest charges can sink you if you don't regularly pay off your balance each month.
Organize your cards and zero in on the one with the highest interest rate. Stash that one away where you can't add to its debt pile. Keep in mind that you may not want to cancel it just yet. Cutting up your cards can actually hurt your credit score, and that's not something you want to do at this point, when you're about to improve how you handle debt.
Once you've decided to stop using that card, we recommend that you make it a priority to pay off that card first, so the interest doesn't just keep on accumulating. See more in Step 6.
- Credit Cards With Low Interest Rates
- How to Cancel a Credit Card
- 23 Money Mistakes Almost Everyone Makes
This is the fun part: You can earn 5% cash back on up to $1,500 in combined purchases in bonus categories each quarter you activate. Enjoy new 5% categories every 3 months. Unlimited 1% cash back on all other purchases. The cash back rewards do not expire as long as your card account remains open. There is no annual fee.
4. Cut Down on Unnecessary Expenses
We'll be honest. We're all prone to the occasional impulse shopping trips or visit Starbucks far more often than we should. Unfortunately, the money spent on these purchases could better be utilized towards paying off your credit card balance.
Track your spending for two weeks - every single expense, no matter how tiny - and see if you have any spending areas that you may be able to cut out. What can you live without? Can you cut back on the number of times you get takeout? To prevent impulse purchases, could you limit how many times you go into a store?
This exercise will help you understand where your money goes each month. Once you realize your daily $3 coffee adds up to be almost $100 a month, you may feel more motivated to cut it out. Use that towards your credit card payment instead (see #2 again).
- Curb Your Desire to Shop
- Where Does All the Money Go?
- Scientific Ways to Trick Your Brain to Save Money
5. Create A Practical Budget
Yep, you knew this one was coming. Once you understand your spending patterns and potential issues, you can come up with a budget.
Most likely, if your credit card spending has resulted in a mountain of debt, a lack of a working budget is part of the problem. Luckily, this problem is also easy to fix. You just need the determination to stick to it.
A budget, in its basic form, is a plan for how you'll spend your money each month. To make one, simply add up all of your expenses and subtract that amount from your income. To get started and to make sure you capture all your expenses, check out budgeting software programs or download a budgeting app to your mobile device.
Do this step in tandem with Step 4. Once you have a clearer picture of your total expenses and what spending areas you can cut out, you can come up with a realistic number of how much you can put towards paying off debt each month.
6. Pay Back Your Credit Cards Wisely
Now, you'll have to decide which cards to pay off first. Rank your credit cards in one of two ways:
- by the interest rate or
- based on the total balance.
If you're choosing the interest rate method, the most effective way to pay off the debts is by starting with the card that has the highest rate. This saves you the most money on interest in the long term. We recommend this method as being the most efficient.
If you're choosing the balance method, you'll have to decide whether you want to start with the lowest or highest balance first. Knocking out those cards with the lowest balances right off the bat is a smart move if you need a psychological push at the beginning to keep you motivated.
The key to making this kind of approach work is rolling over your payments every time you eliminate a card. The idea is to add to the payment on each subsequent card so you can knock out the remaining debts faster.
Let's say you decided that you can afford $300 every month to paying off credit card debt. So you're paying $200 a month to one card and just the minimums to all the others.
After you've paid off the balance on that card, apply that $200 payment to the next card on your list plus the minimum you were paying before. In other words, don't think that's $200 extra you've freed up! Roll it over to the next card. By the time you get to the last one on the list, you should be making one large $300 payment each month until it's gone.
- Calculator: When Will I Be Debt Free?
- How to Pay Off Your Credit Card Debt in a Year
- 2 Repayment Strategies
7. Reduce Your Interest Rate
Maybe you've looked into getting a balance transfer and have a payment plan, but still struggle to make progress in the debt you owe. Did you know that you could ask your credit card issuers directly if they can shave a few points off your rate?
If your account has been open for a while, you've always been consistent about paying on time, and you don't have a huge balance, they may be willing to offer you a rate reduction temporarily. Just be aware that if your rate is lowered and you miss a payment for any reason, you may be subject to the default rate, which can be upwards of 29%, depending on the card.
Have more than $10,000 in credit card debt?
If you need years (instead of months) to pay off your credit card balance, considering a personal loan could be an option. You can use a personal loan to consolidate all your credit card debt. Make sure to carefully understand the terms and conditions, and avoid gimmicky settlement companies that offer to take on your debt.
But please be aware that this option only works if you have created a solid plan to pay back the loan. Otherwise, you will just be stuck with the same debt, just in another form.
- How to Lower Your Credit Card Interest Rate
- 8 Pros and Cons of Using Personal Loans
- 7 "Smart" Credit Tips That Aren't
8. PAY MORE WHENEVER POSSIBLE
If you follow the steps we've outlined, it's virtually impossible not to see some sort of progress on your debt payoff. We've already gone over how just adding as little to your monthly payment can make a big difference in how quickly you're able to say goodbye to those cards.
You can do so even faster by applying any windfalls you receive to your balances. If you were able to get a tax refund, why not apply it towards your debt instead of going on a treat yo'self shopping spree? If you're due for a raise at work, funneling that extra cash into your debt repayment is a smarter move versus just spending the difference each payday.
Changing how you make your payments can also help you tack on a few extra dollars here and there. If you normally make a $100 payment to your bill each month, breaking it up into 4 weekly payments of $25 slows down how quickly the interest accumulates, so more of what you pay goes towards the principal. Or simply bumping up those weekly payments to $30 is a painless way to shrink your balance even faster.
The bottom line is that yes, you can pay off credit cards, even on a tight budget.
- Calculator: The Impact of Making Extra Payments
- Is It Better to Pay Off Debt or Save?
- Credit Card Statistics
Tackling your credit card debt can be a daunting task if you're staring at those numbers and have no idea where to start. We hope our beginner's guide has helped to ease your fears so you can start taking on that debt with confidence.
Everyone is capable of getting out of debt, no matter how tight your budget, but this is really something that you have to jump in with both feet. It takes planning and serious dedication; you have to commit wholeheartedly. Develop an action plan and stick with it, and you'll be surprised at just how much progress you can make in paying off your balance.
Rebecca Lake is a journalist at CreditDonkey, a credit card comparison and financial education website. Write to Rebecca Lake at firstname.lastname@example.org. Our data-driven analysis has been recognized by major news outlets across the country and has helped young adults make savvy financial and lifestyle decisions.
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