At a Glance
Having credit card debt can be overwhelming. You might feel like you don’t know how to begin paying off your debt, or confused about the different options available. Know that you’re not alone: In 2008, the average debt for cardholders with prime credit scores was over $8,000 per cardholder.1This article will cover:
Why pay off credit card debt?
There are many reasons why you should pay off your credit card bills. Debt can negatively affect your FICO credit score, and what you owe can pile up with high credit card interest rates from multiple cards. The more debt you amass today, the less money you’ll have tomorrow.
The dangers of revolving debt
Credit card debt is also known as revolving debt or revolving credit, and refers to an account with a lender that you can draw from up to a predetermined, monthly limit. You can pay the entire debt off on a monthly basis or make a minimum payment and begin accruing interest at high rates. Revolving debt payments are open-ended, meaning that if you’re not disciplined about paying those payments, the debt will continue to grow and compound.
How to pay off credit card debt fast?
Managing your debt is crucial for your future financial security. Here are some of the best ways to get out of credit card debt quickly.
1. Pay over the minimum
Consider paying more than the minimum balance on your card. You’ll both get out of debt faster and owe less interest. Even just a little bit extra every month can add up. Think of every cent over your minimum contributing toward your overall balance.
2. Divide and conquer
Instead of feeling paralyzed by the total amount of money you owe, set goals to pay off one smaller portion at a time. For example, it’s easier to think of paying four payments of $3,000 each, rather than a larger sum of $12,000.
3. Focus on one goal
One field study showed that consumers who focused their repayment strategy on just one account—instead of trying to pay off multiple accounts at once—were more motivated and repaid their debt quicker.2
4. Consider a 0% APR credit card
Credit cards that offer 0% introductory APR (annual percentage rate) don’t add interest to your purchases for a specified amount of time, typically from 12 to 21 months. Once the promotion is over, the card’s normal APR kicks in, so be sure to read the fine print. Some cards don’t tell you that your first large purchase or transferred balance has 0% APR, but other purchases might still be charged with the normal interest rates.
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Other ways to pay off credit card debt
There are also other ways to manage your debt, each with its own pros and cons.
The debt avalanche method is a debt repayment strategy that focuses on paying the minimum amount of each account, and then using whatever money is left to pay off your debt, starting with the account that has the highest interest rate. Once that account is paid off, you move to the account with the next highest interest rate.
Each account you fully pay off allows you to put more money toward the next account, since you’re eliminating the highest interest rates first.
By using the avalanche method, it may not feel like you’re getting anywhere. Cutting down interest expenses isn’t as satisfying as clearing a balance for good.
The debt snowball method works by paying the minimum amount of each account and then using whatever money is left toward paying off the account with the smallest overall balance. Once the smallest account is paid off, you’ll work towards paying off the next smallest account, and so on.
This method is very motivational since it encourages small wins early on in the debt repayment process.
The snowball method won’t save you as much money as the debt avalanche method since it doesn’t take into account interest rates. Taking longer to pay off high-interest debt will cost you more in the long run.
Balance transfers help consolidate your debt and decrease your interest rates. With a balance transfer, you move your credit card balance to a new card with a lower interest rate. The new card is basically used to pay off the owed balance of your old card. While you may have to pay a balance transfer fee, in many cases the amount you can save with the lower interest rate is still greater than the fee.
You save money on interest and consolidate your payments.
The lower interest rate of your new card isn’t permanent. For example, 0% introductory APR credit cards only offer that rate for a limited time.
Debt consolidation loan
A debt consolidation loan is a low-interest personal loan that’s taken out to pay off high-interest debt. Debt consolidation allows you to get out of debt quickly, leaving you with just the loan to pay off in monthly installments.
A debt consolidation loan lets you consolidate multiple credit card balances into a single monthly payment with a low-interest rate. You can repay your debt quicker than if you tried paying off all your credit cards at once.
It’s possible that you may not get a better rate on your loan than what your credit cards currently charge. Again, make sure to read the fine print and compare the interest rates.
How to stay debt-free?
Once you’ve paid off your credit card bills, you’ll want to make sure you stay out of debt. Try these techniques to avoid owing money again.
Request alerts from your credit card company
Spending alerts can tell you when charges are made to your account, keeping you informed, accountable, and less likely to overspend in the future.
Pay with cash and debit
Making purchases with cash or debit keeps you more aware of how much money is coming out of your account. Credit cards can cause you to spend more than you would otherwise, sometimes money you don’t really have.
Create a budget
Budgeting helps prioritize your necessary expenses and avoid unnecessary purchases that could land you in debt. Keep track of income and expenses, live within your means, and stay debt-free.