Paying Off Credit Cards
Credit cards offer a convenient way to build your credit history and take advantage of rewards and benefits such as cashback and airline miles. However, they can make it too easy to overspend. This debt can be overwhelming and delay your progress toward reaching your financial goals.
Did you know that, on average, U.S. consumers carry over $6,000 in credit card debt, with many cards charging 20% in interest—or more? This could translate to over $1,200 in interest paid annually. You can do better than that, and we can help.
This guide will help you reduce—and ultimately eliminate—your credit card debt.
Getting Started: Understand How Much You Owe
Begin by taking a comprehensive look at your credit card debt. List all your cards and note the amount owed and the interest rate for each. Also, look at your monthly credit card statements. They are required to list how much interest you owe for the month and how much interest you have paid since the beginning of the year.
Here is an example of a table you can create to keep track of your credit card debt:
Card Name:
Balance (Amount Owed):
Interest Rate:
Interest Paid This Month:
Interest Paid Year to Date:
Payment Strategies
Always Pay at Least the Minimum on Time
Avoid penalties and late fees by ensuring you pay at least the minimum amount due on each credit card. This also protects your Credit Score. The easiest way to always pay on time is to set up automatic payments from your checking account to your credit cards. Most credit cards allow you to do this online. Just log into your credit card account, find the “Pay” menu and select automatic payments.
Reduce Your Spending
Cut unnecessary expenses and redirect the savings towards paying off your debt. Creating and sticking to a budget can help you identify areas where you can cut back. (See our module on How to Save Money.)
Pay Only with Cash
Switch to a cash-only system (a bank debit card and cash) for everyday purchases. This helps avoid adding to your credit card balances and keeps your spending in check.
Pay Off One Debt at a Time
Having multiple credit cards with growing balances can be stressful and overwhelming. Rather than try to tackle it all at once, make a plan to pay off one card at a time. Generally, there are two methods for doing this: the Avalanche Method and the Snowball Method.
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Avalanche Method: Prioritize paying off the card with the highest interest rate first while making minimum payments on others. This approach makes the most sense financially because you are getting rid of the debt that's charging you the highest interest rate first.
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Snowball Method: Pay off the smallest debt first to gain momentum, then move to the next smallest, and so on. Eliminating the smallest debts first can give you a growing sense of accomplishment and it will encourage you to keep going.
This six-minute video from CreditCards.com describes these two pay-off methods, plus debt consolidation, which we describe below.
Debt Consolidation
Debt consolidation is a strategy that combines multiple debts into a single payment, often with a lower interest rate. This approach can simplify your financial life, reduce your monthly payments, and help you get out of debt faster.
Types of Debt Consolidation
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Balance Transfer Credit Cards: These cards offer low or 0% interest rates on transferred balances for a promotional period, typically 12-18 months. This is a good option if you can pay off the balance before the promotional period ends.
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Personal Loans: Banks, credit unions, and online lenders offer personal loans specifically for debt consolidation. These loans usually have fixed interest rates and repayment terms, making it easier to budget your payments. It's best to shop around to find the lowest rate and the loan's best terms. For example, some loans have to be repaid back in one year.
Things to Consider
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Balance Transfer Fees: While balance transfer cards can offer significant savings, they often come with fees, typically 3-5% of the transferred amount. Calculate if the interest savings outweigh the fees.
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Loan Terms: Ensure that the term of your new loan is reasonable. While extending the term can lower your monthly payment, it might increase the total interest paid over time.
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Credit Score Impact: Applying for new credit can temporarily lower your credit score. However, consolidating debt and making consistent payments can improve your credit score in the long run.
Debt consolidation can be an effective tool, but it’s not suitable for everyone. It works best if you’re committed to not accumulating new debt and can make regular payments on your consolidated loan. Before proceeding, consider speaking with a financial advisor to explore your options and develop a plan tailored to your financial situation.
Debt Management
If all else fails, consider working with a credit counseling agency to create a debt management plan. They can help negotiate lower interest rates and consolidate your payments into one monthly amount. Keep in mind that this method is not a quick solution to debt problems. It requires time, discipline, and a commitment to changing spending habits. Plus, there are lots of pros and cons to consider. Look for agencies that are affiliated with the National Foundation for Credit Counseling (nfcc.org) or the Financial Counseling Association of America (fcaa.org).
Action Plan
To start tackling your credit card debt, here are two actionable steps:
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Create a Debt Inventory: List all your credit cards, along with their balances, interest rates, and minimum payments. This inventory will help you prioritize which cards to pay off first using either the avalanche or snowball method.
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Set a Budget: Develop a realistic spending plan that includes a specific amount allocated toward paying down your credit card debt each month. Stick to this plan, and adjust it as needed to ensure you're making steady progress toward becoming debt-free.
By following these strategies and taking decisive action, you can reduce your credit card debt and move closer to achieving your financial goals.