Debt in and of itself is not always bad. Certain low-interest debts, such as student loans and mortgages, can be investments that will appreciate in value and generate income in the long run. However, this is usually not the case with credit cards.
“It’s important to reduce credit card debt…because credit card interest accrues daily and can stop your financial growth,” explains Dino Celita, president of The Debt Relief Company. “Credit cards are only meant to be used as a short-term means of getting a loan against your cash flow. As a loan product, they will cost more interest than any other financial product.”
If you’re facing credit card debt and you’re worried it will affect your credit, don’t panic – there’s a solution. Here are some strategies to pay off and get your financial life back on track.
Avalanche method
The avalanche strategy is a popular way to pay off credit card debt. It focuses on paying off credit cards with the highest annual interest rates first, in order to save as much as possible on interest.
“So if you have one credit card with a 15 percent interest rate and another with an 18 percent interest rate, you will first pay off the debt accumulated on the 18 percent credit card,” says Freya Kuka, founder of the personal finance blog . Collection of cents.
This saves you money in the long run by eliminating the most wasteful recurring payments first. “This method works well for disciplined people who want to get out of debt with the most effective strategy,” Cook says.
Make sure you’re still making minimum payments on lower interest rate credit cards to avoid late fees and damage to your credit. Missed payments and unpaid debts will remain on your credit report for seven years.
Then, when you’ve finished paying on the card with the highest interest rate, switch to the second highest annual interest rate and repeat until you’re completely out of credit card debt.
Snowball Method
Paying off credit card debt can be mentally exhausting. You may feel like you’re spending most of your income trying to get rid of it, but all your accounts still show a balance.
If you’re worried that this might cause you to lose motivation, consider using the snowball method. It works on the same principle as the avalanche method, but instead of focusing on high-interest credit card debt, you focus on paying off the cards with the lowest balances first.
For example, if you have one credit card with a $2,000 balance and an 18 percent annual interest rate, and another card with a $750 balance and a 14 percent annual interest rate, you must pay the second credit card first, because that she has a lower balance sheet, even if it also has a lower interest rate.
“My husband and I used the snowball method to get out of debt completely, including our mortgage. In all, we paid off more than $260,000 of debt,” says Stacey Heeps, personal and family finance author at Families for Financial Freedom. “I’m a big fan of the snowball method because it gives you quick wins early on that help you get motivated and stay motivated to get out of debt.”
Keep in mind that using this method will likely save you less interest compared to the avalanche strategy. But if you know that you need to see immediate progress in order to continue, the snowball method can be a great option.
Try Debt Consolidation
The idea of debt consolidation is to combine high interest rate balances and convert them into low interest rate debt such as personal loans or other credit cards. There are several ways to do this:
Get a credit card to transfer the balance
Balance transfer cards allow you to transfer your high-interest credit card balance to a new card with a temporary 0 percent annual interest rate. The interest-free period usually lasts from 12 to 18 months. Using a credit card calculator can help you find balance transfer cards that suit your needs.
If you pay off the balance within this period, a balance transfer card can be a great deal. You won’t just lower your interest rate – you’ll eliminate interest payments during the trial period.
However, if you don’t finish paying off your debt by the end of this period, the card’s normal annual interest rate will kick in, which may even be higher than your current interest rate.
To make sure you don’t get caught with high interest rates, consider only transferring the amount you know you can repay on time. You can then set up a payment plan for yourself with higher monthly payments. For example, if you owe $1200 and your zero start period is 12 months, you will pay $100 per month to pay off the debt on time.
Please note that balance transfer cards are generally available to consumers with excellent to good credit history. If you know that your credit needs some work, you can choose another method to reduce your debt.
Consider a debt consolidation loan
Another option for those with a good credit history is to take out a personal loan. When you do this, you need to take out a loan with an interest rate that is lower than your current debt. Once you apply it to your credit card balances, you are left with one fixed monthly payment.
This makes a personal loan not only a smart way to pay less interest, but also a convenient one. It’s easier to keep track of one loan than multiple credit cards. Also, having to make one payment a month instead of many can help alleviate financial stress.
While a long-term personal loan may cut down on the amount you pay per month, try to pay it off as soon as possible. Longer repayment periods may cause your interest rate to increase over time, even if your new interest rate is lower.
Create an emergency fund
According to a January 2022 Bankrate poll, 56 percent of 1,004 American adults surveyed are unable to pay their expenses from their savings account during an emergency.
It is important to have an emergency fund because it can help you create the security to avoid debt during a financial crisis, as well as:
- You do not need to use your credit card.
- You will not go into debt on a loan.
You should not use the reserve fund for your daily or monthly expenses – keep in mind that it is for emergencies only. A good rule of thumb is to have three to six months of basic expenses in a savings account.
Today’s inflation may make it difficult to open a savings account. You can start by reducing your costs in the following ways:
- Reduce the number of accounts on your streaming services.
- Instead of constantly buying coffee on the street, try drinking it at home.
- Avoid spending on restaurants and fast food.
- Make a budget and stick to it.
While you’re building up your contingency savings, don’t stop paying off your monthly credit card balances. Try depositing a certain amount into your savings account weekly, biweekly, or monthly.
bottom line
As you resolve your debt through one of these methods, you may also try to negotiate with your credit card to either pay off your debt, lower your interest rate, or negotiate a more acceptable repayment plan.
Credit card debt can accumulate quickly and be difficult to get rid of. Don’t let that confuse you: pick a strategy you think you can stick to and keep working on reducing your balances. With enough discipline and patience, you will finally start seeing zeros on your credit card statements.
Editorial disclaimer
The editorial content on this page is based solely on the objective judgment of our contributors and is not based on advertising. It was not provided or ordered by credit card issuers. However, we may receive compensation when you click on links to our partners’ products.
