Not only is credit card debt a growing issue, but it’s challenging to escape for those that experience it. While you can pay the minimum monthly payment, this will only leave you with more interest charges in the long run. Paying down credit card debt to zero is best done by following a proven payoff method and making adjustments to your current budget.
1. Choose the Debt Avalanche Method
The debt avalanche method is one of the most effective pay off methods because it focuses on paying credit cards with the highest interest rates first. As you pay down cards with the highest interest rates, you’ll need to pay the minimum payments on any other cards. In the end, you’ll pay less in interest than with the snowball method, which I will dive into next.
2. Use the Debt Snowball Payoff Method
The debt snowball payoff method is one of the most common strategies to pay down debt. With this strategy, you pay down your card balances from smallest to largest. However, as you focus on applying the largest payment to the smallest balances, you’ll still make the minimum payments on your remaining cards. Like a snowball, your progress will start small, but you’ll work your way up until the largest debt is paid off.
Since it takes less time to pay off smaller debts, this method will keep you motivated and more likely to stay on track. It’s a popular method because it gives you the satisfaction of seeing your progress play out early. That’s why this method is perfect for completionists that need an incentive to continue paying down their debt. It also works with all types of debt, meaning you can use it for both personal and business credit cards.
3. Utilize Balance Transfer Credit Cards
The recent $87 billion increase in card debt indicates more people are relying on credit cards to help with unexpected costs. Balance transfers can be a quick way to ease the burden of high-interest credit cards through a 0% APR offer. When you utilize a balance transfer, you can move all your balances to one single card and pay no interest for an introductory period of up to 21 months. You should also be aware of potential balance transfers fees, which usually run between 3% to 5% of the total transfer amount.
Business owners dealing with business credit card debt can also use this method through business balance transfer credit cards or 0% APR business cards. Several business credit cards are designed for this purpose, which can be a handy way to save your company some money in the long run if it’s dealing with debt issues.
4. Evaluate Monthly Expenses and Reprioritize Your Budget
Paying off credit card debt is a reasonable goal, but it’s not practical if you don’t have the extra funds to dedicate toward it. It may be time to take a good hard look at your monthly budget to see where you can trim the fat and free up funds to help pay down your debt. Some common areas you can look to cut expenses include monthly subscriptions, dining out, and coffee shops. Cutting back in these areas can help cut your payoff time down significantly.
5. Apply the Debt Snowflake Method
The snowflake method doesn’t rely on a monthly strategy and consistent payment. Instead, it encourages you to find everyday savings, wherever you can, that you can put toward your payoff plan. Increase your savings by adding up loose change, or by using a “round-up” savings account to beef up a credit payment later. It’s a great method to combine with either the snowball or avalanche payoff plan to chip away at your debt even faster.
Debt Payoff Methods to Avoid
- Debt consolidation loans: These loans may offer a way to pay off credit card debt, but they also expose you to more debt. If you use your credit cards again while you’re paying off your loan, you’ll find yourself with more loan debt, making it even harder to become debt-free.
- Debt settlements: Debt settlement companies claim to negotiate with your issuers to settle on a smaller lump-sum payment. These companies usually charge steep fees for results that aren’t guaranteed to eliminate your debt. It’s much better to contact issuers yourself to work out payment arrangements.
- 401(k) loans: Borrowing against your retirement plan can jeopardize your future security. You could be facing steep penalties and early withdrawal fees from the IRS if you can’t keep up with your loan payments. It may be tempting, but it’s not worth it in the end.
- Home equity lines of credit (HELOCs): HELOCs are borrowed against the equity in one of your most precious assets, your home. It’s rarely worth risking this additional loan debt that could put you at risk for losing your home solely for credit card payments.
I understand these options may be tempting, especially if you’re in a desperate situation, but the tried-and-true payoff methods discussed earlier are much better options. With a few changes to your budget and a little patience, you can pay off your debt for good without risking valuable assets like retirement funds or property.
How Paying Off Credit Card Debt Impacts Credit Scores
When your credit card debt increases, so does your credit utilization ratio. This, in turn, has a negative impact on your credit score. Conversely, this means as you pay down your debt, you reduce your credit utilization ratio and improve your credit score.
Credit utilization ratio: Your credit utilization is the amount of credit you’re using compared to your total available credit, which makes up 30% of your credit score. As a rule of thumb, it’s best to maintain a credit utilization ratio between 0% and 30%.
What’s more, if you repay your bills on time, you will improve your payment history, which is the factor that makes up most of your credit score. This means as you follow a payoff method or strategy, you can perfect your payment history and improve your credit over time.
Frequently Asked Questions (FAQs)
Paying off credit card debt involves several approaches, which we’ve covered in this article. However, there are some commonly asked questions about this topic. We’ll cover those questions in this section. If you have any additional questions, please feel free to leave a comment below.
1. Why is credit card debt bad?
Credit card debt has a negative impact on your credit score and makes it difficult to get approved for large assets like auto and home loans. By paying your bills on time and monitoring your spending closely, you can help keep your balances low and cards free of debt.
2. Should I close my credit card after I pay it off?
A paid credit card is one of your best assets to keep on your credit, so you shouldn’t be too eager to close it after paying it off. When your account is closed, it’s no longer factored into your credit utilization ratio, and your scores may drop as a result. Keeping your card open after paying it off retains valuable card payment history and will boost your credit scores.
3. Can I use a credit card to pay off debt?
You can’t use one credit card to pay off another unless you open a new card with a balance transfer offer. A balance transfer offer lets you move all your balances to one card and pay it off over time with no interest for up to 21 months. However, after the introductory period ends, any unpaid balances will begin to accrue interest.
There are some solid methods for paying off your credit card debt like the snowball and avalanche method. Many people also find it useful to use balance transfers to reduce interest in the process. Whether you use one of these methods or a combination, you can chip away at your debt by rearranging your budget and using a solid payoff strategy.