If you have a goal to become debt-free in 2023, credit card debt is a good place to start. High interest rates and minimum payments can keep you in an endless cycle of debt.
But there are some easy ways to break that cycle and pay off credit card debt for good. This guide will take you through some of the most popular strategies for paying off credit cards.
5 Things to Know about Credit Cards
Credit cards can be incredibly useful tools for making purchases and improving your credit. But it’s important to know a few basics before using them. With this information, it’s easier to understand how to use them responsibly, avoid taking on more debt, and protect your credit score.
1. What Is APR?
If you’ve received a credit card offer in the mail, you may have come across the term “APR” at least once. APR is an acronym for “Annual Percentage Rate.” However, it’s important to know that the APR on a card may change — either over time or for certain types of transactions.
For example, many credit cards offer “introductory” rates that are at a lower-than-normal percentage. After a while, the APR goes from the low “introductory” rate back up to the “normal” one. This normal rate may be significantly higher, so the credit card user may see their balance grow faster than expected.
Other exceptions include cash advances. For many credit cards, the interest charged on cash advances is higher than regular transactions. There is also no grace period when it comes to cash advances.
With regular credit card transactions, you have a grace period or until your next billing period where interest isn’t charged. However, the interest on cash advances is charged immediately.
So, it’s important to avoid using cash advances when possible — and pay them down first — to minimize credit card debt.
2. Credit Limits
A credit limit is how much money you’re allowed to spend on the credit card before the creditor will reject charges (or apply fees for spending more than your limit). Credit card providers can only increase your credit limit with your express consent (e.g., written or verbal) to do so. While higher limits may be more convenient for making big purchases, they can also mean having your debt grow faster.
3. Credit Cards Affect Your Credit Score
Credit cards can be an integral tool to help build a good credit history and increase your credit score. Having a credit card (as well as other sources of credit, like a line of credit) and keeping up with payments as agreed can help you build a positive credit history, which can then help improve your credit score.
However, if you miss payments, have your credit limit decreased, close an account, or make an especially large purchase, you may see your score drop a bit. If your credit cards are all maxed out or close to their spending limits, your credit utilization rate will be high, which can also impact your credit score.
4. Cash Advances
A cash advance is when a credit card is used to withdraw money. As mentioned earlier, cash advances often have extra fees or increased interest rates versus regular transactions.
Relying on cash advances can increase balances very quickly, which makes it harder to get out of credit card debt. So, for those wondering how to get out of credit card debt, avoiding cash advances as much as possible can be a very useful tip.
5. Secured and Unsecured Credit Cards
Two types of credit cards available to consumers include secured and unsecured cards. While both provide a simple way to complete transactions at stores or on websites, they each operate a bit differently.
An unsecured credit card allows you to borrow money up to a specific credit limit, interest-free, as long as the entire balance is paid off before the due date. If you pay only a portion of your balance, you will rack up interest charges. This is the standard type of credit card that comes to mind when most people think about credit cards.
A secured credit card also allows you to borrow against a set credit limit and pay it back later. But the main difference is that you have to make a deposit on the card first (which is often used as the limit for that card).
This security deposit protects the lender in case you don’t keep up with your payments. However, it’s important to note that it’s not used to make payments towards your purchases; it is simply used as collateral.
Secured credit cards are often a key tool for rebuilding credit because they don’t require a “good” credit score to obtain one, and your payment history is reflected on your credit report.
How Does Credit Card Debt Build Up So Quickly?
Many people use credit cards (sometimes referred to as “plastic”) as a convenient way to make purchases quickly, both in-person and online. Some situations which can result in the sudden growth of credit card debt include:
- Job loss, which drives people to rely heavily on their credit cards to make ends meet in the short term.
- Changes in interest rates due to introductory offer periods ending.
- Accidentally missing a bill because of major life changes (e.g., marriage, divorce, new child, death in the family, injury, etc.).
- A major life change that severely impacts cash flow (i.e., losing a partner, maternity/paternity leave, illness, etc.) leading consumers to rely more heavily on credit.
- An emergency expense (e.g., vet bill, dental work, home maintenance, etc.)
The interest rate on credit cards is often why it can be so difficult to get out of debt. The higher the interest rate is on a card, the faster debt accumulates — and the harder it is to pay off even when the balance is relatively small.
The Snowball Method
This encourages paying off your debts from smallest to largest balance. It’s like rolling up a snowball—first you start small, but as you keep rolling you get enough power to knock down your largest debts.
To use the snowball method, you first list all your debts from smallest to largest. Next, you pay as much as you can toward the card with the smallest balance. On the other cards, you only pay the minimum payment.
Once you pay off the first card, pay as much as you can toward the second-smallest balance and make minimum payments on the remaining card. Keep doing this until all your cards are paid off.
The Avalanche Method
This process is measured by interest rate rather than balance. To use the avalanche method, you must first list all your credit card debts from largest interest rate to smallest interest rate. You effectively start at the top and work your way down.
Then, you do the same thing as the snowball method, but in a different order. Pay as much as you can toward the card with the highest interest rate and pay the minimum required payments on the rest.
Once you pay off the highest-interest card, move on to the second-highest, and so on. This can prevent you from racking up interest charges as you’re trying to dig your way out of debt.
Solutions That Make Paying Off Credit Card Debt Easier
Balance transfer credit card
Interest-free payments are the fastest way to pay off credit card debt. If 100% of every payment you make goes to eliminating principal, you can pay off credit card debt fast. The easiest way to get interest-free payments is to use a balance transfer credit card.
This will give you 0% APR for 6 to 18 months after you open the card. However, once the promotion period ends, regular interest charges will apply to whatever balance you have left. Only transfer as much debt as you can afford to pay off during the interest-free period.
Ideal for $5,000 or less in credit card debt. Balance transfers are usually the best option in this situation. As long as you have good credit, you can qualify for a card that offers 0% APR for at least 12 months.
That gives you six months to pay off your debt interest free to eliminate a $5,000 transferred balance in full before the regular APR for balance transfers kicks in, you’d need payments of about $417.
Credit card debt consolidation
If the minimum payment requirements for your credit card debts are too high, consolidate. Debt consolidation loans often lower your monthly payments. However, since it also reduces your interest rates, you can get out of debt faster even though you pay less.
If you use a debt consolidation loan, then the term you choose determines the monthly payment requirement. Choosing a longer term will lower the monthly payment.
Most lenders will let you go up to a 48- or 60-month term on a consolidation loan. This can significantly cut your monthly payment requirements.
Ideal for up to $25,000 in credit card debt. If your total monthly credit card payments are too high prior to consolidation, you may need to opt for a personal loan with a longer term.
In this case, a 3 or 4-year term may be the best solution to give you lower monthly payments, while still allowing you to get out of debt faster. It’s also worth noting that this is only the best solution if you have good credit (670 FICO or higher).
Debt Management Program
For huge credit card debt balances, you need some help to reach zero. If you want to pay back everything you owe to avoid credit score damage, you should use a debt management program.
With a debt management program, a certified credit counselor will help you negotiate with creditors and consolidate your monthly payments into one payment that goes to the credit counseling agency.
Each month, they distribute the payment to your creditors on your behalf. Once everything is paid off in full, the program ends and your accounts may be closed.
Ideal for over $25,000 in credit card debt OR if you have bad credit If you owe more than $25,000 or you have a bad credit score, then do-it-yourself debt consolidation solutions probably won’t work. That means you can skip balance transfers and debt consolidation loans because they won’t be effective.
Debt management can help you eliminate high volumes of debt within four to five years. In fact, it can often help with huge credit card debt balances—$100,000 or more. Although some credit counseling agencies cap their programs at $100,000, there are companies that have no cap.
3 Smart Tips To Boost Your Debt Repayment Strategy
1. Never rely on minimum payments
If you think you can pay off credit card debt making only minimum payments, think again. Minimum payment schedules are not designed to get you out of debt.
Interest charges are one of the main ways that credit card companies make their money. It’s in their best interest for you to stay in debt for as long as possible. That’s more revenue for them!
You always want to pay as much as you can afford so you pay off your debt as quickly as possible. Using the solutions above will usually make it faster and easier to pay off your debt.
2. Stop charging
The biggest mistake that most people make when they pay off credit card debt is that they don’t stop charging on their cards. If you’re dumping water into the boat at the same time you try to bail it out, you’ll never get anywhere.
This may sound like common sense but avoiding the use of your cards can be hard to do in practice.
3. If one solution isn’t working, try another
If one option for repayment isn’t working, you should move onto the next. Don’t wait for the first solution you try to fail. As soon as you feel like there’s trouble on the horizon, adjust your strategy. The goal is to avoid missing payments or falling behind.
Once your creditor writes off a debt due to nonpayment, it limits the options you have for relief. No matter what, if your debts are current, you have options for eliminating them quickly without damaging your credit.
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