How to Pay Off Credit Card Debt?

For most people, building good credit is linked with using credit cards, but that user can quickly lead to credit card debt, a high APR, and credit card accounts with minimum payments that cannot be met. This causes higher interest balances to creep even higher which impacts your credit report negatively and may result in an inability to buy the things you need – from a new car to a home and even education. If you are looking to pay off credit card debt, we have several ways that will help you pay down credit card balances quickly so that you can get out of debt. 

Read More: What is a Payday Loan?

What Are Minimum Payments?

The monthly payment is the least amount of money you should pay the credit card company for a purchase within having a penalty, or fee, attached to the purchase. When you make a purchase with a credit card, you are promising to pay the card issuer at a time in the future. To do this, the card company charges interest. Then, they break that purchase into a smaller minimum payments. If you make only that one purchase and follow their minimum balance repayment, you would pay off that television in a few months. The problem is that most people continue to use the card until the minimum payment is out of reach. Then the highest interest rate begins to pack even more debt onto the purchase, and soon they are making only interest payments rather than paying for the item. 

What Is the Annual Percentage Rate?

Credit card accounts can come in handy if you use them wisely, but can quickly become a money pit because of high-interest rates, monthly payments, and continued credit utilization. A card’s Annual Percentage Rate, or APR, is the annualized percentage that is charged to your account on purchases made. The charge will appear as a separate line on your credit card statement and is added monthly until the purchase amount is paid off. The APR can add quite a bit of extra money to any purchase so it is better to pay off purchases quickly rather than allow the APR to continue to accumulate.

Different Ways to Pay Off Credit Card Debt

There are many different ways to get your credit debt paid and become free from debt faster. Most start by creating a monthly repayment plan, only using cards for purchases that can be paid off within a certain time frame, and looking for lower interest rates on new cards. Also, paying more than the minimum monthly payments can help with credit card debt paying.

The Debt Snowball Method

The Debt Snowball Method is a way of paying down credit card debt without a debt consolidation loan or personal loan. Using the Snowball Method, you begin debt reduction by paying off your smallest balance first. Once the smallest is paid off, you add that payment amount to your next smallest card and begin paying that off. For example, if you set up a repayment plan that allows a $50 payment to Card 1, $75 to Card 2, and $100 to Card 3 then after a few months, you have paid off the smallest card. That payment amount ($50) would be combined with the payment for Card 2 ($75) to make a new payment of $125 to Card 2. The Card 2 payment creates a debt snowball that pays Card 2 faster. Once paid off, that $125 would be combined with the Card 3 payment amount of $100 to make it a $225 payment each month, creating an even bigger debt snowball payment. 

The Debt Avalanche Method

The Debt Avalanche Method is the opposite of the Debt Snowball Method. For this debt reduction plan, you focus on paying the highest-interest debt first. Once that is paid, you combine that payment with the payment of the next highest debt payoff and repeat the process. For those with high-interest credit cards, the avalanche method can quickly attack the high-interest rate so that fewer additional charges are made to your account because of outstanding balances. 

The Debt Consolidation Loan Method

Debt consolidation loans and personal loans are another way to quickly pay off credit card debt but are different from either the snowball method or the avalanche method because instead of focusing on paying off one card at a time, the borrower combines several credit card payments into one larger payment. Typically debt consolidation is done through a third party who will negotiate with the credit card company to freeze the card so that no additional purchases can be made and will agree on a lump sum to be paid off. They will also negotiate a lower interest rate for the debt consolidation loan. This guarantees the company that at least part of the debt will be paid. 

The Balance Transfer Credit Cards Method

If you have one or more accounts, the balance transfer credit card method can be another way to approach the snowball method or the avalanche method of payment. In many cases, cards for balance transfers will have a zero or very low APR, so you can transfer balances from high-interest cards to it. Some balance transfers will have an applicable balance transfer fee. Typically the low or zero interest charges will be for a limited time, so the goal is to pay off the total amount before any interest is then charged to the account. If not paid off before that time limit is up additional balance transfer fees may be accrued.

The Debt Management Plan Method

Debt Management is a form of debt reduction similar to a consolidation loan or balance transfer card. Rather than paying the credit card directly to a third party, usually, a credit counseling agency is brought in to negotiate lower interest rates and the full amount to be paid, and will then create a payment plan for you.

How to Simplify Paying Off Future Credit Card Debt?

For quick debt reduction, first, pay attention to the fees and APRs that are attached to your cards. These fees and interest rates can add up quickly when you are carrying a full balance on your card month to month. For cards with high annual fees or a high APR, once they are paid off consider canceling that account in favor of an account with lower interest charges. Then, make a plan regarding how you will pay off each balance so that you can stay ahead of high APRs. 

Analyze Your Expenses

Debt at high interest is very hard to pay off. This is because, for every dollar that carries over month to month, you accrue additional charges to your account. To build stronger credit without incurring a lot of debt, look at your monthly income and monthly expenses and determine if any recurring expenses can be canceled or paid in a different way that will save money.

Set A Limited Budget And Spend Within It

The next step is to set a budget. Your budget should account for all income during a month, all known or recurring expenses, and a certain percentage that will account for small indulgences like buying an extra coffee or going to a movie. Subtract the known expenses and sundry expense amounts from your income. This is the amount of money you have available to invest, put into an emergency savings account, and use for long-term savings. Once your budget is set, make sure you spend within those parameters; for larger purchases that are not emergencies, consider saving for that purchase rather than putting it on a credit card.

Expand Your Emergency Savings

An emergency savings account is used in case of emergency. Most experts agree that a good balance for an emergency savings account is enough to cover your known expenses for at least three months. If you don’t have an emergency savings account or if your savings is only enough to cover a specific pay period, consider expanding the emergency funds. 

Spend With Cash Instead of a Credit Card

Spending with cash is a great way to keep credit card debt down. Using cash means you pay only the amount of the item with no added expenses like interest or annual fees. To accomplish this, some people will categorize their spending into categories like eating out, groceries, entertainment, and fun spending. They will allow a certain amount of cash each week for these categories and when the money is spent, they stop buying.

Work Harder

Another way to take control of your finances is to start a side hustle so that you earn more cash. There are many job apps that will allow you to work when you have time, such as a shared ride or delivery service. These jobs can be done after your primary job, and the money from these jobs can be used to either pay down debt or as a funding source for any entertainment-type spending. 

Final Thoughts

There are times we all need more money, and during those times credit card usage is not always bad. When used with caution, existing credit cards can be a good way to make purchases that you don’t have the cash for right now. Prudent use of these cards will help you build a strong credit history that can be used for big-ticket purchases like homes and cars. However, when used without caution you can quickly reach your credit limit and have no reasonable way to pay back the debt. If you have only a few cards – fewer than four – balance transfers to a card with less interest can be a way to pay down debt. The balance transfer method should only be used if you will then cancel the accounts with high APRs. This will harm your credit scores and might make it hard to pay for your basic needs.

Frequently Asked Questions (FAQs)