Published April 4, 2017|6 min read
Updated June 13, 2018: Expect your credit card debt to get more expensive this year. The Federal Reserve raised its benchmark interest rate a quarter point this week — the second rate hike of 2018 — and when the Fed raises rates, banks and credit card issuers follow.
Even without rising rates, credit card debt can feel like an insurmountable financial challenge. As of January 2018, the average American had a credit card balance of $6,375, according to credit bureau Experian. If you had a 17% APR and put $100 per month towards paying off that debt, it would take you over a decade to pay it all off. But it doesn’t have to take that long. Here are four ways you can speed up your credit card repayment.
If you’re a credit card holder, it’s likely you have more than one. And if you’re reading this article, it’s likely that more than one of those cards has outstanding debt on it. Having debt on more than one card is overwhelming. You may feel like you have to try to pay all of them off all at once, even though that feels complicated and ineffective.
Here’s an alternative: Pick one card to pay off first. Pour all of your extra money into that card, while paying just the minimum payment on any other cards you owe money on. Eventually, you’ll pay that card off, and then you can move all of the money you were using for that payment over to the next card. Every time you move over to a new card, you’ll add the minimum payment from that card to your monthly debt payment.
The only thing to decide is which card you’re going to pay off first. There are two main methods that people advocate for:
With the Snowball Method, you start paying the credit card with the lowest balance first. That way you’ll get the psychological boost of paying off a debt quickly, and by the time you get to the card with the biggest balance you’ll have the extra boost of a few cards’ minimum payments to help you finish it off.
If you want to save money, however, you should pick the Avalanche Method. This method tells you to pick the credit card with the highest interest rate first. If you pay off the card with the highest interest rate, you’ll save money in the long run, even if you don’t get that immediate psychological boost from paying off a small debt.
You should pick the method that fits your personality and the amount of debt you have. If you know you get discouraged easily, you might want to pick the Snowball method so you get some positive reinforcement right off the bat. Just know that it might cost you more in the end.
This goes without saying, but if you want to pay off a credit card, you have to pay more than the minimum payment. If you look at your monthly credit card bill, you’ll see how long it would take to pay off your card if you just paid the minimum payment every month. Go look at it right now. Next to the length of time it would take to pay off the balance, they’ll also tell you how much it will actually cost you in the end. That’s because if you’re only paying the minimum payment, you’ll be charged interest every month on the remaining balance.
On top of that, any interest that isn’t covered by your minimum payment will be added to your balance, and you’ll get charged interest on that interest next month! Depending on how much debt you have, just paying the minimum payment could cost you hundreds of dollars per year or more.
Let’s add a wrinkle to the Avalanche and Snowball Methods described above. If you can, pay the minimum payment and the interest charges on the credit cards you’re not focusing on every month. If you can do this, it’ll guarantee that the full minimum payment is being applied to your balance every month, as opposed to being split between interest and your initial balance. This will help you pay off your credit cards faster and save you money in the long run.
This is probably one of the hardest items on this list, because it requires you to look at how you spend your money on a monthly basis and make hard choices. The goal of this step is to only spend the money you actually have every month, and to avoid the behaviors or situations that got you into debt in the first place.
One of my favorite budgeting tools is called You Need A Budget, and it’s my favorite because it punishes you for creating new debt. Of course, this can also make it a hard budgeting tool to get into – I’ve heard multiple stories of people falling off the wagon and back into debt-creating behaviors. But if you stick with something like You Need A Budget – a budgeting tool that requires that you keep yourself accountable – you should be able to pay off your debt faster than you ever previously believed. One writer was able to pay off $92,000 of debt in four years using You Need A Budget. Seriously.
Of course, if you're tech-adverse, you can use this simple spreadsheet as a debt-free budget template instead.
It may seem backwards to take out debt in order to pay back your debt, but depending on your debt situation, it may make a lot of sense. Most cards allow you to do what’s called a balance transfer, where you can use one credit card to pay off another. There are several cards that have generous balance transfer deals that give you a period of interest-free repayment. Depending on the card, you may be able to avoid paying interest anywhere from six months to over twenty months.
Personal loans are a similar deal, except instead of using a credit card to pay off a credit card, you just get a sum of cash. You may be able get a lower interest rate on a personal loan than you would from another credit card. Some personal loan offerers, like Payoff, also provide financial education resources to help you avoid debt in the future.
This biggest risk with either a balance transfer or a personal loan is that you’ll suddenly have several credit cards with a $0 balance, tempting you back into the cycle of debt that got you into this mess in the first place. My suggestion? Cut those cards up – avoid using them for even regular household expenses.
How are you dealing with your credit card debt? We want to hear about it! Leave your story in a comment below.
Image: Beatrix Boros
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