How to Pay Off Credit Card Debt: Strategies for Financial Freedom
This summer is the perfect time to start the road to financial freedom by paying off credit card debt and mastering longer-term loans once and for all. Let us show you strategy after debt repayment strategy, so you’ll have plenty of advice at your fingertips.
Ask for lower interest rates on your existing credit cards
Before you start increasing your credit card payments, contact your credit card companies, especially those with which you have large balances and higher interest rates. Assuming your account is otherwise in good standing, you can get a credit card interest rate reduction simply by calling and asking. The reason? Credit card companies want to keep their good customers. So if you pay your credit card bills on time, it’s worth asking for a lower rate. “Ask for lower interest rates, you have nothing to lose and you might be pleasantly surprised,” says Tara Alderete, director of corporate learning at International financial management.
Transfer balances to cards with lower interest rates
If you have high balances on your existing cards, consolidating your debt onto a new credit card with a lower interest rate can save you money on interest charges. The best balance transfer cards offer lower rates on balance transfers, but be aware that you must have good credit to qualify. “In some cases, you may even be eligible for an initial interest-free repayment period,” says Bruce McClary, senior vice president of memberships and communications at the National Credit Counseling Foundation. “The lower your interest rate can be, the easier it is to pay off your debt faster.”
Before applying for a new card, watch out for balance transfer fees, which could cost you 3% to 5% of the transferred amount. Also consider the new card’s credit limit: if it’s significantly lower than the amount you already owe, you won’t be able to transfer much of your debt. Another downside: a card with a good balance transfer offer may not offer rewards points, which you might miss out on if you opt for a card that offers bonuses for spending in certain categories.
Pay more than your credit card minimum payments
The first step to tackling credit card debt is to get into the habit of paying more than the minimum payment on a card. While making a minimum payment will keep your account in good standing, it’s not the fastest or most financially sound way to get out of debt.
One way to understand how it works is to consider this example from Becky House, Director of Strategic Initiatives for American Financial Solutions. If you have a credit card with a balance of $2,000 and an interest rate of 18%, it will take you 10 years and 11 months to pay off if you only make the minimum monthly payments of $35. You’ll also pay $2,574.43 in interest, yes, more than double what you originally owed! By increasing the payments to $50 per month, you will reduce the term to 5 years and 2 months and the interest amount to $1,077.15.
“No matter how much you can add to your minimum payment, it helps you pay off debt faster and save on interest and fees over time,” McClary says.
Focus on the cards with the highest interest rate
Let’s say you have more than one card in debt and you are unable to increase your monthly payments much beyond the monthly minimum. “Focus first on the credit cards that charge the most interest,” says McClary.
Exceptions are if you also have an overdue or already debt collection account. In these cases, you’ll want to settle your overdue account first to make it current, and then move on to paying the credit card account that’s costing the most interest. You’ll want to pay as much as you can on this card per month, once you’ve covered at least the minimum payment for every other card that has a balance (lest you leave any of the those fall into a situation of late payment).
Postpone payments when you pay a card
Paid a credit card? Congratulations! You can now apply the money you paid on this credit card to another account. It’s a great way to maintain your payment momentum or “defer” payments you were making on the card with the next highest interest rate.
“For example, if you’re paying off a credit card, instead of putting that money back into your budget, start sending it to another creditor that you owe,” House says. “These larger payments will help eliminate that debt faster.”
Manage your other debts
Once your credit card accounts are in good standing, you can focus on the other debts of your life. Do you have student loans, car loans and/or home loans? Now you should turn your attention to these types of debts. “Refinancing and consolidation are options for borrowers with good credit,” McClary says. “For those who are eligible, the right approach can result in interest savings and minimum monthly payments.”
By refinancing your loans, you can save on interest charges over the remaining term of the loan. And less interest means more money in your pocket. Start with your lending bank or credit union and learn about refinancing options. You will also want to look at online lenders. Choose the lender offering the best rates based on your credit. When you refinance, you can also consolidate loans into one new loan at a new, lower interest rate.
Whether you’re refinancing or continuing to repay the original loan, pay more than the monthly payment and you’ll really make progress in paying down your debt.
Enjoy life without debt
Once you’ve paid off your last credit card and mastered any other loans you owe, your financial life will be a lot better for it. Living without credit card debt in particular has many benefits.
“In addition to not having big monthly credit card payments that eat into your budget, you also don’t have to worry about all the money you’re paying in interest,” McClary says. You have extra money to grow your savings or put back into your budget. With inflation driving up the cost of living, having a little extra cash for groceries or gas can be a big help.
Plus, the stress of living with credit card debt is over and you can focus on your next financial steps breathing easier. Enjoy your new found freedom.
Prices were accurate at the time this article was published, but may change over time.