How to Pay off Credit Card Debt

Responsible credit card usage can help you take advantage of certain promotions and can help build your credit, but sometimes certain life events or unexpected challenges you come across may mean you end up with excessive credit card debt or financial stress. Fortunately, there a few different strategies that can help you get a handle on your credit card debt.

Figure Out How Much You Owe

The first step to paying off your credit card debt is to figure out how much debt you have since sometimes you may underestimate how much you truly owe.

Make a list of all your credit card balances and loans, along with the minimum monthly payment and APR for each. If you're not sure how many cards you have open, you can check your credit report for free to find out. Your credit report will list your credit card accounts with the most recently reported balances and contact information for those accounts. You can check your bank or credit card issuer to get the most up-to-date information.

Next, make a list of all the non-credit card bills you have to pay each month, such as your rent or mortgage, auto or student loans, utilities, phone bill, groceries, child care, gas, etc. Add the tallies from the two lists (your credit card bills and your monthly living costs) together to get your minimum monthly expenses.

Now, compare that total with your monthly net income or take-home pay. Ideally, your income should be more than your total monthly expenses. If you have money left over, decide how much extra you're willing to put aside to pay down your debt.

At this point, you're ready to decide which strategy is best for you to pay off your credit card debt. The following approaches will depend on the seriousness of your credit debt, along with your ability to handle the payments. Every situation and person are different, so what works for someone else may not work best for you. Knowing your options can help you decide the best approach for you:

The Avalanche Approach

If you make more money each month than you owe, then the debt avalanche approach could be an option to pay down your debt.

For this method, focus on paying off the card with the highest annual percentage rate (APR) first. Make minimum payments on all your other credit cards and put the extra money toward paying down that high-interest card. Once that card is paid off, take the money that you used to spend paying down the first card, and apply it to the card with the next-highest APR, while still paying the minimum on your other cards.

This approach can reduce the total amount you'll pay in the long-term by reducing the amount of interest you accrue. If the card with the highest APR also has a high balance, it can take a long time before you pay off the first credit card. However, as you pay off each credit card and apply the old payments to new cards, your credit card payoff will accelerate.

The Debt Snowball Approach

If you want to reduce the number of credit cards you have with balances a bit faster, the debt snowball approach may be better for you. As with the debt avalanche approach, you want to make sure that you have enough positive cash flow (making more than you owe) to be able to impact your credit card debt. With this method, you make minimum payments on all your cards every month and apply your extra money toward the credit card with the lowest balance. When that card is paid off, you move to the one with the next lowest balance and apply the extra amount to that card, while paying the minimum on your other cards.

While you'll likely end up paying higher interest in the long run, you'll be able to start paying off credit cards more quickly and that can help keep you going with your other cards.

Alternative Strategies for Paying Off Credit Card Debt

Of course, you can accomplish your goal of paying off credit card debt in more than one way. In addition to the avalanche and snowball methods, here are some alternative ways to pay down credit card debt:

Balance Transfer Credit Cards

If you have good credit, one option might be to apply for a balance transfer credit card. These cards typically come with a very low or 0% APR for a set period of time, with some promotions offering up to 21 months interest-free. During the introductory period, you pay no interest on the balance you transfer from another credit card, although you could pay a transfer fee that's typically around 2-3% of the amount you transfer.

If you use that period to pay as much as possible every month toward the balance, you can lower the amount you owe while avoiding interest charges. You may even be able to pay off the entire balance by the end of the introductory period. If you have multiple balances, consolidating them with a balance transfer can simplify your monthly payments.

However, it's important to understand the limitations of balance transfers. The promotional APR is typically only for the amount you transfer, and a higher interest rate will usually apply to any new charges you make using that card. Also, a late or missed payment will cause you to lose the introductory rate. After the introductory period ends, the interest rate on the unpaid balance can jump significantly. Additionally, some people find that it can be tempting to accumulate new debt on their old cards, once the balance has been transferred.

Some issuers could also charge a different APR for transferring balances from additional credit cards. Reading the conditions of the offer can help you make the best decision. These offer conditions can be contained in the "Schumer Box" or summary box on the credit card offer letter, which will list the various APRs associated with the offer. This is just the information you commonly see boxed off in a credit card offer.

Schumer Box Example

Debt Consolidation Loan

In circumstances where you may not have not enough cash flow to impact your debt as needed for the previous methods, a debt consolidation loan could help you pay off the credit card debt with an installment loan that has a fixed monthly payment amount. Basically, you obtain a new loan to pay off multiple other debts such as credit cards. Depending on your credit, these loans can have lower interest rates than what you would pay on a credit card, so a debt consolidation loan can reduce the amount of interest you pay and help you repay the debt faster. Just like a balance transfer, a debt consolidation loan can also simplify your monthly payments by rolling multiple payments into just one.

If your credit is fair or poor, the interest rates could become very high and the likelihood of qualifying for a personal loan could be low. For more serious debt and for individuals with poorer credit, a debt management plan could be a good option.

When you're deciding which strategy is best for you when paying off credit card debt, it's important to consider the interest rate and length of the loan. Is it more important to you to reduce the total cost of your debt by lowering interest charges? Or are you more concerned with repaying your debt quickly? You also should be aware that depending on the debt consolidation loan and how you manage it, there could be implications to your credit. Make sure you cover all the bases to ensure you understand how things will be handled by the company you work with on it.

Comparing Credit Card Payoff Strategies

These tables below can help you compare credit card payoff strategies and to get an idea for which one might be right for you. These examples are all based on beginning with $8900 total debt on three credit cards and assume you have $350 per month to pay back debt.

Debt Avalanche: Repay Highest Interest Rate First

This example assumes that you'll pay minimum amounts due and put additional money towards the card with the highest interest rate first.

BalanceAPRMinimum PaymentPayoffInterest Paid
Credit Card 1$4,20019%$8420 months$702
Credit Card 2$3,60015%$7233 months$1,094
Credit Card 3$1,10013%$2236 months$334
Total Payoff Time & Interest Paid On All Cards31 months$2,130

Debt Snowball: Repay Lowest Balance First

This example assumes that you'll pay minimum amounts due on all cards and then additional money will go towards tackling the card with the lowest balance first.

BalanceAPRMinimum PaymentPayoffInterest Paid
Credit Card 1$4,20019%$8433 months$1,728
Credit Card 2$3,60015%$7221 months$599
Credit Card 3$1,10013%$226 months$41
Total Payoff Time & Interest Paid On All Cards32 months$2,368

Debt Consolidation Loan

This example assumes that you have good credit, and that you'll consolidate all of your credit card debt into a personal loan with a 36-month term.

PrincipalInterest RateMonthly PaymentPayoffInterest Paid
Loan$890015%$35031 months$1,878

Balance Transfer Card

This example assumes that you use a balance transfer credit card that offers a 3% fee for the transfer and a 12-month period of 0% interest.

Balance (including 3% fee)APR After Promo PeriodMonthly PaymentPayoffInterest Paid
Balance Transfer Card$9,16718% $35029 months$660

It's important to understand that each strategy has its pros and cons, and the best solution for each person will vary. Your situation may also vary significantly from the examples provided. For example, it might turn out that you have good credit and can get a better APR for a balance transfer than the one listed or that you have poorer credit and may find it difficult to qualify for a loan or balance transfer credit card.

A good first step is to check your credit report to get a better idea on where your credit stands and how much you owe overall. Then, you can choose which of the various credit card payoff options may be best for you.

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