Budgeting & Saving

How to Pay Down Credit Cards on a Tight Budget

You can pay down credit card debt on a tight budget by using strategies that trim your expenses, lower your monthly payments and prevent damage to your credit.

While significantly lowering your debt balance might be hard when you have little cash left over each month, remember that you're in control and there are many options to consider. Make a plan, stay motivated and choose payoff methods you're most likely to stick to. Use the tips below to start making progress on paying down your debt.

What You Should Do Now

Once you identify reducing debt as a goal that's important to you, follow these initial steps:

Stop Using Credit Cards

It may sound obvious, but your first step toward tackling credit card debt is to stop using your credit cards. It's nearly impossible to tackle debt if you continue adding to the amount you owe. If you continue to use credit, not only will your outstanding debt grow, but you'll pay more in interest—which will cost you money and make it more difficult to pay off your balances.

Instead, switch to using only cash or your debit card for purchases, and stay aware of your account balances so you don't overdraw. This will ensure you don't spend more on credit cards than you can pay off. Staying within your monthly budget is a crucial step in getting your finances under control; if you don't already have one, learn how to make a budget.

Look for Expenses to Cut

Next, take a look at your spending and evaluate which discretionary, or nonessential, purchases you can eliminate. The ultimate objective in cutting expenses is to find the extra money that will help you pay down debt faster. That might mean cutting takeout spending or shopping secondhand more often.

Once you've cut the things you can live without, consider how to save money on your essential, recurring monthly purchases. Look for bargain deals, coupons or offers on items you typically buy—like groceries or home supplies—which can help you save extra cash while shopping.

Keep Your Credit Cards Open

While you may think that closing a paid-off credit card would be good for your credit, usually it's not. Closing a credit card account can hurt your credit utilization ratio by reducing your total available credit. It can also change the average length of your credit history (though if you've always paid your account on time, your account could remain on your credit report for up to 10 years). Both your credit utilization and the length of your credit history are key components in calculating your credit scores, and any changes to these categories could cause your scores to dip.

One exception to this guidance is if you can't afford your credit card's annual fees. Some cards charge steep fees each year, and if you don't have enough money to pay them, check with the issuer about getting a different card it offers or canceling the account altogether.

Strategies to Reduce Your Monthly Payments

Your next step is to identify ways to lower the amount you owe, especially by attacking interest as it accrues—and potentially lowering your interest rate.

Pay More Now to Save More Later

When you receive your monthly credit card statement, you can typically make a minimum payment as determined by the card issuer, pay the entire account balance or choose the amount you'd like to pay toward your debt (as long as it's above your minimum payment). Paying more than the minimum if you are able will help tackle your debt and save money on interest over time.

If you only make the minimum payment, interest added to your overall balance will lengthen the amount of time it takes to pay off your debt. This is especially true if you have a card with a high interest rate. If your balance is high, paying just the minimum balance could add years to your payoff timeline and result in thousands of dollars in additional interest charges.

In addition to costing you more, paying only the minimum may also drag down your credit score. If you're carrying a sizable balance and only paying the minimum, your credit utilization may be high enough to hurt your score.

Negotiate Your Interest Rate

In addition to paying more than the minimum, paying less interest will make your debt payments go even further. If you have high interest rates on some or all of your cards, try negotiating with your creditors to see if they will lower your rates.

Interest rates are assigned when you open an account and are based on your creditworthiness at that time. If your credit or income has improved since then, and if you have a good payment history with your creditor, the company may reevaluate your interest rate.

Prepare for the call by gathering information that shows your track record as a good customer and evidence of how your credit score or income has improved. If your creditor rejects your request, ask for a temporary reduction to get some breathing room.

There's no harm in asking your issuers to reduce your interest rates. Any reduction could help you save money, and will help you speed up the process of getting rid of your debt. The worst that can happen is they say no.

Consider a Debt Consolidation Loan

If you have good credit, you may also be able to reduce your interest rate using a debt consolidation loan. This is a type of personal loan that lets you bundle multiple credit card debts together into one loan, giving you a single monthly payment to pay them off—at a new interest rate.

Ideally, you'll qualify for a rate that's lower than the average of your previous credit cards' rates, which would help you save money. Since this strategy can streamline monthly payments, that means you'll also be less likely to miss a payment or pay a bill late.

Strategies for Paying Off Your Debt

Finally, it's time to start making serious progress on your debt. Consider these potential strategies:

  • Debt avalanche method: If you carry balances on multiple credit cards, find out the interest rate for each card and make bigger payments to the account with the highest rate first. Make sure to pay at least the minimum due on all your accounts to avoid late payments. Once the highest-balance card is paid off, you can move on to the card with the next-highest interest rate and repeat the process. Doing this can lead to substantial interest savings.
  • Debt snowball method: Perhaps your balances with the highest interest rates are also the largest. It could take a long time to make what feels like real progress on your debt when you're paying only a little extra per month. That's where the debt snowball comes in: Using this method, you'll pay off your smallest balances first, rather than the ones with the highest rates. You won't save as much money on interest (though the difference could be minimal), but you may feel more motivated as you see your individual debts disappear.
  • Debt management plan: As you plan to pay off debt, it's a smart idea to set up a free consultation with a certified credit counselor at a reputable nonprofit organization. A credit counselor will look at your debt and budget picture and suggest strategies that may help you. One of these strategies is a debt management plan, under which the credit counselor will negotiate with your creditors to potentially get you a lower interest rate or monthly payment. You'll pay the credit counseling agency each month, and the agency will pay your creditors. The plan comes with a fee, and you'll have to close the credit cards included in the plan, so it may not be best for everyone.

Keep Track of Progress and Stay Motivated

As with any goal, keeping track of your progress is key to understanding where you stand in the process and how much further you have to go. You might use a spreadsheet or keep a note on your phone to track the following for each credit card account:

  • Your remaining account balance
  • Payment due dates
  • Payments you've made
  • Your interest rate
  • Annual fees

Seeing this information in one place for all your accounts will help you understand which debt to tackle first. It will also help you see your progress over time, which can help you stay enthusiastic on what might be a long journey.

If you have multiple cards, make sure to pay close attention to the due dates so you avoid missing any payments. Payment history is an important factor in your credit scores, and even one late or missed payment can cause them to drop.

To get a clear view of all your debt, regularly monitor your credit report and credit scores to see your up-to-date account information as creditors report it. You'll also be able to see if your credit scores change over time and track your debt paydown progress.

Learn How to Use Credit Responsibly in the Future

The journey isn't over once your debt is gone. After you've accomplished that, your new goal will be to prevent debt from accumulating again. But since you have more tools and a greater understanding of debt to draw from, you're more likely to use credit cards responsibly. Here's how:

  • Check your credit report regularly, even when you're debt-free. With an improved credit score, it becomes vitally important to protect it from issues like inaccurately reported payments or identity theft. You can ensure you're safe from these concerns by keeping an eye on the accounts listed in your credit report.
  • Avoid relying on your credit cards for nonessential purchases. Make sure you can pay off whatever you spend on your cards every month to avoid paying interest charges.
  • Prioritize building an emergency fund, which is an account with cash you've saved to cover unexpected expenses—so you don't have to rely on credit cards. Experts recommend you have at least three to six months' worth of expenses set aside to cover unforeseen financial needs, but even one month's savings is a good start.

Using Credit After Paying Off Debt

It's important to remember that once you're out of credit card debt, you can go back to using your credit cards—but with caution. Using a credit card for purchases can have many benefits, including travel rewards and purchase protection.

As long as you bring your balance back to zero every month, credit cards can offer plenty of savings and perks. Let your experience paying off credit card balances remind you of how hard you worked to be debt-free, and motivate you to stay that way.