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Budgeting & Saving

How to Pay Down Credit Cards on a Tight Budget

Paying down credit card debt on a tight budget can be challenging, but it is possible when you make a plan and stick to it. If you don't have much income leftover at the end of the month, you'll need to be strategic with your money to make a good dent in your debt.

Follow these steps to start navigating your way out of credit card debt.

Stop Using Your Existing Credit Cards

It may sound obvious, but the first thing you need to do to pay down 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 your credit cards, not only will your outstanding debt grow, but you'll pay more in interest—which could cost you hundreds or even thousands of dollars over time, and make it more difficult to pay off your balances.

If you have the willpower to keep your credit cards in your wallet and not use them, great. But if you think you might be tempted to use your card while out, consider leaving them at home.

Instead, use only your debit card for purchases. In addition to not racking up more credit card debt, this will help you avoid spending more than you have in your checking account. Staying within your monthly budget is important to getting your finances under control. If you don't already have one, learn how to make a budget.

Try to Cut Your Expenses

If you're already on a tight budget, you may not know where to cut expenses. But it's an important step to take because the less money you spend, the more you can put toward paying down your credit card debt. First, look at your spending and evaluate what discretionary (nonessential) purchases you may be able to cut back each month. Making your own coffee in the morning instead of buying Starbucks and packing a home-cooked lunch are two ways to trim expenses, allowing you to put more toward your credit card balances.

Once you've cut the things you can live without, consider how to save money on your essential monthly purchases. Look for bargain deals, coupons or offers on items you typically buy—like groceries or home supplies—which can help you save a few extra dollars while shopping. Also consider using less heat, air conditioning or water to lower your monthly utility bills.

The ultimate objective in cutting expenses is to find the extra money that will help you pay down your debt faster so you can put your credit card debt behind you.

Pay More Than the Minimum Amount Due

When you receive your monthly credit card statement, you typically have the choice of making a minimum payment, paying the entire account balance or selecting a custom amount to pay toward your debt. If possible, pay more than the minimum to help tackle your debt and save money on interest over time.

If you only make the minimum payment, your overall balance will grow and you'll lengthen the time it takes to pay off your debt. That's because only a small portion of the minimum payment will go toward paying interest. This is especially true if you have a card with a high interest rate. In addition to costing you more, paying only the minimum may also drag down your credit score, as your credit utilization ratio, or the amount of available credit you're using, is one of the most important aspects of your score. If you're carrying a sizable balance and only paying the minimum, your creditilization may be high enough to hurt your score.

Pay Off the Credit Card With the Highest Interest First

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. When you carry a balance on a card with a higher interest rate, you pay more over time to borrow those funds.

To find out which card has the highest rate, check your monthly statement or contact your credit card issuer. Make sure to pay at least the minimum due on all your accounts to avoid late payments, then put any extra cash toward the card with the highest interest rate.

Once that card is paid off, you can move on to the card with the next-highest interest and repeat the process. This is called the debt avalanche payoff method, and it will help you reduce the amount you pay in interest as you work to pay off your credit card debt.

Try to Negotiate Your Interest Rate

If you have high interest rates on some or all of your cards, you could try negotiating with your creditors to see if they are willing to lower your rates.

Interest rates are assigned when you open an account and are based on your credit score at that time. If your credit or income has improved since then, and if you have good payment history with your creditor, they 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, you may be able to ask for a temporary reduction to get some breathing room while you work toward paying down a large amount of debt.

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

Keep Your Credit Cards Open

While you may think that closing a credit card once you pay it off 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 score to dip.

One exception to this rule 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 they offer or cancel the account altogether.

Keep Track of Your Progress and Stay Motivated

As with any goal, keeping track of your progress is key to understanding where you are in the process and how much further you have to go until all your credit card debt is gone. Consider using a spreadsheet or another document that tracks the following for each account:

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

Seeing this information across 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 motivated through 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. Late payments are the most important aspect of your credit scores, and even one late or missed payment can cause your score to drop.

To get a clear view of all your debt, consider getting a free copy of your credit report and credit scores from Experian to see your up-to-date account information as creditors report it. You'll also be able to see if your credit report changes over time and you can use Experian's tools to track your progress.

What to Do Once You're Finally out of Debt

Once you've paid off your credit card debt, consider crafting a strategy to help you manage your spending going forward. You'll want to avoid overspending and not to rely on your credit cards for non-essential purchases. Always make sure you can pay off whatever you spend on your cards every month to avoid paying interest charges.

Review your budget and see how much extra money you have each month. If you don't already have an emergency fund, take that extra amount and put it in savings to begin building a fund solely for emergency expenses. Once you have an emergency fund (experts recommend you have at least three months' worth of expenses set aside to cover unexpected financial needs), you can use any extra cash to save for other financial goals, such as a down payment for a car or home. As long as you know how much extra money you have to play with each month, you'll be able to budget how much you can spend on other things and how much to save.

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 earning rewards and purchase protections. As long as you pay off your balance every month, credit cards can offer plenty of savings and perks.

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