How to Pay Off Credit Card Debt: 6 Winning Strategies
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If you’re wondering how to pay off credit card debt, these 6 tried-and-true strategies can help you settle your balance and become debt-free. (iStock)
Paying off credit card debt may feel impossible, but it is doable. With a well thought out plan and strategy, you can make steady progress towards paying off your balances until you are finally debt free.
Here’s a look at six proven strategies to help you pay off your credit card debt, along with some tips on how to avoid credit card debt in the future.
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1. Pay off the highest-interest debt first
Best for those looking to save on interest costs
Known as debt avalanche method, this strategy involves making minimum monthly payments on all of your credit cards except for the one with the highest interest rate. Focus on making the largest payment possible using your card with the highest interest rate to top up your balance quickly. Once that card is paid off, switch to the card with the next higher tariff. You continue this process until all of your credit card balances have been paid in full.
The biggest benefit of the debt avalanche method is that it saves you money on the overall interest cost. By tackling your highest-interest debt first, you ensure that over time you will earn less interest on your unpaid balances. Additionally, since the total amount you owe will be less, you should be able to pay off your credit cards sooner, assuming you can continue to make the payments consistently.
Unfortunately, it may take longer before you see any significant progress using this method, especially if the balance on your highest-interest credit card is quite high. If you tend to get discouraged when you don’t see results right away, you may be a better fit for the next debt elimination strategy.
POLL: 40% OF MILLENNIALS SAY CREDIT CARD DEBT IS THEIR BIGGEST FINANCIAL SETBACK
2. Pay out the smallest balance first
Best for those who want to see quick results
With the debt snowball method, you make the minimum monthly payment on all but the card with the smallest balance. On this card you want to make the largest possible payment. Once you’ve paid off that card, move on to the next lower balance card until you’re completely debt-free.
The biggest advantage of the debt snowball method is that it gives you quick results. It aims to encourage you to continue on your debt-repayment journey by offering you a series of small wins to start with. Even if you only pay out a small amount, your confidence will likely grow as you continue to progress.
The disadvantage of the debt snowball method is that over time you will likely pay more in interest charges. These additional fees increase the total amount you pay to your creditors. They can also cause your debt to take longer to pay off.
3. Take out a debt consolidation loan
Best for those juggling multiple debt payments
A debt consolidation loan is a private loan you use to pay off high-interest debt, especially credit cards. to take out a debt consolidation loan, apply for a new loan from a lender. If approved, use the money from the loan to pay off your existing credit card balances. Some personal lenders pay your creditors directly for you.
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The main advantage of a Debt Consolidation Loan is that you can combine multiple payments into one. If you’re having trouble meeting your minimum payments and due dates, this might be a good option for you. Because personal loans often have lower interest rates than credit cards, there’s a good chance you’ll save money on interest charges over time.
It’s important to note that debt consolidation loans often come with additional fees. Depending on the terms of your loan, the lender may charge a processing fee, which is an upfront fee that covers the administrative costs of underwriting the new loan. origination fees typically range from 1% to 8% of the total loan amount, and the fee is deducted from your loan funds as they are disbursed. In other cases, you may have to pay a prepayment penalty if you decide to prepay your loan.
CREDIT CARD CONSOLIDATION CAN SAVE YOU THOUSANDS AS PERSONAL LOAN RATES ARE AT A RECORD LOW
4. Use a credit card to transfer the balance
Best for those with good credit
Funds transfer credit cards allow you to transfer your funds from an existing high-yield credit card to a new card with a lower interest rate. Balance transfer cards often come with an introductory 0% APR for a period of time, and some cards may even waive any balance transfer fees during the promotional period. To use this debt settlement method, you must first apply for and be approved for a new credit card.
The biggest advantage of a credit card with balance transfer is the introductory price. For a limited time, you have the opportunity to repay your new credit without interest. This can help you make more progress towards paying back your balance.
Credit cards for the balance transfer are usually only available to borrowers who have a higher credit rating. If you have a lower score, you may need to look for other options. The campaign period must also be taken into account. After the introductory interest period ends, your interest rate will adjust to the card’s regular interest rate, which may be higher than the interest rate you paid with your original credit card. Balance transfer cards also often come with balance transfer fees — typically 3% to 5% of each amount you transfer.
HOW DO BALANCE TRANSFERS AFFECT YOUR CREDIT BALANCE?
5. Seek help through debt relief
Best for those whose debt has become unmanageable
To seek debt relief, you must hire a third party to negotiate with your creditors on your behalf. Debt relief usually comes in one of three forms: a debt management plan, debt settlement, or bankruptcy. Using these methods, the third party can help you negotiate a repayment, which in some cases may be less than the total amount you owe.
When it comes to debt relief, the main advantage is that you have to do less legwork. Negotiations with creditors often require several phone calls and sometimes even the sending of letters. When you hire a third party, much of this work is done for you.
This method also has several disadvantages. First, debt settlement companies often charge high fees to negotiate your debt for you. The company may also instruct you to stop paying with your credit cards, which can have a negative impact affect your creditworthiness when the missed payments show up on your credit report. Finally, some debt settlement companies are notorious. If you’re thinking about going this route, make sure you do a lot of research. To make sure you are dealing with a reputable company, contact your Public prosecutor.
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6. Borrow money from family or friends
Best for those who don’t qualify for other debt settlement options
If you can’t do any of the other debt settlement options, consider borrowing money from family and friends. If you choose this option, it’s a good idea to carefully consider who you’re asking to lend you money, create a repayment agreement, and prioritize any required payments.
Access to flexible repayment terms is undoubtedly the greatest advantage of borrowing money from loved ones. Those in your inner circle are often willing to give you a lower than normal interest rate, if they charge you interest at all. You can also be flexible about your repayment schedule.
Too often money has the potential to ruin relationships. If you don’t pay off your debt, it will most likely put a strain on your relationship.
How to avoid future credit card debt
Now that you have a better idea of how to pay off existing ones credit card debt, the next step is to learn how to avoid further debt in the future. Here are some strategies to help you stay out of debt:
- Spend what you can afford. While credit cards let you fund purchases and pay later, it’s a better idea to treat your credit cards like cash. By spending only what’s in your bank account, you can pay off your balance in full and avoid accruing interest or incurring new debt.
- Pay as much as you can. Even if you can’t pay off your balances in full every month, you should make the largest possible payment. If you only make the minimum payment, you can incur significant interest charges that can cost you more money over time.
- Pay on time. When you are late in making a payment, interest costs start to add up. You may also have to pay reminder fees. Late payments can not only cost you money, they can also affect your credit score.