If figuring out how to pay off your credit card debt is on your to-do list, you’re not alone. Not even close.
In fact, 43% of Americans have carried a balance on their credit cards for more than two years, and the average household with credit card debt owes $16,883.
Thankfully, paying off credit card debt isn’t rocket science but you do need to have a plan.
How Credit Card Debt Spirals Out of Control
It’s easy to let credit card debt spiral out of control, eventually getting so big that it feels impossible to repay.
Here’s an example that illustrates the point:
Let’s say you’re putting $250 per month toward paying down $10,000 in credit card debt, and your credit card has 18% interest.
After a year, the monthly payments you made would add up to $3,000.
But with 18% interest, it might shock you to learn that $1,800 of the money you put toward paying down your credit card debt actually went toward paying the interest, not the principal.
That means $1,800 of your hard-earned money went straight into the credit card companies’ pockets!
Meanwhile, only $1,200 was actually applied toward paying down your $10,000 principal balance. At this rate, you’ll not only pay an additional $5,386 in interest, but it will also take you 62 months to pay off.
62 months is the equivalent of 5.17 years!
It doesn’t have to be this way. You can get out of debt.
How To Avoid Paying Interest on Credit Cards
Take advantage of your credit score! If you have good or excellent credit, use it to your advantage by having banks compete for your business as a balance transfer credit cardholder.
Doing so could save you $1,800 annually in interest and potentially lower your monthly payments based on the rates available today. It can also reduce the time it would take to pay off your debt by up to 20%.
How Balance Transfer Cards Can Help You Pay Off Debt
Balance transfer cards are credit cards that typically offer a 0% introductory APR for several months so you get ahead on paying down your debt.
It may feel counterintuitive to sign up for another credit card in order to pay it off, but using this method with a clear strategy is one of the fastest and easiest ways to pay off a substantial amount of credit card debt.
By taking interest out of the equation for a certain period of time, your payments can work on tackling your debt in a fraction of the time.
Choosing the Best Balance Transfer Card For You
Deciding which balance transfer card is right for you when you refinance credit card debt comes down to your personal situation.
While many have similar terms and offers, you may be able to benefit more from one than another. For instance, one card might offer a combination of 0% introductory APR for 12 months plus cash back rewards, while another might offer a longer 0% interest period with no additional rewards. It’s all about choosing the best balance transfer card that will benefit your specific financial situation the most.
When there’s no interest being accrued, there’s more money going toward the principal balance because the interest accrual has essentially been temporarily frozen during the introductory APR period.
How It Works
As soon as you get your new balance transfer card, divide the amount you transfer by the number of months during your introductory period. So, if you transfer $3,500 and your introductory period is 18 months, that’s a payment of just under $200 a month until your balance is back to $0.
Another Option: Use a Personal Loan To Pay Off Credit Card Debt
If you’re looking for an alternative to a balance transfer card, a personal loan could be worth considering. Depending on your credit score, you may be able to find a one with a lower interest rate than your current credit card. You can even look for a personal loan that can cover multiple credit cards if you qualify for the total amount of your debt.
How It Works
What you’ll do with the personal loan is immediately pay off your credit card(s) so the balance is $0. If you had multiple credit cards, you’d now have one single payment instead of managing multiple payments each month — a method of credit card consolidation. Also, you won’t need to decide if you should make a larger payment on a particular card. You can add it to your personal loan payment.
Benefits of Using a Personal Loan
A major benefit of using a personal loan to pay off your credit card debt is that it will happen quicker than paying the minimum payment on your cards each month. Depending on a variety of factors, you could spend more than 20 years paying off your credit card if you’re only paying the minimum payment — that’s a tough number to accept.
With a personal loan, you’d typically repay the loan in 3-5 years. The monthly payment may be higher than your credit card payment was, but if you can afford it, it’s worth it to erase that debt sooner rather than later.
Note: There are also companies like Tally that specialize in helping people manage their credit card debt. Tally not only offers a low-interest line of credit where you can consolidate your debt, but they also help simplify and prioritize your monthly payments. With Tally, you make one monthly payment to them and then they handle all your monthly credit card payments.
Is It Possible For Me to DIY My Debt Repayment Strategy?
If you’re self-motivated and self-disciplined, it’s completely possible to create your own debt repayment plan. However, many individuals have trouble staying motivated because the temptation to use a card for an “emergency” or impulse buy is too great. Having the means to succumb to peer or societal pressure to afford something might make you waiver from your repayment strategy, which could land you further in debt.
Put some preventative measures in place to keep yourself on course. For example, if you’re determined to not use a credit card while paying it off, leave the card at home instead of in your wallet.
Debt Snowball vs. Debt Avalanche
There are two common strategies you can use to pay off your cold-hearted debt: Debt Snowball and Debt Avalanche.
The Debt Snowball method is paying off your smallest debt first. You will still make all of your minimum payments and pay some extra toward that credit card. When it’s paid off, you’ll put that total amount toward the next credit card that will be paid off the fastest.
The Debt Avalanche method involves paying off debt with the highest interest rate first. You’ll create a payment strategy similar to the Debt Snowball method which will have you paying more towards that high-interest debt. This method saves you money on interest but can take a bit longer to eliminate all of your debt.
What If These Options Don’t Work For Me?
You might feel like these options aren’t going to work for you and you’re not alone in feeling that. The majority of Americans are in some sort of credit card debt and would love to pay it off as soon as possible. No matter what your situation is, it’s crucial to be responsible with your payments or risk creating a worse financial situation for yourself.
Debt consolidation could be an option for you. These loans typically combine all of your debts into one loan and the interest rate is the average of what you’re paying already. It might not save you money, but if you’re struggling with managing multiple payments, it can help you get out of debt.
If your debt is incredibly overwhelming and a debt consolidation loan is not an option, you can look into a debt management program.
Before making any decisions regarding consolidation, debt management, or bankruptcy, be sure to fully understand your options and how it might affect your credit.