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How to Pay Off Credit Card Debt

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Claire Matthews

Financial Advisor, DCL

how to pay off credit card debtCredit card debt is one of the most common types of debt, according to finance experts. There are many reasons why people end up with massive debt on their credit card. Most of it is due to financial irresponsibility. In some circumstances, it is a case of trying to get by as most people rely on their card to make ends meet. However, it is only a matter of time until that debt snowballs and becomes difficult (if not impossible) to manage. Regardless of the reason for getting into credit card debt, the next area of focus should be towards paying off debt.

Since a lot of credit reporting agencies use credit card as one of the basis for evaluating your credit worthiness, it is important to slowly chip away your debt.

How Bad is the Credit Card Debt Problem?

According to a report issued by the Federal Reserve, the total credit card debt in the US alone has exceeded $1 trillion (that was previously set in 2017). This would be the highest ever recorded amount of credit card debt in history. Given the fact that credit card debt problem is widely known, you would think that consumers would become aware to use their plastic less. Apparently, that isn’t the case as spending with the use of credit card has only intensified within the last year.

Below are some of the compelling statistics that you need to know about credit card debt (in the US – to give you a solid picture of this problem):

  • About 43% of Americans have a credit card balance that is at least 2 years old.
  • The average credit card debt amount per household in the US is $16,883.
  • The average annual interest payments made per household in the US is $1,292.
  • About 42% of those with credit card debt cited “making ends meet” as the number one reason for credit card spending. The rest are car repairs (29%), medical bills (27%), dining out (22%), and clothes shopping (22%).

By identifying the problem, you can take the necessary first step in paying off credit card debt. In the next section, you will learn more in detail how to pay off credit card debt using strategic and effective methods.

How to Get Rid of Credit Card Debt

As with any debt problem, an awareness that such problem exist is a crucial first step in order to fix the problem. Once you acknowledge that you have to do something to reverse your debt, you will be able to map out a plan on the best way to pay off credit card debt. It is never a good idea to simply ignore the problem. Refusing to read your credit card statements won’t see that credit problem go away soon.

If you are not sure on how to go about the process, you will find a detailed step-by-step guide below. Simply follow the process so you can gradually chip away the debt until you become debt-free. Do not stress yourself over how to pay off debt quickly. Instead, focus on paying off as much as you can from that debt so you can save on the interest fees.

1. Closely analyze your current financial situation

This is a good tip to remember when you are dealing with any debt, not just credit card debt. It is important to know where you stand. It is important to pinpoint exactly how much debt you owe. Some people like to put a certain amount, such as say they owe $10,000 in credit card debt. In reality, they actually have $15,000 to $20,000! That $5,000 is considerable and you should never take it lightly. No matter how grave your credit card debt might seem, it is important that you determine exactly how much you need to pay off.

Once you determine how much debt you owe, it is also important to look at the bigger picture – your overall financial situation. You need to write down a list of everything you owe – from the smallest expenditures to the biggest amount. Do not omit any expenditure from that list – make sure you include everything, most especially your debts. The next thing you need to do is to compute your debts and expenses versus your income. This will give you a fair idea on how much money you can pay towards your debt each month. By identifying your basic expenses such as food/grocery, gas, rent or mortgage, you can allot a certain amount off your monthly income for those. The rest, you can allocate towards paying off debt and other types of loans.

2. Negotiate a lower interest rate

This is another trick that finance experts recommend when it comes to making your credit card debt easier to manage. This is not guaranteed to work all the time; however, it is worth the shot. If you are able to shave off even just a few percentages less from your card’s original interest rate, it can mean savings of up to hundreds per month. If you add that over time, this could mean thousands in interest savings a year!

A polite request is therefore worth the chance when you want to know how to pay off credit card debt. You can do this through a phone call with your credit card company. You can also write them a formal letter detailing your request. Most credit card companies will check your credit score as a basis for approving your request. However, there are also other factors that they might consider. Therefore, it never hurts to give it a shot.

If you own more than one credit card, do this for every credit card company. Most of them would be willing to renegotiate a lower interest rate in exchange for the promise of paying off your debt.

how to pay off credit card debt3. Stash your plastic

When you have major credit card debt, you need to stop the bleeding. Meaning, you need to stash your plastic somewhere and stop using it. It won’t help if you are paying $300 a month of minimum payments and then adding $100 of credit to that each month. Do not bring your cards with you and pay only with cash for your purchases. In fact, credit experts recommend that you do not use your cards altogether.

4. Work on one credit card debt at a time (if you have multiple cards)

If you have multiple credit cards and have accumulated debt on each of them, paying off debt can easily overwhelm you. The best thing you can do is to focus on one debt at a time. This is a smarter way to get out of debt rather than spread out payments on each of your cards. While you make lump sum payments on one of the credit cards, make sure you continue to make minimum payments on the others. This will help to maintain good standing on your accounts while you are trying to pay off one at a time.

But how do you determine which card to pay off first? Is it the high-interest card or the ones with lowest balance first? If you want to save on the interest fees (versus wanting to pay off your debts quickly), then your priority should be the credit cards with the highest interest rate. You can save a lot of money in the long run from the finance charges placed on that particular card (especially when those cards are associated with higher balances, too). If necessary, write down a list of your credit cards. Rank them from the highest interest rate to the lowest. It would also be good to indicate the outstanding balance for each. Once you pay off the first one on the list with the highest interest rate, you can work your way down that list. Do this for the next until you have paid off all the credit card debts.

If your priority is on how to pay off debt quickly, you should start with credit cards with low balances. Since they have a low balance, the payment period will be relatively shorter. When you are able to pay off one card, you can “feel” like you are making progress. When you see progress, you will become more motivated to knock out the rest of your credit card debt. You can use whatever extra money you earn towards paying off that credit card debt, such as when you get bonus or commissions at work.

5. Transfer your balance

Another technique for paying off credit card debt that experts suggest is to transfer your balances. For example, you have a high-interest credit card and you have another with a much lower interest rate. You have the option to transfer your existing balance from the high-interest card to the other account with a lower interest.

However, credit card experts would warn that you should be cautious when you make that transfer of balance. Most credit card companies only offer a low-interest-rate for a specific window of time as part of an introductory offer. If you make that transfer of balance, you have to commit to paying off your credit card debt within that time frame. Most credit card companies allow anywhere from 12 to 18 months. This should give you adequate time to put money towards paying off that debt with the low interest. If you cannot do this, you could end up with skyrocketing interest rates that are potentially higher than the original credit card you own.

It is also important to take note about the balance-transfer fee (around 3-4% of the amount transferred). Make sure you factor in that extra cost, too.

6. Set up a budget

Once you have committed to clear your credit card debt, you must create a budget (if you do not have one yet). A budget is important so you know exactly where your finances go. You will be able to identify your expenditures down to the last detail. This will enable you to ax some expenses that are not necessarily important and use that to pay off credit card debt.

Be realistic when making a budget. You need to make some sacrifices too. For example, if you used to go out to eat three times a week, you can cut that down to once a week. The savings you can make for those two meals at a restaurant can be put towards debt payment instead. Or, you can bike instead of drive when you buy something from a nearby grocer. The savings you make on gas can be added towards your debt payment, or for your other expenses at home. You do not need to make dramatic lifestyle changes in order to pay off your debt. However, you need to be more aware on how you spend your money in order to make significant savings. When you plan on doing any purchases, check back on your budget. If it is not listed as a priority, you can skip that purchase. Adhering to your budget is crucial if you want to free up money in order to prioritize debt payments.

7. Choose a Debt Payment Strategy

There are so many strategies that can be used for paying off credit card debt. Before you choose one, it is important to sit down and take full consideration about the pros and cons of each. There are currently three strategies available for debt elimination: 1) avalanche method, 2) snowball method, and the 3) blizzard method.

The first method – Avalanche Method – gets its name because experts believe this is one of the best approaches to erase debt quickly. Some would consider it the most efficient approach, too. This method involves paying off the credit card debt with the highest interest rates. For the rest of your cards, you must make minimum monthly payments. For the card with the highest APR, make it a point to pay as much as you can afford each month. Repeat this process until you are able to pay it off. When you aggressively make payments on high interest cards, you can save up to thousands of dollars in the long run. This is why experts recommend you put them as high priority if you decide to pay off your debt.

The second method is the Snowball Method. This is a reversal of the Avalanche Method. Instead of paying off the card with the highest interest rate, you will be working on the credit card with the smallest balance first. You will still be making minimum payments on your other cards, but you put more towards paying off the card with the smallest balance. The idea is to make it easier to eliminate debt so you can build up confidence. The more cards you can pay off in a short amount of time, the more it will reinforce positive repayment habits. This will make you feel more motivated to conquer your remaining debts.

Finally, there is the Blizzard Method. This is a combination of the above two methods of debt elimination. Essentially, you will be putting extra money towards the payment of the card with the highest interest rate and the smallest balance. Your goal is to target both types of accounts so you can eliminate them both. It will require aggressive planning on your end and lots of discipline to make sure that you can manage your debt (while still making minimum payments on the rest of your cards).

Still not sure which is the right approach for debt elimination? You might want to consider the next tip so you can be on the right path towards eliminating your credit card debt.

how to get out of debt8. Seek help (if necessary)

As mentioned earlier, there are three common strategies on how to pay off debt fast. You can choose from any of the above methods that would suit your current financial situation and the extent of your debt problem.

But if you’re still feeling overwhelmed, do not be afraid to ask for professional help. There are various kinds of professionals that can help you out. From financial advisors, to credit counselors, and so much more – these experts can help organize your plan so you can be on the right financial track. They can even refer you to other help resources to expand your knowledge on money and help gain control over your finances.

9. Make more minimum payments as you can

Making minimum monthly payments on your credit card debt is not going to help pay it off. In fact, most of your minimum monthly payments are allocated towards finance charges and does not really do much in terms of eliminating your debt. Make it a habit to pay more than the stated minimum payment on your credit card statement.

If you’re really strapped in cash, at least aim to make two minimum payments each month to make a significant dent on your credit card debt. Your credit card company computes the interest on your debt based on average daily balance. Put payment towards your credit card as often as you are able to. This will help reduce your principal balance and the total interests that you would have to pay. Ideally, you should make payments once every two weeks. For the first payment, try to pay the minimum required amount. For your next payment, put in as much as you can afford. If you do this regularly, you will see a significant improvement in your overall balance.

10. Track your progress and motivate yourself

It is important to keep track of your progress: this is one of the most important tips to pay off debt. This will enable you to keep track of which repayment methods are most efficient. At the same time, seeing the progress you’ve made will further motivate you to keep going. Revisit your progress every few months.

However, you do not need to fret over your credit card debt on a daily basis. Put reminders on your calendar or on your phone when it is time to make your payments. This will help ensure you won’t skip any payment schedule. Don’t get frustrated if you haven’t been able to pay off your debt in full over a given period of time. It took some time to get you into debt; it will also take time to get you out of debt. As long as you follow your scheduled payments, there is no need to keep beating yourself up.

11. Stop the cycle

This is the most important tip of all: improve your financial habits. Put an end to the cycle of acquiring more debt. Once you have decided to pay off credit card debt, work on improving your finances. It starts by not acquiring any new debt. A lot of people fall into this trap once they manage to pay off their previous debts. They wrongly assume that they are ready to take on new debt. Do not bring yourself back into that cycle.

You can also use this as an opportunity to look at your financial habits before and after your debt problem. This will enable you analyze what changes you made that helped you become debt-free. Follow that new financial path that you have carved for yourself instead of going back to the old one.

Importance of Paying Off Debt

When you accumulate debt on your credit card, it can put you in a precarious financial situation. Would you rather save up your money or use it to pay off debt? This is one of the biggest questions that most people face when it comes to finances. Simple math suggests that paying off debt should be given priority over saving for retirement, or adding to your emergency fund. Don’t get this wrong – it is highly important that you have an emergency fund, or that you plan for your retirement (even at an early age). But when there is debt involved, you should make it a priority to pay that off.

If the amount of interest you are paying is higher than what you earn from your savings, then it is only logical to eliminate the interest that you are paying first. This is especially true when you are dealing with high-interest credit card accounts. The ability to pay that down can solve any ongoing and future problems when it comes to managing your money.

If you are on the process of building your emergency fund, it is also a good idea to prioritize saving. However, this is only applicable if you are not dealing with a high-interest debt. Focus on building an adequate emergency fund to fall back on. Once you reach your target, you should aggressively work towards paying off credit card debt. Once you live debt-free, you can experience financial freedom and be able to do more with your money.

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