4 smart solutions for paying off credit card debt faster with fewer interest charges.
Let’s face it – credit card debt can wreck your budget. When you overcharge, the bills take up more of your income, often leaving you with little to cover other expenses. At the same time, every time you carry a balance over from one month to the next, you face high interest charges. These can eat up over half of your minimum payments even on a “low interest rate” credit card.
At 15% APR, how much of each minimum payment does it take to cover accrued monthly interest charges on a $1,000 credit card debt?
The minimum payment requirement for a $1,000 balance would be $25. Of that amount, $12.50 covers accrued monthly interest charges. At 20% APR, $16.67 goes to interest charges, meaning only 1/3 of your payment goes to the actual debt.
Fact: The average American household carries a current credit card balance of $16,748
4 solid answers to how to pay off credit card debt faster
#1: Lower interest, increase payments
The first way to pay off your credit cards faster is to use extra cash in your budget to pay it off in the biggest chunks possible. But first you call each of your creditors to negotiate lower interest rates on your credit cards. With lower APR, more of each payment you make goes to principal repayment, rather than accrued interest charges.
Creditors are more likely to negotiate lower rates with you if:
- You’ve been a loyal customer who pays on time consistently over many years
- Your credit score is higher than when you applied for the card
- Your balance is current right now
You call the general customer service line for each credit card. They may pass you up to a manager or supervisor who is authorized to negotiate lower rates. It’s a good idea to know current average credit card interest rates for each card you hold. This gives you a baseline to negotiate.
Once you lower the rates, you implement a debt reduction plan. This is where you organize your credit cards to prioritize them for repayment. You make minimum payments on all cards except one; for that one card, you make the biggest payment possible with all the extra cash flow in your budget.
The once you pay off the first card, you move on to the next. Each debt you eliminate frees up more cash for tackling the next debt. You accelerate debt repayment until you reach zero on all your cards.
#2: Use a credit card to pay off debt
It sounds a little counterintuitive, but you can use a credit card to solve problems with credit card debt. You transfer your existing balances to a balance transfer credit card that offers 0% APR on balance transfers. The higher your credit score, the longer the promotional APR will be. With excellent credit, you may be able to find cards that offer 0% APR for 18 to 24 months.
This allows you to pay off credit card debt interest-free for a time. That way, every dollar of each payment you make goes to reducing the principal debt you owe. So, for instance, let’s say you have $10,000 in debt to pay off. You get a balance transfer credit card that offers 0% APR for 18 months. With payments of $555 per month, you can be debt free before the introductory period ends.
#3: Get a loan to pay off credit cards
If you have too much debt to eliminate during a balance transfer introductory period, the next option is a loan. You take out a personal debt consolidation loan and use the funds to pay off your credit card balances. Personal loans tend to have interest rates that are less than 10%, which is much lower than most credit cards. A higher credit score allows you to qualify for the lowest rates possible.
In general, you should only use an unsecured debt consolidation loan to consolidate credit card debt. You can take out a home equity loan to pay off credit card debt, but it’s not advisable. This essentially converts unsecured credit card debt into secured debt. You increase your risk because if you default on a home equity loan, you can put yourself at risk of foreclosure.
Still, most people with good credit can qualify for an unsecured consolidation loan at a good interest rate. You typically want to aim for a term of less than 60 payments. Any less may be too expensive for your budget, while any more would take too long, leading to higher costs.
#4: Work out a debt management plan with a credit counselor
If you don’t have good credit or you have too much debt to pay off with a debt transfer or consolidation loan, call a credit counselor. They can help you enroll in a debt management program. This is a credit card debt repayment plan specifically designed for people with lower credit scores and higher debt levels.
You work out a monthly payment you can afford with the credit counselor. Then they call your creditors to get them to accept the modified repayment schedule. In addition, the negotiate to reduce or eliminate interest charges, as well as stopping future penalties. In most cases, enrollment reduces your total monthly payments by 30 to 50%. Programs usually run anywhere from 36 to 60 months.
Since a credit counselor administers the program and acts on your behalf, your credit score is not a factor for qualification. Even if you have rock-bottom bad credit, you can get approved. This can even work for debts that have already passed to collectors, as well as unpaid medical bills and payday loans.
3 tips for paying off debt effectively
Tip #1: Stop charging!
The biggest mistake that most people make when paying off credit card debt is that they don’t stop making new charges. If you’re dumping water into the boat at the same time you try to bail it out, you’ll never get anywhere.
This may sound like common sense, but it can be hard to do in practice. This is especially true for balance transfers and consolidation loans. These two solutions mean you’ll have zero balances again on all your credit cards. It will be tempting to make charges so you can earn cash back or just to pick up something you need. But don’t do it!
When you consolidate, balance your budget so you can cover all your monthly bills and necessary expenses with cash. Don’t start using your cards again until you can pay off any charges in-full each month.
Note that when you enroll in a debt management program, the creditors freeze your accounts so you can’t make any charges. You also can’t apply for new credit cards during enrollment. This can be annoying, but it can also be beneficial to break a credit habit if you can’t stop charging.
Tip #2: If one solution isn’t working, try another
The nice thing about all these debt repayment options is that nothing is set in stone. If you transfer balances but can’t pay off the debt during the 0% APR introductory period, take out a loan. As long as the debt consolidation loan you get is unsecured, you can include it in a debt management program. Basically, if one option for repayment doesn’t work, you can move onto another without even waiting for it to fail.
In any case, try to avoid missing payments or falling behind. Once your creditor writes off a debt due to nonpayment, it limits the options you have for relief. No matter what, if your debts are current, you have options for eliminating them quickly without damaging your credit.
Tip #3: You may be able to eliminate other types of debt, too
Many solutions to pay off credit card debt can be used to pay off other types of debt, too. This is particularly true with a debt consolidation loan or debt management program. In both cases, you may be able to include:
- Unpaid medical bills
- Payday loans
- Store credit accounts for furniture or electronics
- Other unsecured personal loans
The more debts you include in your elimination strategy, the better. Ideally, the only thing left after you use one of these repayment strategies should be your mortgage, auto loans and student loans. For the latter, you can use a separate repayment strategy to eliminate those debts faster, too.