Are your credit card balances keeping you awake at night? Short of winning the lottery, there’s no quick-fix solution to get out of debt, despite what solicitors or infomercials might have you believe.
There are, however, many tried-and-true strategies for paying down debt. They’ve worked for others. Will they work for you? Ultimately, you’ll achieve success by committing to these actions:
Here are 6 distinct techniques for paying off credit card debt. Choose the method that motivates you most and get started now.
If you want to get out of debt as cheaply as possible, list your debts from highest interest rate to lowest. Make the minimum monthly payment on each, but throw all your extra cash at the highest-interest debt. This is sometimes called the debt “avalanche” method of repayment.
This strategy is the cheapest because when you’ve paid off all your debts, you will have paid the least amount of interest overall compared with other strategies, says J. Dennis Mancias, a financial adviser with Planto Roe Financial Services in San Antonio.
Say you owe:
If you have $600 a month to put toward your debts and you send $200 a month to each creditor, it will take 5 years and 3 months to pay off what you owe plus interest, which will total $20,364, Mancias says. This assumes once you pay off one credit card, you shift that $200 monthly payment to another credit card.
If, instead, you made the minimum monthly payment on the 2 lower interest debts — $150 on the $10,000 debt and $15 on the $1,000 debt — then put the remaining $435 toward the $5,000 debt that you’re paying 22% interest on, you’ll be debt free in 2 years and 7 months and will have paid $18,452 in total.
“The key to this strategy is to maintain the $600 per month debt payment throughout,” Mancias says. “So, once one card is paid off, you don’t eliminate that payment, but instead roll it over to the next card to accelerate the payoff.”
Who this strategy is good for: Those motivated by interest savings.
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If you’ve ever listened to “The Dave Ramsey Show,” a popular personal finance radio broadcast, you’ve heard Ramsey advocate the debt “snowball” method of repayment. With this method, you pay off your debts from smallest to largest.
Getting a debt completely paid off in the shortest time possible creates confidence and a sense of hope that pushes you to stay on track.
Similar to the avalanche method, you make the minimum monthly payment on each debt except the one you’re focused on paying off. Once you’ve repaid it in full, you put the money you were allocating to it toward the next debt on your list.
Paying the most expensive balance first might be the cheapest way to get out of debt, but if you don’t stick with that method because it frustrates you, it won’t really save you money.
Who this strategy is good for: Those motivated by small successes.
If you have good to excellent credit despite your debt — which is possible if you’ve been making your minimum monthly payments on time and kept your debt-utilization ratio low — you might qualify for a low- or no-interest balance transfer. This offer will let you transfer your higher-interest balances to the new card and save on interest, making it easier and faster to get out of debt.
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“Try to find a promotion with a low rate or no fee associated with the transfer,” says Matt Freeman, manager of credit card products at Navy Federal Credit Union.
But if you make a late payment, you could lose the low promotional interest rate, Freeman cautions.
You should also avoid making new purchases on the card. They may not come with the same low interest rate, Freeman says. Besides, continuing to use cards when trying to pay down debt isn’t a good choice. Put that card aside, make a dedicated payment plan and stick to it.
Who this strategy is good for: Determined risk-takers.
Sometimes people get into credit card debt because of bad luck. They have a health problem or get laid off and start charging everything. Other times, the source of the problem is chronic overspending, which often means you aren’t really aware of how much you bring in and how much goes out each month. To gain that awareness, you need a budget.
Matt Kelly, owner of Momentum Personal Finance Coaching in Durango, Colorado, says he and his wife paid off $165,000 in debt from credit cards, student loans and a mortgage in 15 months using the snowball method and a realistic budget while also putting away $20,000 in savings. His experience inspired him to start his business.
Your budget should account for the following, Kelly says:
It’s the last category that often trips people up and becomes the source of credit card debt, Kelly says. “These little and not-so-little expenses go onto the card and are hard to pay off.”
Once you’ve put your expenses down on paper or entered them into a spreadsheet, go through each item and find ways to free up enough money each month to pay off all your debts in 12 to 18 months, he says.
Who this strategy is good for: Anyone who is consumed by their debt.
In a June 2015 Bankrate survey, 29% of Americans reported they had no emergency savings. Another 21% said they had some savings, but not enough to cover 3 months of expenses.
That’s bad news because it means an emergency will make going into credit card debt an enticing option, especially if it’s not possible to borrow from friends or family or cut back on spending.
“You have to build your savings first before concentrating on debt,” says Steve Repak, a Charlotte, North Carolina-based CFP professional and author of “6 Week Money Challenge.”
He suggests building your short-term savings to at least $500 while making only the minimum payments on your existing credit cards before you start concentrating on your debts. That way, you can tap your savings instead of swiping your credit card if you have an unexpected expense.
“For consumers that have debt and their income isn’t high enough to save anything, they either have to reduce expenditures or increase their income, and the best-case scenario would (be) to do both,” Repak says. “Supplementing your living expenses using credit cards cannot be a solution.”
Who this strategy is good for: Potential layoff victims.
If your goal is to pay off your credit card debt, the last thing you want to be doing is adding to that debt by continuing to charge your expenses.
“Quit using your credit cards,” Repak says. “It seems like a no-brainer, but sometimes it is easier said than done.”
Paying with cash not only prevents you from accumulating more debt, it can also help you spend less overall because of the psychological pain of handing over those $20s.
Switching to an all-cash spending plan can help you cut spending by as much as 20%. It requires you to plan ahead and makes certain purchases — like the ones you make through the Amazon app on your phone — inconvenient, so you’re less likely to make them.
Who this strategy is good for: Anyone who can’t trust themselves with a credit card.