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. Getting yourself out of credit card debt may be daunting, but it isn’t impossible. It just takes focus and perseverance.
Here are six techniques for paying off credit card debt the smart way:
- Pay the most expensive balance first.
- Try the “snowball method.”
- Consider a balance transfer credit card.
- Get your spending under control.
- Grow your emergency fund.
- Switch to cash.
Read on to learn more about the six methods and which one you could benefit from the most.
Ways to pay off credit card debt
1. Pay the most expensive balance first
If you want to get out of debt as quickly as possible, list your debts from the highest interest rate to the lowest. Make the minimum monthly payment on each, but throw all of your extra cash at the highest-interest debt. This is sometimes called the debt “avalanche” method of repayment.
This strategy is good for saving money, since you’ll 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.
If you have, say $600 per month that you can budget toward your debt payments, you can focus the majority of those funds toward the highest-interest debt. Once that debt is paid off, you can use the funds you would have put toward that debt toward the next-highest interest and eliminate it faster, since you won’t have as much interest to pay off.
“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.
2. The ‘snowball’ method
With the “snowball” method, you pay off your debts from smallest to largest. Getting a debt completely paid off in the shortest time possible is a good motivator that could help you stay on track.
Like 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 end up sticking with the method, it won’t save you money.
Who this strategy is good for: Those motivated by small successes.
3. Consider a balance transfer credit card
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 may qualify for a 0 percent APR balance transfer offer with a balance transfer credit card. This zero-interest introductory offer could last anywhere from 12 to 21 months and will let you transfer your higher-interest balances to the new card. You’ll save on interest for the duration of the 0 percent period, making it easier and faster to get out of high-interest debt.
“Try to find a promotion with a low rate or no fee associated with the transfer,” says Matthew Freeman, manager of credit card products at Navy Federal Credit Union.
You should also avoid making late payments or new purchases on the card. New purchases may not come with the same low interest rate, and late payments could cause you to lose the promotional 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: Those good at keeping track of credit card payments.
4. Get your spending under control
Sometimes people get into credit card debt due to unexpected medical or emergency expenses. Other times, the source of debt is chronic overspending, which often means you are spending more than you’re saving or more than you have in your account. To gain full insight into how much you are spending, a reasonable budget is the next best step to help alleviate that debt.
Matt Kelly, owner of Momentum: Personal Finance Coaching in Durango, Colorado, recommends that your budget account for the following:
- Basic necessities: Rent/mortgage, utilities, groceries and gasoline.
- Obligations: Minimum payments on credit cards and other debt.
- Nice-to-haves: Restaurants, coffee and entertainment costs.
- Irregular recurring expenses: Insurance, car repairs, tires, haircuts, vitamins, toiletries, vet bills, holiday gifts, travel, weddings and gifts.
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 lacking a sufficient budget.
5. Grow your emergency fund
If you’re one of the many Americans who don’t have significant savings, overtapping credit cards could be an easy trap to fall into, 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, CFP 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: Anyone lacking a significant emergency fund.
6. Switch to cash
If your main 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 due to the psychological act of handing over physical bills. It also requires you to plan ahead and makes certain purchases inconvenient, so you’re less likely to make them.
Who this strategy is good for: Anyone looking for ways to limit their credit card usage.
Ways people get into credit card debt
Whether from unexpected medical costs, an emergency expense or everyday purchases, credit card debt can rack up swiftly. Many people fall into credit card debt by financing large purchases that they can’t immediately afford with their credit card.
Credit cards — depending on your credit score and financial history — can come with high interest rates, making it harder to pay off the debt in the future if at least the minimum payment isn’t made. And if you’re also on the hook for more structured payments, like personal loan or student loan payments, credit card debt may fall lower on the list of priorities and end up growing.
Benefits of debt consolidation
Debt consolidation can be a useful way to consolidate multiple lines of high-interest credit card debt under a loan with one fixed, monthly payment. You can consolidate your debts with a debt consolidation loan, a balance transfer credit card or even a home equity loan.
Debt consolidation can make it easier and less expensive to pay off your debt, but only if the interest rate of the debt consolidation loan is lower than the interest rates of your credit cards. Use Bankrate’s debt consolidation calculator to find out how much money you could save on interest.
Consider a debt consolidation loan
A debt consolidation loan is a type of personal loan that can help you consolidate multiple lines of high-interest debt into a single loan. Debt consolidation loans also come with a perk: If you make the monthly payments in full and on time, your credit score could see a positive impact.
The main perk of a debt consolidation loan is that it tends to carry lower interest rates than credit cards, so if you meet the qualification requirements, you may be able to save money on your credit card debt.