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How to pay off credit card debt

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Written by Mark London

Carrying too much credit card debt is a major threat to your financial security.

High interest rates can cause debt to quickly accumulate beyond your ability to repay, and the potential damage to your credit score can make it harder to qualify for other loans, or even rent an apartment. Those monthly credit card repayments can end up being mostly interest payments, taking longer to pay down the balance of your actual debt.

Fortunately, there are several ways to tackle debt and get your finances under control. Here are common strategies for paying off credit card debt.

  1. Pay off credit cards one at a time

  2. Pay off more than the minimum payment each time

  3. Refinance with a balance transfer or loan

  4. Read the fine print

Before you start any of this, it’s a good idea to write down exactly what you owe, and to whom in the one place. It will be easier to track the debt if you know exactly how much debt you have, and where.

Pay off credit cards one at a time

If you owe money on more than one card, you can pay off each card in sequence. One common approach is to start by paying off the card with the highest interest rate first to reduce your finance charges. After paying down that balance, move on to the card with the next highest rate. But remember: You’ll need to make the minimum payments on all your cards while focusing on one to pay down. 

Don’t fall into the trap of sending all your repayment money to just one card’s balance and missing even the minimum repayment on another.

If rates on your cards aren’t substantially different, you might pay off the smallest debt first, as quickly as possible. Doing so can give some people a psychological boost, and help you move on to the larger balances.

Pay off more than the minimum payment each time

Your credit card provider may advise you that you only need to make the minimum repayment each time, but this will mean it takes you longer to pay off the balance of your credit card and you will waste a lot more money in interest. One of the best ways to pay off credit cards is to repay as much as you can as quickly as possible. This means paying far more than the credit card minimum payment. 

Doing this may require you to make other cuts to your normal spending like eating out and shopping though keep in mind the more you can repay now, the more you will save in the future by paying less interest over time.

Refinance with a balance transfer or loan

A more proactive approach to paying off credit card debt is to refinance – borrowing money at a lower rate to pay off all your credit cards, then developing a payment plan for your consolidated loan. Refinancing typically results in lower costs due to the lower interest rate.

There are three common refinancing approaches:

  • Consolidating debt on a balance transfer credit card 

  • A personal loan

  • Remortgage

One potential catch: to qualify for a loan or lower credit card rate, you’ll need a “good” or ideally “excellent” credit score. Read our guide on how to improve your credit score.

Balance transfers onto a credit card can save you a lot of money because they may offer 0% interest for an extended period of time, potentially one or two years. This means you can transfer the balance and only repay the balance (without interest payable) for the extended period of time. By avoiding the interest payments with each repayment, you’re likely to repay the balance much quicker than if it had remained on your original credit card. 

Be aware there are strict rules about repayments and the interest free period -- check the details of the balance transfer offer. There may also be a balance transfer fee of a few percent of the balance you are transferring. Compared with the high interest rates charged by some credit cards this is likely to be a small price to pay, but you will need to factor it into your calculations if it is charged.

Other than the formal balance transfer method, you can’t usually pay off one credit card with another, as the repayment will need to come from a debit card or savings account. It can also become very complicated and difficult to track if you are attempting to pay off one credit card with another.

With a personal loan, if approved, you can use the amount of the personal loan towards paying off your credit card balance. You’ll still need to repay the personal loan amount, though the rate of interest charged is likely to be far lower than the rate of interest charged on your credit card. This has two benefits -- you’ll pay less interest to clear your debt and your debt is likely to be paid off sooner as you can repay more of the balance rather than spending so much in interest each repayment.

Read the fine print

While rebalancing your debts can offer potential advantages, each method comes with important considerations that you must understand:

  • Rates can change: 0% interest on a balance transfer card generally lasts for a limited time, and personal loans can have teaser rates that expire.

  • Watch out for fees: Balance transfers often carry a fee that’s a percentage of your balance or a fixed amount, whichever is more.

  • Crunch the numbers - work out how long it will take you to repay the balance, and how much in fees or interest you might be charged with these different repayment methods. This way you can work out the total cost, best method and understand how much you will need to repay, how often, and for how long.

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24 November 2020