Everyone who uses credit cards is likely to get into debt at some point. Credit cards can be very useful and even life-saving. However, they can also cause financial problems if you are inclined to impulse purchases or overspending.
Although it is possible to get rid of your credit card debt, it is not something you can do overnight. It takes planning, strategizing and determination. There are several methods for paying off your credit card debt, so let’s explore the ups and downs of each:
Methods of paying off a credit card
1. Consolidating Debt
This is the most common way to get rid of debt. Consolidating debts is the process to replace multiple debts with one loan. This method has many advantages if done properly.
First, the consolidation loan must have an interest rate that is lower than your current debt. If you can’t find a loan that fits the bill, then it’s unwise to go the consolidation route, as you’ll be spending more in the long run, which is not what you should be after.
There is also the fact that, instead of having a bunch of debts to pay off, you’ll end up with a single payment. You’ll be using the loan’s funds to pay off your credit card debts, so once you pay off that loan, you’ll be done. A great strategy for simplifying your finances is not only for credit cards debt, but also for other financial matters. It makes it much easier to keep track of how much you have to pay off.
However, getting a consolidation loan isn’t always easy. Having a lower credit score – which is often the case with credit card debt – may completely lock you out of the desired loan or get you one that won’t suffice to clear your original debt. This only works if the loan is able to cover all expenses and has an interest rate that is lower.
2. Snowball and Avalanche Payment Methods
Instead of trying to pay off all your debts at once you might be better off tackling them one at a time. This is called “pay-as-you-go” (also known as “pay-as you go”) Methods for snowballing and avalanche. The two options work in opposite directions, but their core principle stays the same – paying off credit card debts one by one until you are in the clear.
The snowball method is simpler to implement. It also offers more short-term gratification, so those motivated by “small victories” might be well-suited to it.
The idea is to first pay off the smallest debt. Next, pay off the next smallest debt. Keep going until you have all of your debt paid off. You will be paying minimums on all credit card debts. However, the debt you are focusing your attention should receive a higher rate of payment.
When you are done, you can take the money that was supposed to be used to pay the debt and transfer it to the next person.
The avalanche approach is the opposite. It involves taking on the largest debt first, with the highest interest, and then moving to the bottom. The principle is the same – paying off more than the minimum for the highest debt while keeping all other payments at bay.
This is a great option if you need to get rid of high interest debts quickly. It’s harder, but it will save you more money than the snowball method, as the interest won’t have as much time to compound.
No matter what method you choose to use, the basic idea is to go through all your credit card accounts. Next, use whatever you used for the payment to pay for the next payment. Obviously, you’ll want to avoid incurring any additional expenses on those credit cards while you are paying them off.
3. The Balance Transfer Method
The final step in paying off your credit card debt is to manage your finances and do a lot of math. The planning phase is similar the snowball or an avalanche route: You organize all your debts in ascending and descending order. Avoid using credit cards that you owe money on. Also, make sure to note whether you have to pay any transfer fees for each card.
Now that you have all of this on paper, it’s time to transfer your high-interest card balances to cards with lower interest rates. Ideally, you’ll move all your debt to the cards whose introductory zero per cent APR period is still in effect. By using this tactic, you’ll avoid paying interest rates for those new cards and clear off your debt along the way.
Of course, this only works if the balance fees don’t eat up any money you would be saving by transferring payments around. This is a DIY debt consolidation solution that might work better than an official loan.
The Game Plan
You are now familiar with the most popular credit card payment strategies. Here is additional advice on how you can plan your course of action.
While it is best to pay every credit card bill in one month, they are becoming more common at a time when consumer debt has reached record levels. However, there is no reason to delay. Your debt is costing your money.
So, the first thing you’ll need to do is organize your debts to get a clearer picture of your financial situation. This will help you track your progress, prioritize payments, and keep you informed. Start by writing down every debt on every credit card you own – not just the total amounts you, but the interest rates and the minimum monthly payments you need to make for each one.
Next, you’ll want to pause your spending. You can identify discretionary spending areas and reduce or postpone large or annual costs while you pay off the debt. You might also consider removing your cards from your wallet and sticking to cash.
Tracking your expenses is crucial during the first few months of your program. This will help you to map your spending habits and allow you to allocate cash to an emergency fund.
Every penny saved is a benefit when dealing with credit card debt. Perhaps more important, your savings will provide a cushion in the event you lose your job or are faced with an unexpected crisis.
Once you know what you need to change to meet your repayment goals, it is time to pick one of the aforementioned strategies. Stick to a strategy that is suitable for your individual circumstances and one that you are certain you’ll be able to see through to the end. While there are many people who will offer advice, you cannot guarantee the accuracy or applicability of certain methods in your quest for debt-free living.
Avoid These Potential Pitfalls
You should avoid debt and make timely payments. There are also a few things you need to remember when settling outstanding balances. Depending on the bank that issued your card and the exact nature of the debt, you might need to continue using the same card even while you’re trying to clear the balance.
That’s because of something called the debt-to-credit ratio, a measure of used vs. available credit. This basically means that you shouldn’t have underutilized credit, as that signals to the bank there is inactivity.
Additionally, this will result in a decrease in your credit limit, and sometimes even a bank closing your credit line entirely. Recent reports show that credit limits were decreasing during the pandemic.
You should use your credit card occasionally to make small, easy to cover purchases. This will allow you to maintain your credit limit and can even improve your credit score. All of the above is still valid, except for the part about eliminating large annual expenditures.
No matter what method you choose to use, it is important to plan ahead and not default on any debts. Although credit card debt can be overwhelming, it is possible to get rid of it.