Credit cards can be a valuable tool for building your credit while enjoying rewards and benefits. But if used irresponsibly, you could end up with a mountain of debt that can cripple your finances.
The good news is that you can reduce your credit card debt by freeing up money in your budget, lowering your interest rates and payments, and following proven repayment strategies. Remember, you are in control of your debt and can beat it with the right plan, persistence, and self-discipline. Follow the tips in this guide to start paying off your credit card debt.
Understanding Credit Card Debt
Credit card debt is a type of revolving debt that allows you to borrow up to your credit limit. Typically, revolving credit is indefinite, so you don’t have to pay off the debt at the end of the loan term, usually at the end of your monthly billing cycle. In contrast, installment loan accounts are closed once the balance is fully paid.
If you have a large debt on your credit card, you may find it difficult to pay more than your minimum payments. As such, you could end up paying high interest and fees. Let’s say you have a balance of $2,000 on a credit card with an annual percentage rate (APR) of 18% and you make minimum payments of $50 per month. It will take you about five years to pay off the balance, including $1,077.25 in total interest.
Additionally, paying off debt can have a positive impact on your. As stated by FICO, your credit utilization rate – the amount of credit you use – is 30% of your credit score. Many credit experts recommend keeping your credit utilization ratio below 30% to maintain a good or excellent credit score, but the lower your ratio, the better.
And if you have bad credit (or not enough credit history), you can work on improving it by working with a credit repair company. Several repair options are available to you.
3 proven ways to reduce your credit card debt
The more you can pay beyond your minimum payments, the faster you can pay off your credit cards. If your budget is tight, look for ways to free up some extra money to apply to your payments.
Looking at your expenses and cutting unnecessary expenses is one way to create a cushion in your budget. For example, you might consider cutting out streaming services you rarely use or an expensive gym membership. It’s up to you to decide which luxuries you’re willing to do without and which are non-negotiable.
Increasing your income is another option to help you get out of debt faster. If you have more time, you might want to volunteer for overtime at work or take on a side gig. You can also talk to your employer about a pay raise if it’s been a while since your last job.
Freeing up money will go a long way toward paying down debt. Following these three strategies can help you reach your goal:
1. Negotiate a lower rate
One of the fastest ways to pay off your debt is to call the customer service number for your credit card issuer on the back of yourand ask for a lower interest rate. Be prepared to explain why you deserve a lower APR. Let them know how long you’ve had the card, your on-time payment history, and whether your credit score is higher now than when you originally applied for the card.
If the representative can’t help you, ask to speak to a manager or supervisor with the authority to make a decision about reducing your APR. If a supervisor does not change your rate permanently, ask for a temporary rate reduction or ask what hardship options are available to you.
2. Consolidate your debts
Two of the most common ways to consolidate your debts are with a debt consolidation loan or a balance transfer credit card.
Debt consolidation loan: A debt consolidation loan is an installment loan, usually with fixed interest rates and payment amounts. Locking in a fixed-interest loan could act as a hedge against rising federal interest rates.
Getting a personal loan can be a good idea if you have several high interest credit cards. According to the Federal Reserve, from April 2022 to June 2022, the average interest rate on a 24-month personal loan was 8.73%, compared to an average interest rate on a credit card of 16.65%. .
You might considerif you were required to make minimum payments and want a structured repayment plan. A debt consolidation loan will come with a fixed end date when your debt balance will be zero.
Before taking out a debt consolidation loan, check with your lender to see if they charge origination fees to process the loan. These fees can range from 1% to 8% of the loan amount and could reduce your savings.
Balance Transfer Credit Card: With good credit, another option might be to apply for a. These cards usually come with a low or 0% APR introductory period, with promotions for some of the best cards lasting up to 21 months. During the introductory period, you will not have to pay any interest charges.
With 0% interest, your full payment amount can be used directly to pay off your balance, minus any fees or other charges on your bill. Even if you can’t completely pay off your credit card debt before the introductory period expires, you could still save hundreds of dollars by paying off as much debt as possible during this period.
Remember that your credit card company will likely charge you a balance transfer fee, usually 3% or 5% of the transfer amount. If your debt balance is relatively low, the transfer fee could offset the savings you’ll realize during your interest-free period.
3. Follow a debt repayment strategy
Although making regular payments above the minimum amount owed helps reduce your credit card debt, it can help to follow a plan, such as debt avalanche or snowball strategies. debt.
Debt avalanche method: This credit card repayment strategy involves paying off your most valuable cards first. To do this, you will make minimum payments on all of your credit cards except the credit card with the highest APR. Once you’ve paid off all of the debt on that card, you’ll take the money you paid into it and add it to the pot. You will now have more money to pay off the credit card with the second highest interest rate. Repeat the process until all of your credit cards have a zero balance.
The main advantage of the debt avalanche method is that you can save money by paying off your credit cards with the highest interest rates first.
Debt Snowball Method: The debt snowball strategy is also about making minimum payments to free up money and focus on paying off a card. In this case, you will direct your money to pay off your credit card with the lowest balance. Once your credit card with the lowest debt amount is cleared, you can take the money you used to pay for that card and use it to pay off your card with the next lowest balance. .
With every card you pay off, the amount you can apply to pay off your debt grows like a snowball. Many people prefer the debt snowball method because quick wins build momentum and serve as inspiration to keep going.
Of course, everyone has a unique financial situation. While some may use a debt avalanche method to save money and reduce credit card debt, others may opt for a balance transfer card to take advantage of the interest-free introductory period. If your debt is overwhelming, you may want to turn to credit counseling or ask your credit card issuers for programs in case you have difficulty. Credit repair experts are here to help.