Paying Off Credit Card Debt

Paying Off Credit Card Debt

May 5, 2020         Written By Lynn Oldshue

We all know that investing money is a good idea because it typically grows over time, leading to long-term profits. When someone says “investments,” we usually think of stocks, bonds and mutual funds.

Paying off your credit card debt may not seem like an investment, but if you are carrying a balance from one month to the next, it actually provides a significant “return” on your money. Before you sink your funds into the stock market, you may want to focus on paying off your credit card debt. That could save you a tremendous amount of money and become the best investment you make this year.

If you are carrying a $2,000 balance on your credit card account with a 15% APR, you will be paying an estimated $300 in interest penalties over the course of a year. If you were to pay off that balance rather than investing $2,000 in the stock market, you’ve essentially saved $300 for the year which is equivalent to a 15% return on your investment. There are very few stocks where you can get that kind of guaranteed return.

There are some other benefits to paying off this credit card debt. You are not taxed on these savings, unlike gains in the stock market. Your credit score will likely increase since you will be lowering the amount of debt you have. This can help lower your interest rate on future loans. And there is no doubt your personal stress level will decrease as your credit card debt disappears.

Tips for Reducing Credit Card Debt:

1. Understand that paying off debt won’t be easy. It took time to accumulate this credit card debt, and it will probably take even more time to pay it off. Do not get discouraged or give up. Eliminating debt and building a secure financial foundation for yourself or your family is worth the sacrifice.

2. Get an honest assessment of how much you owe for all debts, including credit cards. It may have been easier to pay the minimums without looking at the total amount that you owe, but misleading yourself only makes it worse. Collect all of your bills with outstanding debt: credit cards, mortgage, student loans, personal loans, auto loans and bank loans. Write down a debt summary that includes the creditor, monthly payment, interest, balance due, credit limit and due date for each loan.

3. This debt summary may be overwhelming, so prioritize which bills to pay first. If you don’t have enough money to pay all of your bills each month, put off the credit card bill. Start with the bills for necessities such as: basic groceries, health, shelter, and basic transportation. Next, pay the secured loans such as your car loan. Payments on unsecured loans, including credit cards, should be last.

4. Contact your creditors to negotiate lower rates. The less money you pay in interest, the more money you use to pay off your bills. If your lender does not offer a lower rate, shop around for another credit card.

5. If you are in danger of missing a payment, or defaulting on your credit card loan, contact your credit card issuer as soon as possible. Your issuer may work out a payment plan with a lower rate or monthly payment if it will help keep your account out of default.

If the first person you speak with can’t help lower your rate or make adjustments to your account, ask to speak with a supervisor or someone who can. Persistence may be necessary to find the person will help you. Explain that you are in debt, the steps you are taking to repay it, and what you can pay today. Document all conversations, including whom you spoke with, and the date, time, and the results.

6. Pay off the card with the highest APR first. Continue to pay the minimum on your other cards until you pay off the card with the highest rate. Then focus your effort on the card next in line.

After you pay off the card, keep it open, especially your oldest cards. Issuers are closing inactive accounts to reduce their lending risks. Losing this available credit can lower your debt utilization ratio which will lower your credit score.

7. Pay more than your minimum payment. Your minimum payment is usually only 2-5% of your balance. At this rate, it will take you many years to pay off your debt. Start with the card with the highest interest rate and try to double your minimum payment.

Here is an example of the benefits of paying more than your minimum balance: assume you have a credit card balance of $8,000 and your interest rate is 12%. If you pay just the minimum payment of 2% each month, it will take 346 months to pay off the balance and will cost $7,696 in interest. If you pay 5% of your balance each month, it will take 113 months to pay and cost $1,974 in interest.

Starting in February 2010, if you pay more than your minimum payment, issuers will apply this amount to your balance with the highest APR.

8. Transfer your balance to a card with a lower rate. If your rate is above 15%, look for a card that offers 0% for 6-12 months. To take full advantage of this 0% interest, pay as much as you can above the monthly minimum.

Only use this card to pay off your existing balance. Do not add to your balance with new purchases.

9. If you have a credit card balance, stop using it for anything other than necessities. Use cash instead.

If you carry a balance, you are paying interest for every purchase, including clothing, entertainment or dinner. Factor that into each purchase. For example If your APR is 15%, ask yourself if the purchase is worth paying an additional 15% in interest per year.

Paying with cash will not only save money on interest, but it will also reduce the amount you spend. Studies show that shoppers spend less money when using cash.

10. Pay your bills on time, every time. Credit card issuers are looking for reasons to raise your rate. Even one late payment can trigger a rate increase.

11. If you are surprised by your current rates, check your credit report. It may contain an error that lowered your credit score, causing creditors to increase your rates.

If you find an error on your credit report, contact the credit bureau to report it. They must respond to your claim in thirty days or remove the information that is incorrect or unverifiable. You can dispute by mail, telephone, or online. If the corrected error results in a higher credit score, alert your creditors to this and ask for a lower interest rate.

12. The reward is worth the effort. If you build a history of paying your bills on time every time, and pay down your debt, your credit score will increase. This will lead to lower interest rates for credit cards, mortgages and auto loans.

There are many different strategies to approach paying down debt and each one has a benefit. We’ve compiled a quick list to help you find the one that would work best for you in paying down your credit card balances and other debt.

Utilize The “Snowball” Effect

The “snowball” effect can be extremely useful when paying off credit card debt and other loans. It refers to the method of paying off the smallest debt first, and moving from smaller to larger debts. When you pay off one debt take the minimum payment, plus any additional money you have for paying off debt and apply it to the next smallest debt. This process can be very motivating, and motivation is one of the biggest factors when it comes to paying off debt. If you believe paying off small balances will motivate you to tackle larger ones, then this strategy might be the right choice for you. If you would rather spread your payments throughout your various balances or you want to pay the highest rate balances first, then this is not the best option.

Pay Off The Most Expensive Balance First

When we say the most expensive balance, we are actually referring to the balance with the highest interest rate. High interest rates can quickly turn manageable debt into something that is out of control. If you use this strategy, you will be paying off the balance with the highest interest rate first, followed by the balance with the next highest rate. While this strategy might not seem as satisfying as the “snowball” effect, you are saving yourself valuable dollars in the long term. This strategy is for those who are looking to be the most cost efficient in paying off debt.

Utilize Balance Transfers

Balance transfers can be very effective for managing debt—especially if you are transferring a balance to a new account with a much lower interest rate. However, balance transfers can have fees of up to 3%-5% of the amount you transfer, so make sure the lower interest rate is worth the cost of the transfer. Don’t forget about your debt after you transfer the balance. Make sure you draw up a plan so you are making payments each month and sticking to your plan.

Consolidating Your Debt

Consolidating your debt can be an option for those who want to simplify the process instead of dealing with numerous open accounts each month. Consolidating your debt is something you should talk over with a financial adviser because the consolidation process can leave you with higher interest rates. Make sure you will be able to afford the consolidated interest rate before you make the switch. You don’t want to jump in without knowing the risks because you can’t “un-consolidate” your loans after the process is completed.

Create An Emergency Fund

Creating an emergency fund will allow you to take care of unexpected expenses without incurring more debt. This is critical to staying out of debt and maintaining your lifestyle. Ideally, you’ll want to keep at least several month’s worth of pay saved up for a rainy day. Make sure you aren’t dipping too far into your savings to pay off your debt.

Stop Acquiring New Debt

You don’t need any new credit cards when you are already deep in debt. You need to find a way out first. Acquiring new debt isn’t going to help you get out of old debt—it will only make the situation worse. Instead, you should focus on curbing your credit card usage as much as possible, and if you can, stop using your credit cards altogether. You can then focus on paying off your debt without worrying about how to pay new credit card bills.

Paying off your credit card is not an easy process. In fact, it can be a very difficult, frustrating and time-consuming one. But once you complete the process, you will reap the financial rewards of not sacrificing your hard-earned cash to creditors every single month. Picking a strategy to pay off your debt should depend on your personal lifestyle choices. If you like for things to be simplified, maybe you should consolidate your debt so you only have to worry about one payment each month. Perhaps paying off the smallest balance motivates you to tackle the other debt. You’ll want to pick a strategy that not only fits your lifestyle but motivates you to keep going when things get difficult. Having the courage to push through those difficult times will determine if you will be successful. It’s one thing to pick a plan, it is another thing to stick to it. Make sure you remain dedicated throughout the process, and you will be debt-free before you know it.

The information contained within this article was accurate as of May 5, 2020. For up-to-date
information on any of the terms, cards or offers mentioned above, visit the issuer's website.


About Lynn Oldshue

Lynn Oldshue has written personal finance stories for for twelve years. She majored in public relations at Mississippi State University.
View all posts by Lynn Oldshue