Americans have over $1 trillion of credit card debt.
Here’s how to pay off your credit card debt faster.
1. Write down your credit card balances and interest rates
You have several choices how to attack your credit card debt. No matter which strategy you choose, remember to always make at least the minimum payment on all your credit cards to avoid additional penalties and fees. Don’t skip payments.
It can be intimidating to tackle your credit card debt if you focus on the total amount due. Instead, think about your credit card debt in smaller amounts, such as by each credit card. This can make the credit card repayment process more manageable. While it doesn’t change the math of what’s owed, dividing and conquering can be an easier approach when paying off credit card debt.
2. First, pay down the credit card debt with the highest interest rate
With the average interest rate on a credit card at 17%, credit card interest can add up quickly. Your best bet is to start paying down your credit card debt with the highest interest rate. Why? The credit card debt with the highest interest rate means you’re paying the most amount of interest relative to the principal balance. Since your goal is to reduce principal to limit the interest that accrues, focus on repaying not only the interest payment, but also the principal balance.
Once you have paid off the credit card with the highest interest rate, move onto the credit card with the next highest interest rate (and so on).
Another school of thought says to pay off the credit card with the smallest balance first. While this strategy may not be the best financial decision, a smaller win can provide a psychological boost and peace of mind. The downside of this strategy is that it disregards the interest rate and therefore, it can cost you more money in the long-run.
3. Pay your credit card every two weeks
Here’s an easy trick that you help you reduce your principal balance and save interest.
Rather than pay your credit card bill each month, pay every two weeks. By paying every two weeks, there are several benefits. First, you will lower your principal balance and save some interest costs. Second, you will make 26 payments each year, which is more than what you would make if you pay monthly. The extra payments will help reduce your principal balance.
Since there are no prepayment penalties to pay off credit card debt, you can also make a lump-sum payment on your credit card debt whenever you have extra cash. For example, if you earn a bonus or receive a tax refund, consider applying it to reduce the principal balance of your credit card debt.
4. Get a 0% APR credit card
A 0% APR credit card gives you 0% interest on your credit card debt balance for a certain amount of time, such as 12 months or longer.
With a 0% APR credit card, you can transfer your existing credit card balance to a new credit card and not owe any interest until the 0% APR period ends. You do need to pay the minimum payment each month. Many of the best 0% APR credit cards also offer 0% APR on new purchases during the same time period as well.
With a 0% APR credit card, you essentially can buy more time to pay off credit card debt without accruing high interest charges. The goal is to pay off your credit card balance in full before the grace period ends. Otherwise, you will be subject to a high interest rate on the balance.
5. Consolidate credit card debt
You can consolidate your credit card debt with a credit card consolidation loan, which is also known as a personal loan. With a personal loan, you can consolidate your existing credit card debt into an unsecured personal loan that is typically repayable in 2-7 years. Personal loans range from $1,000-$100,000 depending on the lender.
The interest rate on your credit card can be higher than the sum of the interest rates on your student loans, mortgage and auto loan. Plus, credit card debt is considered variable interest debt, which means the interest rate can change. In contrast, a personal loan is a fixed interest loan, so you pay the same, fixed amount each month, which is more predictable.
If you plan to repay your credit card debt in this time frame and can obtain a lower interest rate than your current credit card interest rate, a personal loan is a great strategy to save interest costs.
For example, let’s assume that you have $20,000 of credit card debt at a 17% interest rate and $400 monthly payment. With a strong credit profile, if you can consolidate your credit card debt with a personal loan at a 7% interest rate and three-year repayment term, you will save $12,568 and pay off your credit card debt earlier.
You can use this personal loan calculator to see how much you can save on your monthly payment when you consolidate credit card debt.