Excessive credit card debt can put a hold to anyone’s finances. At the worst of times, you may be forced to put your life on hold. At the best of times, it’s an annoying thorn in your side. It can be a costly problem above all. There are many ways to pay off credit card debt. The question is how to pay off credit card debt without going broke. It’s not easy, but it is possible to do it and save money.
It can be done in several different ways. Each method requires you to be resourceful and smart about your spending, and there’s a good chance that success could improve your credit. In the following sections, I’ll outline a few tips to help you save money when you pay off your credit cards.
The Debt Avalanche Method
The debt avalanche method prioritizes paying off high-interest debt. It can cover multiple credit card accounts. If successful, you can minimize interest costs and pay off debt in a shorter time frame. It’s a very popular tactic.
First, list out the balance, minimum monthly payment, and interest rate of each outstanding credit card account. Make sure to list them in order of highest to lowest interest rate. Next, start adding up the minimum payments for a total minimum payment amount for each month across all accounts. With this number in mind, take a look at your personal budget and figure out how much extra you can pay on your credit card debt. Try to come up with as much as you can, but don’t overextend yourself.
Moving forward, you would pay the minimum on each credit card account. With that extra money from your budget, you would make a larger payment on the credit card at the top of the list with the highest interest rate. After paying that account off, you would repeat the procedure with the next highest-interest credit card. By prioritizing high-interest debt, you minimize the impact of capitalization across multiple credit card accounts. This saves you money!
The Debt Snowball Method
The debt snowball method is basically a counterpart to the avalanche method, but there’s a key difference. It prioritizes paying off low-balance debt as opposed to high-interest debt. Some people argue about whether this saves more money than the avalanche method, but it still might be helpful depending on your budget.
The snowball method is implemented in the same way as the avalanche method. However, you would put the account with the lowest balance at the top of the list. Any extra money you have is devoted to paying off the credit card with the lowest balance. After it’s paid off, you would repeat with the next lowest-balance credit card. Some people prefer this method because it can knock out a low-balance account quickly. Then you don’t have to worry about it moving forward.
It may sound crazy that saving money on credit card debt involves opening up another credit card, but it can make sense for individuals with great credit. A balance transfer credit card is a special product that allows you to transfer old credit card debt to a new account. This account comes with a low- or no-APR introductory deal. After transferring a balance, you have a window where interest capitalizes at a lower rate. This makes it easier to pay off the debt. Paying off your debt sooner and the lower interest rate should help you save money.
There are certain credit cards that are specifically designed for balance transfers. These cards may have a period of 0 percent APR for 6 to 18 months. The main incentive is to transfer as much of your debt as possible onto this card and pay it off within the promotional period. It’s important to pay off your debt before the deal is up. If you can’t do this, then you’ll be stuck paying interest again on the balance. A balance transfer is most effective if you can eliminate your debt wholesale (or most of it) within the introductory period.
Consolidate Your Debt
Some consumers can save money if they choose to consolidate credit card debt with a personal loan. You can pay off all credit card balances with a debt consolidation loan. Then you are left with installment loan debt and regular monthly payments at a new interest rate. If you can get a rate reduction, then you should save money at the end of repayment – so long as you don’t miss any payments. If you succeed with this, then you may also build up your credit.
However, there are a few caveats. Only borrowers with good to excellent credit have a better chance at getting a lower interest rate. Second, you need to remember that your debt doesn’t just disappear after consolidating. You’re on the hook for installment debt. If you can’t pay this off, then you may find yourself in a worse situation at the end of the day.
Make Weekly Payments
Most of us pay credit card bills once each month, but consider making smaller payments on a weekly basis instead. There are a couple of reasons for doing this. If you check out your bill each week, then you’re less likely to mess up and miss a payment. There is also less room for interest to capitalize which should save money. Paying weekly also gives you the chance to keep a closer eye on your budget; you might even learn a thing or two about your spending habits.
Put Lump Sums to Work
If you get a lump sum of cash (like a tax refund), then you may want to put that towards your credit card debt. It may be tempting to spend that extra cash on something fun, but you will get more long-term value from paying down debt. If you can put more cash towards your balance, then you’ll stand to save on interest costs down the road. If you’re loaded with credit card debt, then you should plan to knock off a chunk of it whenever you get a cash windfall.
Negotiate Lower Rates
Believe it or not, some credit card companies will negotiate and lower interest rates. If you’ve been making your payments on time for a long time, then you might be able to reduce your rate. You may have to speak with several people before this happens, but it’s not as uncommon as you may think.
If you don’t have a great history of making on-time payments, this might not be an option. You can revisit this idea from time to time, but it shouldn’t be something to bank on. There’s no guarantee even if you have a great track record.