Tips for Paying Off Credit Cards

A lot of people know what it feels like to have credit card debt hanging over them—maybe you’ve been feeling that way, too. You don’t have to face your financial situation on your own, and it’s great that you’re reading up on ways to get clear of credit card debt.

There are so many practical ways to start tackling those balances and move closer to getting a grip on your finances. Once you find the right approach, every step you take could bring you more confidence and peace of mind. These seven strategies may help you turn the corner and regain control. 

1. Decide Which Debt to Attack First

Since debt is your problem, start by getting to know the enemy. Bring together information on your different debts so you can decide how to attack it. Here are some steps to try.

Make a detailed debt inventory

List each of your debts, along with the total balance, the monthly minimum payment and the interest rate for each. For credit cards, you should be able to find all this on your monthly statement. 

When you bring it all together, it might look something like this:

It's helpful to total the balances and minimum payments. Knowing the total amount you owe can help you track progress as you pay it down from month to month. Monthly payment totals will tell you how much money you have to come up with from month to month. Then you can work on finding additional room in your budget to pay down debt faster.

Another useful piece of information you should find on your credit card statement is a calculation of how long it will take you (and how much it will cost) to pay off your balance if you make only the minimum payments. Here's an example using Credit Card B:

The time and the cost it would take to pay off a balance using only the minimum are good reasons to pay more than the minimum whenever possible. 

Choose a repayment strategy

This starts with budgeting to figure out how much above the minimum you can afford to pay. The next step is to figure out how to use those extra payments if you can't afford to pay off all your balances at once. 

We’ll explain some of the repayment strategies you can choose.

Prioritize payments according to the method you choose

If you plan to pay more than the minimum but can't afford to pay off all your balances at once, you need to decide which account should get the extra money. 

Once that debt is paid off, decide which of the remaining balances is your next target. Keep doing this until all your balances are paid off. 

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2. Take a Break From Your Credit Cards

Credit cards are convenient and easy to use. That convenience could lead to a bill that’s bigger than you can afford to pay at the end of the month.  

The first step in solving a problem is to stop it from getting worse. Take a break from your credit cards. Don’t automatically take them with you whenever you leave the house—they can be expensive company. Put them in a safe place at home where they’ll keep you out of harm’s way. Remove them from your favorite shopping sites. You’ll still be able to use them, but having to type in the number every time could slow you down enough to remember that you’re trying to avoid new credit card transactions right now. Maybe you have a debit card you could use instead.

Log into your credit card account online for the option of temporarily locking your credit card. This is another trick that could help you go cold turkey on credit card use.

You don’t have to give up your credit cards for good. It could be just a temporary measure to get your debt under control. Then you can let your cards out of the penalty box.

You'll still need money to keep up with expenses. Consider these alternatives to using credit cards:

• The envelope method. Withdraw a budgeted amount of cash every week to cover routine expenses and plan how you're going to use the money before you make the withdrawal. Put the appropriate amounts of cash in different envelopes, labeled for their intended use. Keep those envelopes in a safe place until you're ready to use them. 

• Automated payments. Instead of a credit card, make automatic payments from a checking account. Automated payments can be a good way to make sure you keep up with recurring bills like rent and utilities. If you make these payments from a checking account you'll be using money you already have instead of borrowing on a credit card. To do this, you'll have to keep close track of your account balance and these payments. 

• Create an emergency fund. As long as you have high-interest credit card debt, paying it off should be the top priority. Once you get a little breathing room in your budget, start building an emergency fund. Having a little money set aside could allow you to handle unexpected expenses without borrowing. Once you've paid off your credit card debts, you can use some of the money you'd been spending on those bills to build an emergency fund. You can also jumpstart your emergency savings whenever you get a lump-sum payment like bonus pay or a tax refund. 

3. Figure Out What’s Draining Your Budget

Many people with debt problems don’t know where all their money goes. If that describes you, it’s time to solve the mystery.

Keep track of your spending. Save your credit card receipts. Look at bank and credit card statements to discover how you spend your money. Sort your spending into categories—housing, groceries, transportation, entertainment, and so on. Be sure to include any ongoing loan payments in your record of regular spending.

This record can form the basis of a budget. Once you have a handle on your expenses, add them up and subtract them from your take-home pay. If your spending exceeds your income, you have some work to do—and that’s where the next few tips can help. 

4. Cut Expenses to Free Up Money for Debt Reduction 

Once you’ve jotted down all your expenses, look for areas where you can make some adjustments. 

Separate wants from needs. Decide which expenses are necessary for day-to-day life. Other expenses could be opportunities to trim some fat from your budget. 

Consider eating out less often. Cut subscriptions you can live without. Also, think about shopping for necessities more carefully. Every small amount adds up. 

Not all cuts have to be permanent. The idea is to find some extra money that can go toward debt reduction. Reducing debt will help you breathe easier, and in the long run will leave more room in your budget for the things you want.

5. Choose a Method to Conquer Your Credit Card Debt

Once you’ve freed up some room in your budget, you can start putting more money toward paying down debts. Next, decide where that money should go.

The key to wiping out credit card debt is paying more than the minimum required payment whenever possible. More room in your budget should give you a way to do this, but you’re probably puzzling over which credit card account should be the first to get that that extra money.

Definitely continue to make the required payments on all your debts. Then, consider two possible approaches to paying extra: the avalanche and the snowball methods of paying off credit card debt.

The avalanche method 

The avalanche method has the potential to get you out of debt for the least money. With this strategy, you put extra payments toward your debts with the highest interest rates first. 

Here’s the math behind the avalanche method: if you attack the highest interest rate debt first, it'll have the biggest impact on the amount of interest you have to pay. That means more of each subsequent payment can go toward paying down principal instead of interest. As a result, your efforts build greater and greater force, like an avalanche.

So look at your credit card accounts to figure out which card has the highest interest rate. Start putting extra money toward paying down that balance first. Also, avoid using that card. This will give your debt payments the most bang for your buck.

The snowball method 

The snowball method may be more satisfying than the avalanche.

The snowball method uses psychology and motivation: you wipe out your smallest debt first. This gets you to your first payoff fastest, regardless of the interest rate.

The idea is that each outstanding balance you eliminate gives you a clear sense of progress. After you knock out your smallest debt balance, you move on to the next smallest. Each one you pay off gives you one fewer bill to pay each month—and an increasing feeling of relief and satisfaction. Those positive feelings could keep spurring you on to continue your debt reduction efforts until you’ve wiped out all the balances. 

With both methods, each time you clear a debt, you add its payment to what you were already paying on the next debt. Your payment grows bigger and bigger as you pay off individual debts.

Other credit card payment theories 

Several other theories detail how best to manage credit card debt. Here are some examples:

• The 15/3 payment rule. You make two credit card payments each month: the first one 15 days before the due date, and the next one three days before the due date. The idea is keeping your credit utilization down to help your credit score. Also, early payments could reduce the amount of time when interest accrues. And the 15/3 numbers aren’t set in stone. The right timing depends on when you use the credit card and when money becomes available to make payments. The main point: it can be helpful to make an extra payment a month.

• The 20/10 debt rule. This rule says your total debt (not counting mortgage debt) shouldn’t exceed 20% of your annual income, and your monthly debt payments shouldn’t exceed 10% of your take-home pay. Limiting total debt and monthly payments is a good goal. Again, the numbers themselves are somewhat arbitrary. They don't distinguish if the debt is for short-term spending or long-term purchases. They also don't tell you how much room is in your budget after other expenses. The main point: lower debt and payments are the goal—set guidelines for your situation. 

• The 30% credit utilization rule. An often-quoted guideline says to use no more than 30% of your available credit. Lower credit utilization is better for your credit standing and for your wallet. The lower the better. Zero credit card debt is the ideal level to aim for.

There’s definitely value to having a system that governs how much debt you take on and how you make payments. However, some rules don't always apply to everyone's situation. In general, try to follow these guidelines:

• Budget before you borrow. Don't take on debt without understanding what the payments are going to be and how they will fit into your budget.

• Don't take on long-term debt for short-term purchases. Save your debt budget for things that have long term value, like a home or a car. Taking on credit card debt that could take a long time to repay for short-term experiences is a way of digging yourself a deeper hole.

• Paying faster saves money. The more aggressive you are about repaying debt, the less interest it will cost you. 

6. Debt Consolidation Could Make Your Debts More Manageable

Debt consolidation means using a new loan to pay off multiple smaller debts. If you have two or more unpaid balances such as credit card debts, you could combine them and make one payment. 

A debt consolidation loan could be beneficial for several reasons. It could simplify your finances by reducing the number of bills you pay. If you pay off higher interest debt with a lower interest loan, consolidating could reduce the amount of interest you pay. Also, you may be able to improve your credit score by replacing revolving debt (credit card balances) with an installment loan (like a personal loan or home equity loan). Installment debt doesn’t affect your credit score the same way revolving debt does.

While debt consolidation works best if you can lower your interest rate, it could also be used to lower your total monthly payment. For example, a loan that gives you more time to pay could give you breathing room in your monthly budget. Just keep in mind that if you take longer to repay a debt in order to get a lower monthly payment, you’ll pay more in interest by the time the debt is paid off (compared to paying it off faster with a bigger payment). Balance the total cost with your need for a lower monthly total that gives you the break you need. 

The key to winning with debt consolidation: don’t run your credit card balances back up after you’ve paid them off with a loan. Debt consolidation should be part of a larger plan to get rid of debt and stay in the clear.

The following are some ways you could borrow to consolidate existing credit card debts:

0% balance transfer credit card

Balance transfer credit cards allow you to transfer existing balances onto them. Many offer a 0% interest rate for a temporary introductory period, typically 12 to 18 months. 

With the average credit card rate above 20%, not having to pay interest for a while could really speed up your debt repayment. These cards typically charge a fee to transfer balances, which erodes some of the savings. 

Your credit must be in good enough shape to qualify for a balance transfer card. If you don't pay off the balance within the introductory period, your balance will be subject to the credit card’s regular interest rate (maybe even a higher rate than you had before).

Personal loan

Historically, personal loans have had a rate advantage over credit cards. At times, this advantage has been slight, but more recently the advantage has grown to over 10%.

If you can get a clear rate advantage, a personal loan could be a cost-effective way to consolidate credit card debt. Besides the potential rate advantage, personal loans have a set repayment period, which could help you keep debt reduction on track.

Most personal loans are unsecured debt, so you generally need good credit to qualify. You typically need decent credit to get an interest rate that would represent a clear savings over your credit card debt. 

Personal loans generally have fees. You can sometimes add these costs to the loan rather than paying them upfront, but they still cut into the savings from debt consolidation.

Home equity loan

If you own a home, you may be able to get a home equity loan to consolidate credit card debt.

A home equity loan is secured by the equity in your home. That's both good and bad news. Because of that security, home equity loan rates are often the cheapest way to borrow. On the other hand, borrowing against your home is a risk. If you fail to keep up with home equity loan payments, you could lose your home.

To get a home equity loan, you need sufficient home equity and at least fair credit. Home equity is your home’s current market value minus the amount you still owe on your mortgage. 

7. Still Struggling With Debt? Get Some Debt Relief Help

It’s not always possible to solve all your problems on your own. If you’ve tried the methods here and still can’t pay off your credit card debt, there are ways to get some credit card debt relief.

Debt management plan and credit counseling

If you’re at risk of falling behind on your payments, a debt management plan (DMP) might be an option to consider. DMPs are administered by credit counselors, who might also be available to help you learn to budget and manage your finances if you sign up for a plan to pay off debt. Credit counseling agencies are typically funded by credit card companies, so they can afford to offer help for a low price.

A DMP is designed to pay off your unsecured debt within three to five years. Your credit counselor typically helps negotiate a lower interest rate on the debts you include in your plan. You’ll make one monthly payment to the credit counselor.

DMP costs vary. Usually they involve a monthly fee of around $25 to $50, as well as a one-time set-up fee. On the plus side, credit counselors may get your creditors to waive fees and/or lower the interest rate. You’ll probably have to agree to close your credit card accounts. 

Enrolled debts are reported as being in a DMP, which could temporarily affect your credit score. Also, if you close credit card accounts before they’re paid off, expect a negative impact on your credit. In the long run though, getting rid of troublesome debt could eventually put you on track toward a better credit score. Counselors could also help you learn to reduce your dependence on debt. 

The downside of DMPs is that there is no debt reduction. Also, the monthly payment is typically high. 

Debt resolution

If you’re already behind on your bills or you know you can’t afford to fully repay all your debts, you might consider settling your debt.

Debt settlement is designed to resolve your debts for less than the full amount owed. Anyone can attempt debt settlement on their own. You contact your creditor, explain your situation, offer an amount that’s less than you owe, and hope they accept it. 

People just like you are seeking debt relief in Springfield, MO and across the country. The first step is the most important one—explore your options.

For some consumers, it’s easier and more effective to let a reputable professional debt settlement company do the heavy lifting of negotiating with your creditors. With their experience, the process might be easier, less stressful, and more successful.  

Freedom Debt Relief has been handling debt settlements for over 20 years. We've worked with over 1 million clients, and have settled more than $20 billion worth of debt. That experience means we know how to help clients and negotiate settlements. Most Freedom Debt Relief clients have gotten their first settlement within 90 days of beginning the program. 

Debt settlement professionals charge a fee for their services that’s typically based on a percentage of the amount settled. By law, that fee can’t be charged until a settlement has been reached. Debt settlement may also have tax consequences. 

To make a settlement offer to your creditors, you need to have money set aside. That can be hard to accomplish if you’re already struggling to keep up with your debt payments. To save up funds for making offers, many people choose to stop paying their debts. This is likely to damage your credit score. If you've already been missing payments most of that harm might already have been done. 

On the other hand, missing payments does send a clear signal to your creditors that you’re in financial trouble, which could make them more open to negotiation.

In the end, the goal is to get those debts settled so you can start building a better financial future. 

What Is Credit Card Interest and How Does it Work?

Don’t put off paying off credit card debt. Because of the way credit card interest works, this debt can get worse every day.

Any credit card balance you carry over from month to month is charged interest even if you make the minimum payments on time. 

Not everyone knows this, but those minimum payments are purposely kept low to stretch your debt out for as long as possible. Here's how that works:

• A common formula to calculate minimum payments is to base them on any interest charged for the month plus a low percentage of the balance, such as 1%.

• Since most credit rates have been above 20% in recent years, monthly interest charges are now well above 1%. 

• When you make minimum payments, most of it goes toward interest, and little of it goes toward paying down your balance. 

• For this reason, it would generally take years to pay off a credit card balance if you pay just the minimum amount every month. Meanwhile, you'd be paying new interest charges every month.

• In reality, if you also continue to use the credit card, you could get stuck in a cycle of paying down and charging up your balance.

• You could watch your debt go up even if you make the required payments every month. 

Here's how to break this cycle of continually paying interest:

• Make every credit card payment within the billing grace period. This is the time after the billing date that you have to make a payment before interest is charged. The grace period is usually around three weeks, starting on your statement closing date.

• Pay your balance off in full every month whenever possible.

• If you can't pay your balance off in full, at least pay more than the minimum. That way you can make meaningful progress towards reducing the balance on which interest will be assessed.

• If you get some extra money within the month, send in a payment early. Since interest is charged on your balance every day, paying sooner saves money. 

The bottom line is that one of the best ways to successfully tackle your debt is to be as aggressive as possible. That way, you’ll pay it off faster and spend less overall—and avoid the built-in trap of the way interest works.

Multiple Paths Lead to a Better Financial Future

Everyone’s problems are different. You need to choose which of these debt reduction techniques are right for your situation.

Whichever path you take, keep in mind that the destination is the same. Imagine a life where less of each paycheck is going toward debt payments. Your credit score will become strong enough for you to get affordable credit when you need it. Gaining control over our budget means you won’t have to rely on continuous borrowing.

That’s a life that can reward you for all the work you put into paying off your credit card debt.