Credit card debt acts as an anchor on many people, and a significant factor in holding them back from achieving true financial security or freedom. In 2019, Americans have $435.9 billion in credit card debt, and US households with revolving credit card debt pay an average of $1,141 in interest annually, according to Nerdwallet’s recent American Household Credit Card Debt Study.
Interest rates on credit cards are often notably high—in many cases, even higher than the interest rates on your mortgage, auto loan, and student loan combined. This of course makes it a disproportionately expensive type of debt, and incredibly difficult to pay off if you only make the minimum monthly payments.
So, let’s take a look at how to pay off credit card debt in an organized, effective manner. It takes discipline and determination, but it’s certainly possible to get out from under the weight of your credit card debt. It will make a huge difference in your stress levels and your life (and it will raise your credit score, too)!
Stop Creating Credit Card Debt
Before you can successfully use any of the three approaches to paying off credit card debt, you must first stop generating new debt. If you continue adding to your credit card balances, you’ll never make progress paying them off.
Take a hard look at your lifestyle and situation to determine how to get to a point where you don’t need to put any new charges on your credit cards. Sometimes, you can achieve this by cutting your monthly costs. If there are enough non-essential expenses to eliminate, and/or if you can downsize your lifestyle enough to reach a positive monthly cash flow, that’s great.
Other times, though, you have to increase your income. If there aren’t enough cuts to make to get you out of the red on a monthly basis, it will take a higher salary, a second job, or a side hustle to reliably free you of dependence on credit cards.
Of course, the best solution in most cases is a combination of cost-cutting and increased income. The more money available to pay off your credit card debt, the sooner you’ll get there. These things are all easier said than done, but it’s a reality you must face if you’re overwhelmed by credit card debt, and it takes sacrifices.
Having an Emergency Fund
It’s also advisable to establish an emergency fund that can cover at least three to six months of all your expenses before aggressively attacking credit card debt. That may seem unrealistic right now, but once you’re cash flow-positive, start saving up.
This ties into what we said above: You can’t get free of credit card debt as long as you’re in a situation where you rely on credit cards. What happens if you make significant headway paying down balances, but then you or your spouse lose your job? Or you suddenly face an unforeseen major expense? If you have to turn back to credit cards, you can quickly undo the progress you made.
In general, it’s not worth putting money into a savings account if you have considerable credit card debt; the small amount of interest you earn is nothing compared to the credit card interest you pay, so it makes much more sense to pay off credit cards before directing money to a savings account (or really any type of investment). But the exception to this is that you should certainly have an emergency fund.
How to Pay Off Credit Card Debt: Minimizing Accrued Interest
The most logical and cost-effective system for paying off your credit card debt is to start by going after the card with the highest interest rate. You make the minimum payments on all your other cards each month, of course, and you put everything extra that you can come up with toward the card with the highest interest rate. Once that one’s paid off, you move to the card with the next highest interest rate.
This method is particularly good for people who may not have a lot of credit cards, but who have one or more with notably high balances or high interest rates. It minimizes the interest you accrue each month. That means more of your payments are going toward paying down your existing debt over time, and that you slow new debt as much as possible.
How to Pay Off Credit Card Debt: Snowballing Payments
Another effective approach to tackling credit card debt is focusing on the card with the lowest balance, then moving on to the one with the next lowest balance. Again, you must make the minimum monthly payments on all your other cards, and apply as much as possible each month toward the lowest card.
Once a card is paid off, add the money you were using to make those payments to the next card’s payments. In this way, funds available for card payments snowball, and it becomes easier to pay off each card as you move on to higher balances. This is an especially good method for people with a lot of cards of varying balance amounts, and for those who find it motivating to knock cards off their list.
How to Pay Off Credit Card Debt: Balance Transfers and Debt Consolidation
Another option is use balance transfers and/or debt consolidation loans. The former refers to moving a credit card balance to another card offering a very low or preferably 0 percent interest rate on balance transfers for an introductory period—ideally 12 or 18 months or longer. Debt consolidation loans are personal loans used to pay off credit card debt in exchange for a lower interest rate and one monthly payment.
Balance transfers let you make much faster headway paying off a balance. It can be great if you can pay the balance off in full during the promotional period. Even if you can’t, this can still be an excellent opportunity for accelerated progress. Debt consolidation loans are really only beneficial if you get a significantly lower interest rate.
But let’s revisit something from above, because it’s so important. It can be a huge financial mistake to use this approach if you aren’t completely free and clear of your reliance on credit cards.
If you transfer a balance or pay it off with funds from a loan, but then charge money on one or more of the cards you paid off, you go into an even bigger hole, with more debt and more monthly payments. This ends up being disastrous for many people who use this approach without truly being cash flow positive every month and having some emergency funds.
There’s one other important consideration before taking out a debt consolidation loan for people on tight budgets. The biggest help comes from a lower interest rate, but you may also reduce your monthly payments.
For example, if you use a loan to pay off six credit cards that have a total of $350 in minimum monthly payments, and the loan payment is $275 per month, you’ve given your monthly budget $75 more breathing room. But those six card payments are probably due at all different times during the month, meaning you have six smaller payments, spread out. But that larger loan payment will be due all at once, and often right at the beginning of the month when many bills tend to be due.