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The Best Ways to Pay Off Credit Card Debt

The Best Ways to Pay Off Credit Card Debt

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This article was last updated May 29, 2020. Terms and conditions may have changed. For the most accurate information, please consult the issuer website.

Struggling with high-interest credit card debt can be a burden on both your finances and your peace of mind. However, with a strategic action plan, it is possible to get rid of credit card debt.

There are two different popular ways of paying down credit card debt, with one focusing on knocking out smaller debts quickly, and the other on paying off the highest-interest rate debts first. There are also other potential options for paying less in interest with a balance transfer or a personal loan. And in case tackling this on your own is overwhelming, we’ll offer tips on selecting a reputable credit counselor.

To set yourself up for success, jot down on paper (or via an app) two lists: One should include your income, a list of monthly expenses (including the minimum payments of all your credit cards) and any discretionary income left over each month. The other list should include the balance, interest rate and minimum payment of each credit card you’d like to pay off.

Pay off debt with the ‘debt snowball’ method

How it works

The debt snowball method involves prioritizing your debts from smallest to largest, allowing you to achieve payoff sooner. For example:

 Credit Card No. 1Credit Card No. 2Credit Card No. 3
Balance$500$2,000$5,000
APR20%18%15%

In the table above, the first card to pay off would be Card No. 1, with the $500 balance. While making minimum payments on the other two cards, you’d determine a monthly payment amount above the minimum for the first card that allows you to pay it down as rapidly as possible — which is why it’s important to know how much discretionary income you have after meeting monthly expenses.

After paying off the smallest debt first, you’d work your way up the list, which in this case means paying off the card No. 2 with the $2,000 balance next. This continues until you’re debt-free.

Pros

The debt snowball method works well for those who like to reach frequent milestones on the journey to becoming debt-free. By paying down the smallest debts first, you’ll get the satisfaction of watching your first balance hit $0 sooner rather than later. This is a good way to stay motivated for what can be a long and tedious process.

Cons

Because you’re paying off the smallest debts first rather than the debts with the highest-interest rates, the debt snowball method may cost more in interest over time than the debt avalanche. As an example of how interest adds up over time, consider these two different scenarios for paying off a card with a $5,000 balance and a 20% APR:

  • Paying off the card in four years will cost you about $152.15 a month. During that time, you’ll be charged roughly $2,303.29 in interest.
  • Paying off the card in one year will cost you about $463.17 a month. During that time, you’ll be charged roughly $558.07 in interest.

Pay off debt with the ‘debt avalanche’ method

How it works

With the debt avalanche method, consumers prioritize high-interest debt first. We’ll use a similar example:

 Credit Card No. 1Credit Card No. 2Credit Card No. 3
Balance$500$2,000$5,000
APR15%18%20%

Using the debt avalanche method, you’d pay off Card No. 3 first, since it has the highest APR, while still making the minimum payments on the other cards. In this example, the highest APR card also has the highest balance, but that might not always be the case.

Once you finish paying the balance on that card, you’d tackle the balance on Card No. 2 next, and you’d save the card with a 15% APR balance for last.

Pros

Since you’re prioritizing the cards with the highest APRs, the debt avalanche method can help you save money in the long run. To illustrate, consider again the two different timelines for paying off a card with a $5,000 balance and a 20% interest rate:

  • Paying off the card in four years will cost you about $152.15 a month. During that time, you’ll be charged roughly $2,303.29 in interest.
  • Paying off the card in one year will cost you about $463.17 a month. During that time, you’ll be charged roughly $558.07 in interest.

Cons

Where this method can be more difficult is if your card with the highest-interest rate is also the card with the highest balance (or one of the highest balances). That means you’ll be tackling a large amount of debt at the outset of your debt payoff journey, and you won’t get the quick satisfaction that can come from paying off small balances first when using the debt snowball method.

Apply for a balance transfer credit card

How it works

When you get a balance transfer card with an introductory 0% APR, you can effectively pause paying interest for a period of time — usually 12 to 18 months, but sometimes as long as 21 months. During this time, payments go entirely to the principal of the debt.

Balance transfer cards offering long interest-free periods often charge a balance transfer fee between 3% to 5% of the amount transferred. There are cards available with no balance transfer fee, but they may offer shorter intro 0% APR periods.

Note that you won’t be allowed to transfer debt between cards from the same issuer.

For those who need a long intro 0% APR period, the Citi Simplicity® Card - No Late Fees Ever offers an intro 0% for 18 months on balance transfers. After, a 14.74% - 24.74% (variable) APR applies. The balance transfer fee is Balance transfer fee – either $5 or 3% of the amount of each transfer, whichever is greater..

For those who can pay off their debt within a shorter intro period, The Amex EveryDay® Credit Card from American Express is an excellent choice. It offers intro 0% for 15 months on balance transfers. After, a 12.99%- 23.99% variable APR applies. Where this card stands out is its $0 balance transfer fee. Be aware that balance transfers must be requested within 60 days of account opening in order to be approved.

Use our balance transfer calculator to run the numbers on how much time you’ll need to pay off your credit card debt.

Pros

Though many balance transfer cards charge a fee for each transfer, it’s still likely that you’ll be able to save money by avoiding interest charges (assuming you pay the card off in full during the intro period). Of course, always run the numbers to be sure that’s the case.

Plus, some cards with good balance transfer deals also offer rewards. We don’t recommend spending on the card until you’ve paid off the transferred amount — but after that, a card with rewards may provide ongoing value. For example, The Amex EveryDay® Credit Card from American Express card mentioned above offers 2x points at US supermarkets, on up to $6,000 per year in purchases (then 1x), 1x points on other purchases..

Finally, getting a new credit card increases your overall available credit and decreases your utilization. As long as you don’t increase your spending, this should help improve your credit score over time.

Cons

Balance transfer cards typically require a good or excellent credit score to qualify (a good score is one that’s at least 670). Consumers with poor or fair credit scores are unlikely to be approved.

If you don’t know what your credit score is, there are several ways to check it for free, such as by signing up with My LendingTree or using the Discover Credit Scorecard — which doesn’t require that you have a Discover card. You can also check directly with the Experian credit bureau.

There’s also a risk that you might be approved, but not granted a credit limit high enough to transfer all your debt. Even with a high enough credit limit, there might be a max transfer cap. In that case, you might opt to apply for a second balance transfer card — or, if you have an existing card you’re not carrying a balance on, see if the issuer is willing to extend you a balance transfer offer. For more solutions, check out these five options for when a balance transfer credit limit isn’t enough.

Once the intro 0% APR period ends, you’ll pay interest on any remaining balance at the regular APR. Thus, it’s important to calculate how much you need to pay every month to pay the balance off in full within the intro period to avoid interest charges.

And finally, doing a balance transfer involves getting a new credit card. This means a hard inquiry on your credit report, which could knock down your score a few points. It also reduces your average age of accounts — and length of credit history makes up 15% of your credit score. While your score should rebound as you pay down debt, expect an initial drop.

Read: What’s the maximum balance transfer you can do?

Consolidate credit card debt with a personal loan

How it works

Personal loans are offered by banks, credit unions and online lenders. Interest rates can range from 6% to 36%. Once approved for a loan, you should direct those funds to pay all or part of the loan amount to your credit card issuers.

Pros

You might be able to qualify for a higher loan amount than the credit limit that a balance transfer card would offer — making personal loans a good solution for consumers with a lot of debt to pay off.

Plus, a personal loan may offer a lower interest rate than what you’re paying on a high-APR credit card. And personal loans come with a set payment amount each month and a set end date by which you should have the entire loan balance paid off.

Cons

Unlike a balance transfer card, when you take out a personal loan to pay off credit card debt, you’ll be paying interest from the start. And if you have less-than-stellar credit, you’re likely to be offered a loan with an interest rate on the higher end of the spectrum.

There may also be fees involved, such as an origination fee, and in some cases, a penalty fee if you want to pay off the loan balance early.

Finally, be aware that personal loans also result in a hard inquiry on your credit report.

Read: Debt consolidation – Personal loan vs. balance transfer credit card

Work with a nonprofit credit counselor

How it works

A credit counselor can help you evaluate your financial situation and create a budget, and can potentially help you enter a debt management plan. Most reputable credit counseling organizations are nonprofits, and should be associated with the National Foundation for Credit Counseling (NFCC) or the Financial Counseling Association of America (FCAA).

It’s important not to mistake a debt management plan for debt settlement. With the former, you’ll work with a reputable nonprofit to ensure your bills are paid over a specified period of time. You may pay the money to the credit counseling organization, along with a monthly fee, and they’ll pay your creditors at pre-negotiated, lower interest rates.

By contrast, debt settlement is offered by oftentimes predatory private companies. A debt settlement company will have you stop paying your bills while they attempt to negotiate the amount you owe — this may or may not work, and your credit score will be severely damaged. Debt settlement may also be called debt relief.

Pros

If you’re overwhelmed, working with a credit counseling organization can help you get your finances under control. And if the counselor determines that a debt management plan is a good option, they may be able to work with your creditors to negotiate lower interest rates or fees on your accounts.

Cons

You may have to pay for a credit counselor’s services — however, there are strict rules about what fees a nonprofit credit counseling agency can charge, which offers you some protection.

Also, if you enter a debt management plan, there will be restrictions on what you can do while in the plan. For example, you won’t be able to add to your credit card balance or open new cards.

Read: Best Ways to Consolidate Credit Card Debt


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