How to Pay Off Credit Card Debt
According to a report by CreditCards.com, almost half (47%) of Americans have credit card debt. Sadly, in the wake of the COVID-19 pandemic, 34% of millennial cardholders state that they have fallen deeper into debt in the last year.
Credit card debt occurs when people make purchases that they do not immediately have the money for. Whether it is from daily expenses or financial emergencies, credit card debt can accumulate quickly. When it does, it’s important to have a plan on how to pay it back.
Why you should pay off credit card debt asap
Credit card debt negatively impacts people in more ways than one.
Your credit utilization makes up 30% of your total credit score. When you carry high credit card balances from month to month, it signals that you are overextending yourself financially—leading to a negative impact to your score.
Due to high interest rates, credit card debt is harder to pay off and will cost you more money over time.
For example, if you have a $3,500 credit card balance with a 19% APR, the balance would accumulate $55.42 in interest each period. If you make $75 monthly payment towards this balance, only $19.58 of that would be applied to the principal balance. At this rate, it would take 86 payments… or 7.2 years… to pay off the balance, and you would pay a total of $2,911.07 in interest!
It’s no surprise that credit card debt is a major cause of stress for many people. The negative effects of credit card debt can effect more than your finance. Credit card debt can cause tension with your partner, lack of sleep, and distraction at work.
With all that being said, it’s time to make 2021 your year to pay off credit card debt!
How to pay off credit card debt
When you want to pay off your credit card debt, it’s important to explore and understand your primary options.
Debt Avalanche
The Debt Avalanche method is a debt repayment strategy that prioritizes paying off debts in the order of highest to lowest interest rate.
While paying the minimum payment on all other debts, send as much extra money as possible towards the debt with the highest interest rate.
Once the debt with the highest interest rate is paid off, add the amount that you were paying on the debt with the highest interest rate into the debt with the next highest interest rate.
By paying off the highest interest debts first, you can save more money on interest overall.
Debt Snowball
The Debt Snowball method is like the Debt Avalanche, but focuses on paying off debts in the order of lowest to highest balance.
While paying the minimum payment on all other debts, focus on sending extra money towards the debt with the lowest balance. Once that debt is paid off, roll what you were paying on that debt towards the debt with the next highest balance.
By paying off lower balance debts first, you quickly see the progress that you're making! This can help keep you motivated on your debt free journey.
Balance Transfer
If you have credit card debt but a good credit score, then you may be eligible for a balance transfer. This can happen when you make on time payments and keep a low credit utilization ratio.
A balance transfer is when debt from one credit card is moved to another card with a lower interest rate. These transfers come with certain rules, limitations, and fees. A balance transfer typically costs 3% to 5% of the amount transferred, and you might not be able to transfer the full balance. These rules vary between different institutions.
IMPORTANT! If there's an interest free period and you don't pay off the transferred debt, you may have to pay interest that would have accrued during that time. Again, these rules vary, so always read the fine print!
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Should you keep your credit cards while paying them off?
Generally, it’s best to keep credit cards open after they’re paid off.
Why? Because your length of credit makes up 15% of your credit score. By keeping old credit card accounts open, it will help maintain your length of credit history.
It also gives you a larger amount of available credit. This will help lower your credit utilization ratio—also boosting your credit score!
But, there are times when it makes sense to close a credit card account. If you opened the card recently, you're concerned about being able to control your spending, or the credit card has large annual fees, then closing the account might make sense.
Debt repayment tips to keep you on track
Make a budget
A budget brings awareness to your spending and financial situation. When you make a budget, you are creating a plan for how you want to spend your money each month. This is a critical part of achieving any financial goal, including paying off debt.
Before starting a budget, make sure you understand your current financial situation and spending habits. To do this, go through your credit and debit card statements and track your income and spending for the last 30 days. Then, use a zero-based budget to decide where you want your money to go between needs, debt, savings, and recreation.
Reduce your expenses
Cutting back on expenses gives you more money to send towards debt each month. This can help you reach your debt free goals faster!
After tracking your spending for the last 30 days, organize expenses into categories. Total up the amount spent in each category, and identify areas that you can cut back on each month.
Pick a debt repayment strategy
When you have a plan for how you want to pay off debt, it makes the entire process more organized and efficient. Whether you pick the Debt Avalanche or Debt Snowball, I recommend having a clear strategy for your debt repayment .
Pay more than the minimum payment
When you only pay the minimum balance, majority of the payment goes towards interest instead of the principal. By paying above the minimum payment, that extra money goes directly towards the principle balance.
If you want to pay off your debt quickly, it is critical that you pay more than the minimum payment each month.
We saw this in the example above! Only paying the minimum payment causes you to stay in debt longer and pay more money in interest over time.
Boost your income
Your income is one of your biggest tools when it comes to achieving your financial goals! If you want to speed up your debt payoff, consider negotiating a raise, starting a side hustle, or working a part time job.
I am a huge fan of side hustles! Save Live Thrive began as my side hustle, and is now on the way to becoming my full time career.
Looking for where to start? Check out this post on 60 Side Hustle Ideas You Can Start This Year.
Know your “why”
When you are clear on “why” you want to pay off your debt, it will help you stay motivated and efficient while working towards your goal.
Here’s my Debt Free Vision Board! I just use a felt message board that I update each month.
Let’s be honest, paying off debt is hard. There will be days when you want to give up, and that’s when knowing your why can keep you focused and motivated.
Create a debt free vision board
Research shows that the more we envision our goals, the more likely we are to achieve them.
To do this, I recommend creating a debt free vision board! A debt free vision board is a compilation of your financial goals, aspirations, plans, dreams, and ideas.
Some people create a physical vision board that hangs in their home, while others create virtual ones that they use as their desktop or save on Pinterest.
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