That piece of plastic (or pieces of plastic, in some cases) in your wallet can be a great tool. Not only can you use your credit card to help you pay for the things you need, but doing so can help you build credit. But sometimes your spending can get out of control, ultimately landing you in credit card debt. In fact, according to Experian’s seventh annual State of Credit Report, released in November 2016, the average debt per consumer is $39,216.
High balances and high finance charges can put a real drain on your wallet and limit your financial options, both in the moment and down the road. If you let those balances linger long enough, they could keep you from achieving important goals and dreams, such as buying a home, as your credit card debt can affect your credit (more on that in a minute).
There’s a lot you can do to pay off your credit card debt, and the strategy that is right for you will depend on your individual situation. Whatever your financial goals and dreams, however, paying off your credit card debt is a good step in the right direction. These pay-down tips and strategies will help you find out how to pay off your credit card debt.
Step one is getting organized. Gather up all your credit card information for every card you’re carrying a balance on. Make note of the balances, interest rates, due dates and minimum payment for each card. How bad is it? The Experian Report showed that the average consumer has 2.35 bank cards, carrying an average balance of $5,551.
So now it’s time to look at where yours stands. Do you have lots of balances spread out over lots of different cards? Do you have one big balance and several small ones? Have you consolidated your debt to one card but can’t seem to make any headway on your balance? Have you been playing the balance transfer game for months and months?
Once you have all of that information compiled, add up the minimum payments on each of your credit cards. How much money must you pay each month just to stay current on your credit card bills? (Remember, paying your statements on time each month, even if you’re only paying the minimum amount is quite important. Payment history is the biggest influencer of your credit scores, accounting for 35% of the scores.)
Once you have this number, take a look at your budget. Can you afford to pay more than the minimum payment on one or more of your cards? If so, get ready to do it.
Understand How You’re Affecting Your Credit
High balances on your credit cards can be bad for your credit scores. As we mentioned, payment history is the biggest influencer of your scores, but the second biggest is your debt usage. This means the amount of debt you’re carrying in relation to your total credit limit (also known as your credit utilization ratio) is going to weigh in on your scores. Experts recommend keeping your debt at 30%, ideally 10%, of your credit limit to have the best effect on your scores. And if you’re maxing out your cards, that certainly won’t be keeping you at that level.
Plus, having low credit scores usually means you will pay higher interest rates, whether on a credit card balance or a loan. And with high interest rates, the amount you owe gets larger at a faster rate, making it more of a challenge to pay off debt. It’s truly a vicious circle. Not sure where your credit currently stands? You can find out exactly how your debt is impacting your credit by checking two of your credit scores for free on Credit.com.
3 Strategies to Help You Pay Down Credit Card Debt
Credit card debt can pile up for all kinds of reasons. Paying it down is pretty straightforward — you just need a plan. Pick a pay down strategy and stick with it until your balances are paid off in full. And remember: Paying off a card is great, but once you do, you’ll want to think twice about closing the card, as the age of your credit lines is the third largest influencer of your credit scores. Here are three strategies that you may want to implement to help you get those cards paid off and get yourself on the path to financial freedom.
1. Pay Off the Balance with the Highest APR First
This strategy is pretty straight forward: You look at all of your balances and the interest rates associated with each. Whichever one has the highest annual percentage rate (APR), that’s the one that gets the focus of being paid off first (while still making minimum payments on your other cards, of course). Once that card is entirely paid off, you move on to the one that has the next highest APR, and so on.
From a monetary sense, this strategy may make the most sense, as it will cut out you spending so much on interest. To implement this, you simply boost your payments on that card up to whatever you can afford and stick with it. If you start by paying $150 extra on that credit card, keep paying at least $150 each month until the card is paid off.
Be sure to stick with your boosted payment amount even as your balance and minimum payments get lower. Remember: The goal is to get your balance to zero. Easing up on your payments as your balance creeps lower will slow your progress.
2. Pay Off the Card with the Lowest Balance First
Are you someone who feels like you’re progressing when you can mark things off a list? This may be a good strategy for you, as it’s a great way to build up a little momentum and see the results of your hard work sooner. With this strategy, you increase your payment on the credit card with the lowest balance, while continuing to make the minimum payment on the rest of your credit cards. Once you pay off the card with the lowest balance, you move onto the card with the next lowest balance, and so on.
It’s quicker and easier to pay a $500 balance down to zero than a $2,500 balance. And it feels good to pay a credit card bill in full, no matter what balance you began with. Plus, every low balance card that you pay in full is one less minimum payment that you have to pay each month. By knocking out one or two smaller balance cards, you’ll be able to shift your money to focus on paying off those larger balances.
3. Consolidate Your Debt to a Single Card or Loan
Like things simple? This pay-down strategy might be for you. By consolidating your credit card debt to a single card or a debt consolidation loan, you’ll be left with only making a single payment each month rather than four or five. You can even automate payments so you don’t have to worry about paying late.
Remember: Just because you’ve transferred all your debt to one place doesn’t mean it went away. You’ll still want to focus on paying this debt off, so it’s a good idea to pay more than the minimum due each month.
Need an extra incentive? Many balance transfer credit cards come with an introductory zero-interest period. This gives you time to pay down your debt without tacking on any additional charges and you can use the end of the introductory-APR time as your end goal for having the debt paid off. Typically, the APR skyrockets once the introductory time has expired, so that can act as even more motivation.
Recommended Balance Transfer Card:
- $0 Introductory balance transfer fee for transfers made during the first 60 days of account opening
- 0% Introductory APR for 15 months on purchases and balance transfers
- Monthly FICO® Score and Credit Dashboard for free
- No Penalty APR – Paying late won't raise your interest rate (APR). All other account pricing and terms apply
- $0 Annual Fee
Card Details +
Whatever pay-down strategy you choose, it’s essential to curb your credit card spending. It’s awfully hard to pay down credit card debt when you keep ringing up new balances each month. Put your credit cards on ice while you focus on paying down card debt. If you absolutely must use your credit card for a purchase, only charge items you can afford to pay off in a month or two, and try to avoid doing so on a balance transfer credit card so you don’t get hit with high APR charges on top of it.
Lucy Lazarony also contributed to this story.