Best Methods to Pay Off Credit Card Debt
Growing balances on high-interest credit cards can put a huge financial strain on your monthly budget. Whether it’s an unexpected expense (like car repairs or a medical bill) or you’re going through a period of declining income, being saddled with credit card debt can make it impossible for you to move forward financially. If you’re struggling to pay off credit card debt, here are some of the best ways to create a plan to get rid of debt once and for all.
Debt snowball method
The debt snowball method aims to pay off debts in order from smallest balance to largest. You make minimum payments on every debt except the smallest one, where you pay as much as possible until it is paid off. The idea is that earning “wins” by paying off small debts quickly can provide much-needed motivation to keep going. However, this method usually results in more interest being paid over time. Here’s my guide to deciding if the debt snowball is right for you .
Debt avalanche method
Compared to the snowball method, the avalanche method involves listing all your debts from the highest interest rate to the lowest interest rate. You make the minimum payments on every debt except the highest interest-bearing debt, which is where you throw all the extra money until it’s paid off. This is the fastest mathematical way to get out of debt while paying the least amount of interest. This can be especially helpful if you have one or two debts with significantly higher interest rates than the rest. The downside is that you may not see your debt paid off in full for some time, which can dampen your motivation a bit.
The debt snowball method is often recommended for people who need the psychological motivation of quick wins to stay motivated on their path to paying off debt. On the other hand, the debt avalanche method is considered the most cost-effective approach in terms of pure numbers because it minimizes the amount of interest paid over time.
Debt consolidation loan
Debt consolidation may seem like a simple solution if you have multiple loans or credit cards and are struggling to keep up with all the separate payments. Taking out one loan with a lower interest rate to pay off all your credit card balances at once can simplify the repayment process into one payment.
You can qualify for a much better interest rate than your cards through a bank, credit union or online lender with a debt consolidation loan or personal loan. Balance transfer credit cards that offer 0% interest for 12 to 18 months can provide breathing room if you can pay off your entire balance within that period—more on that below. But first, keep in mind: Debt consolidation loans are not necessary in many cases. After all, debt consolidation loans are financial products, which means financial institutions won’t offer them to you unless they make money from them.
Balance transfer
With a balance transfer, you transfer your existing credit card balance(s) to a new credit card that offers an introductory 0% APR promotion for a specified period of time, usually 12-18 months. If done correctly, you can use these months to actively pay off your debt without accruing additional interest. The key is to have a plan to pay off as much of the balance as possible before the 0% APR period ends. Many balance transfer cards charge a fee of 3-5% of the transfer amount, but this is usually still cheaper than the interest you would pay without the transfer. Here are some of the best balance transfer credit cards worth exploring.
Debt management plan
If you’re having trouble managing payments to multiple creditors, consider contacting a nonprofit credit counseling agency. A qualified (and importantly, non-profit) credit counseling agency will provide you with a free debt analysis. And by law, they must serve your interests and recommend a debt solution that works for you, not them. They may offer you a debt management plan in which they negotiate lower interest rates and fees with your creditors. All the money you pay goes directly toward your debts, but there may be additional costs associated with using such a program. There is often an installation fee of up to $75 and an ongoing monthly fee of $25 to $75. Check out qualified nonprofit credit counseling agencies here .
Borrowing from friends and family
I’m not suggesting that you create an intolerable —not to mention uncomfortable —situation with your loved ones. But if your circumstances allow it, one option to avoid high interest rates is to borrow money interest-free from a loved one. When exploring this route, be sure to clearly document the terms and repayment amounts in writing to protect your personal relationship.
Regardless of which method you choose, review your complete financial situation and create a plan that you can stick to until you are debt-free. Seeking professional advice can help you determine the right debt repayment strategy for your unique circumstances.