If you’re like a lot of people out there, your credit card usage is seamlessly woven into your everyday life. Maybe you use them to pay for gas, groceries, clothes, and/or even your regular bills. And they can serve more of a function than just a means to pay for your normal expenses. If you use them effectively, they can help you to positively impact your credit history, earn travel or cash back rewards, and more. But as useful as they can be when used properly, they can also do a lot of damage to your financial profile if you’re not careful.
One of the biggest impacts your credit cards can make on your finances is through the accumulation of debt. According to a 2020 WalletHub survey, the average credit card interest rate for new offers is nearly 18%. This is nothing to laugh about. At rates like that (and higher), building up even a relatively small balance can do a lot of damage if you’re not careful. Because of this, you should always make sure you pay off your balance on time and never make purchases with your credit card that you can’t afford to make.
Having said that, whether it’s through negligence or necessity, people sometimes find themselves with more credit card debt than they can pay off in one go. If you find yourself in this type of position, you’re going to want to do everything you can to get out of it. Today, we’re going to go over 5 tips to help you with the process of paying off credit card debt.
1. Go Over Your Spending
The first step in paying off credit card debt is to get a good grasp of your situation. After all, it’s hard to fix a problem when you don’t fully understand what the problem is. So, how do you do this? You start by looking at what you’ve been spending your money on.
A lot of people might be able to look at their statement history and feel like they already have a relatively good idea of where their money has been going before they ever look into it closely. But even if a small amount of your expenses are unaccounted for, that’s more than enough to make the difference between having your spending under control and starting a slow spiral into debt.
So, the purpose of taking a close look at your expenses is to be able to identify the percentage of your spending that has previously gone over your head. This could include things as innocuous as your regular morning latte, that round of drinks you bought last week, or the money you spend on takeout every month. Once you’ve identified these things, you can start to work on a plan to shore up your budget and prevent this from happening in the future.
2. Create a Plan for Your Money
If you want to understand how to pay off credit card debt, you’re also going to have to understand what it means to assign a purpose to every dollar you spend. To do this, you’ll want to create a spending plan and start working within the confines of a budget.
While you do need to be thorough, budgeting doesn’t need to be overly complicated. The main goal in this context is to track your expenses and your income, and find ways to put aside money to help you pay off debt.
Make sure you’re tracking ALL your expenses, like your rent/mortgage payments, groceries, utility bills, car-related expenses, and every dollar you spend on entertainment. There’s more than one way to budget, and not every budgeting method is going to work for everyone. If you want to learn more about different ways to budget, take a look at these guides on some popular budgeting techniques:
3. Put Your Debts in Order
Once you have a budget in place that works for you and provides you with clear insights into your spending habits, it’ll be time to zero in on your debt. More specifically, you’ll want to list out your credit card debts (including all the important details like your balances, interest rates, etc.) and rank them in order of importance.
What you deem to be of most and least importance is going to be specific to you. Maybe you’re most concerned about the debt you have that’s carrying the highest interest rate and want to get that out of the way as soon as you can. Or maybe you need some quick wins to keep you motivated, so you opt to focus on your smallest accounts. Either way, you’re going to want to meet your needs while still maintaining the motivation you need to see this process through till the end.
But the question still remains, how do you go about paying off credit card debt? Well, there are two repayment strategies that seem to come up time and time again. These are the snowball method and the avalanche method. While they can both be effective, one may suit your particular situation better than the other. Let’s take a look at both.
The Avalanche Method
If you’re trying to mitigate the damage done by your debt to your bank account, the avalanche method may be the smartest way for you to pay off debt. To follow this route, you’ll need to start by listing out all of your credit card debt from your highest interest accounts to lowest. You’ll then make sure you’re making the minimum payment on all your accounts and then put any extra money you have towards the account with the highest interest rate. Once it’s paid off, you’ll move to the next highest interest account.
The idea of this method is that the higher the interest rate of a particular account, the more it’ll be sapping your bank account. So, to limit the amount of money you’ll have to pay, you’ll chip away at the highest interest rate first and then go on down the line.
The Snowball Method
With the snowball method, you’ll still need to list out your debt accounts, but instead of going from highest interest rate to lowest, you’ll be going from your smallest debt to your biggest. The idea here is that by starting with your small debts first, you’ll be scoring quick wins throughout this process. Motivation is a huge part of paying off all your debt, and this method is designed to keep your spirits high and keep the momentum going. While you may end up paying a bit more interest overall, the hope is that you’ll be more likely to see things through till the end.
4. Put Your Credit Cards Away and Use Cash
If you really want to stop the bleeding while you simultaneously make an effort to pay off credit card debt, the simplest thing you can do is to stop using your cards. Maybe you just need to exert a bit of willpower to stop using them, or maybe you need to take them completely out of your wallet. You might even need to give them to a friend or family member to hold onto until you get things back on track.
In place of your credit cards, use cash or your debit card as much as possible. While you may miss out on the potential benefits and rewards you might get from using your credit cards, it can help you keep track of your spending and it could just be a temporary substitute. In general, make sure to only pay for things with your credit cards when you have the money to pay down your debt right away.
5. Pay More Than the Minimum Payment When Possible
A minimum payment on a credit account is the minimum amount you can pay in order to avoid a missed payment and keep your balance in good standing. While the amount can vary, your minimum payment will typically be a small percentage of your last month’s balance, give or take, along with any applicable charges. An important point to note here is that if you’re only paying the minimum, a lot of that money will likely be going towards paying off the interest versus your principal balance. So, while you could eventually pay off your account by only making minimum payments, it would likely take a long time and you’d be extending the amount of interest you’d be paying in the end.
Whenever you have some extra money after taking care of your basic needs, use it to pay more than the minimum. And don’t worry if you don’t have a ton of money to spare, every little bit counts!
Stay Patient as You Start Paying Off Credit Card Debt
No one likes to be swimming in credit card debt, but it’s tough to get out from under its weight without the proper knowledge and tools. However, even if you have a plan in place, just remember that you won’t be out of the woods overnight. It’s going to take time, effort, patience, and a sustained level of motivation to get you to the finish line. But it’s more than worth the effort! We hope we’ve helped to give you some of the tools you need moving forward, and we wish you good luck in your quest to start paying off credit card debt!