February 16, 2021
It's no surprise why credit cards are so popular. After all, there are lots of benefits to be had—the opportunity to build a credit history, perks and rewards, bonuses, and, a financial safety net in the event of emergencies, just to name a few. But—as there always is—credit cards can also lead to an expensive cycle of debt if you’re not careful. As your balances rack up, your finances can start to feel out of control.
Fortunately, paying off credit card debt is possible, especially with the help of some tried-and-true strategies. Below, we’ll break these strategies down for you.
Paying off credit card debt can sound like a daunting, tedious task. You may be wondering how long it will take. The amount of time it takes to pay off credit card debt depends on your:
Total debt amount – The more debt you have, the longer it will take to pay off.
Interest rate – The higher your interest rates are, the more money you’ll have to pay in interest charges each month. Costly interest can add time to your overall debt repayment timeline.
Monthly payment amount – If you only make the minimum monthly payments on your credit cards, you could stay in debt for a very long time. To speed up the process, it helps to make larger debt payments each month.
With that being said, it takes Americans an average of 13 months to pay off a credit card. This metric is based on the assumption that the average American has a debt balance of $8,195 (the average debt balance in 2018) and puts 15% of their monthly income towards debt payments.
According to an Experian study, the average amount of credit card debt for Americans in 2020 was $5,313.
If you have more debt than the average American, don’t worry. You can pay it down over time by following a debt repayment plan.
If you’re wondering how to pay off debt, there are many effective strategies you can choose from. Each method comes with different benefits and drawbacks.
Let’s take a look at the most popular options:
With the avalanche method, you pay off your debts one-by-one in order of their interest rates.
By tackling your high-interest rate debt first, you can save the most money on interest. You may also be able to pay off your debt faster, since you’ll owe less money in interest overall.
To use this credit card refinancing method, simply follow these steps:
Make a list of all of your credit card debts, along with their interest rates
Arrange your debts in order from the highest interest rate to the lowest interest rate
Each month, make the minimum payment on each of your credit cards
Use any extra money you have to make a larger payment on your highest-interest rate debt
Once you’ve paid off this first debt, repeat this process with your second-highest interest rate debt, and so on
Another popular debt payment strategy is the snowball method. With this method, you pay off your credit cards in order of their balance sizes, rather than their interest rates, starting with the lowest balance on your list.
By paying off your smallest debt payments first, you’ll get to cross some debts off the list early on. This sense of accomplishment can provide you with positive reinforcement and help you maintain your motivation. With this momentum on your side, you can stay committed to the debt payment process, even when your larger debt balances take more time to pay off.
Due to these psychological benefits, many people have better long-term success with the debt snowball method, even though it doesn’t offer the same interest savings as the debt avalanche method.
When you have a long list of debts, particularly from multiple credit cards, it can feel overwhelming. You have to keep track of multiple:
Minimum payment amounts
Payment due dates
Fortunately, you can simplify your debt by consolidating it first. Credit card debt consolidation is the process of paying off your credit card balance with one credit card or personal loan.
Once you’ve consolidated your debt from multiple credit cards, you’ll only have one debt payment to make each month. If you can qualify for a credit card loan that has a low interest rate, you may be able to save money on interest and get out of debt faster.
If your debt is out of control, you may be looking for some relief. You can find this from your lenders through a process known as debt settlement. During this process, you can try to negotiate your interest rates and outstanding balances with your lenders.
While there’s no guarantee that they will agree to your requests, it’s always a possibility. If they do, you may be able to reduce your debt balance and receive better terms, like a lower interest rate or a lower monthly personal loan or credit card payment.
No matter what debt payment method you use, you can speed up the debt payment process by making larger debt payments each month to your loan or credit card company.
To create more room in your budget for these payments, consider:
Reducing your monthly spending
Following a strict budget
Earning extra income on the side
Even if you have to make some sacrifices during this time, getting out of debt faster will make it worthwhile in the end.
If you’re drowning in an exorbitant amount of debt, paying it off may seem like an impossible task. In this case, you may want to consider filing for bankruptcy.
Bankruptcy is a legal process where you seek relief from your debt. During this process, you may be required to sell some of your assets, like your home, car, or other valuables, to repay a portion of your debt. You could also be enrolled in a court-ordered repayment plan.
Note: Student loans, child support, alimony, and unpaid taxes are usually exempt from bankruptcy.
There’s a pervasive myth out there that paying off your credit card balance has negative consequences. However, that isn’t the case.
While using a credit card can help you build a positive credit score, carrying a revolving balance month-to-month is not recommended.
Ideally, you should only charge what you can afford to pay back each month. This way, you can avoid getting into credit card debt altogether.
Paying off your credit card is a big accomplishment. It takes a lot of sacrifice and dedication.
After all of that hard work, you may be surprised to see that your credit score went down in response. Here are a few possible explanations for why this might happen:
You reduced the average age of your credit accounts. Length of credit history is one of the five factors that impacts your credit score. The longer your credit history is, the better. Any time you close a credit card account, that account’s age is removed from your average age of credit accounts. If you close your credit accounts after paying them off, this could explain your recent drop in credit score.
You increased your credit utilization. Credit utilization is another factor that impacts your credit score. It compares how much credit you’re currently using to your total credit limit. The lower your credit utilization is, the better your credit score will be. Any time you close a credit account, its credit limit will be removed from your total credit limit. As a result, your credit utilization may increase, reducing your credit score.
You reduced your credit mix. Credit mix is another important factor that impacts your credit score. It looks at how many different types of credit accounts you have open. When you pay off all of your credit cards and close their accounts, your credit mix may become less diverse. In turn, this portion of your credit score may go down.
Fortunately, you can prevent these events from occurring by keeping your old credit accounts open, even after you pay them off.
With hard work, dedication, and the right tools, you can finally become debt-free. If you’d like to make this journey easier, Tally can help.
At Tally, we take the burden out of credit card management by giving you a centralized place to monitor your debt. Our Tally Advisor can give you personalized recommendations on how much you should pay each month to save the most money on interest and get out of debt faster.
Financial freedom is available at the touch of your fingertips with our easy-to-use app. Download the Tally app today!