7 top tips for paying off credit card debt
With a bit of planning and consistency, you can get out of credit card debt once and for all.
Contributing Writer at Tally
November 6, 2020
Carrying credit card debt is rather common — 55% of Americans with a credit card report having debt. But as common as it is, carrying debt can harm your credit score and make it difficult to save money.
7 tips to help you pay down credit card debt
Below are seven debt management tips that you can use to kickstart your journey to becoming debt-free.
1. Know your budget and how much debt you have
Before you can start paying down debt, you must get a clear picture of your personal finances. Start by reviewing your latest credit card statements to determine your credit card balances, which is the amount you owe on each card. You’ll also want to track your monthly minimum payments.
Create a list and organize your credit cards from the lowest balance to highest balance. Create another list of your cards and organize them from the lowest interest rate to the highest interest rate. These lists will come in handy when you choose a debt payoff strategy. (More on this later.)
Next, create a budget. Start with your total monthly earnings, otherwise known as your net pay. This is the amount of money you receive in your paycheck after deductions like taxes and health care expenses. Then, subtract necessary expenses, such as:
Mortgage or rent
Student loan payments
Minimum payments for credit cards
Once you know what your monthly budget is, you'll know how much money you can put toward paying off credit card debt. There may be some tough choices involved, like cutting out your daily trip to the coffee shop. But maximizing the money you put toward your debt allows you to pay it down more quickly, moving you closer toward financial freedom.
2. Stop spending on credit
If you have credit card debt, it means you aren’t paying your balance in full every month. Adding to your existing balance can make it more challenging to get out of debt. It can also lower your credit score if your credit utilization is too high.
When possible, consider using checking accounts, debit cards, and cash to pay for your expenses. You likely can't make your mortgage payment in cash, but you can write a check or connect directly to your bank account for automatic withdrawals. You can also use this approach for other necessary expenses.
Using cash or a debit card can help cut down on unnecessary spending. When you charge something on a credit card, you're telling yourself, "It's fine. I can pay for that later." But paying in cash forces you to spend only the money you have. As a result, you may think twice before making a purchase.
3. Start making minimum payments
We're going to discuss a couple of debt payoff methods below. They both have one thing in common: You must make your minimum credit card payments.
Every month, your credit card company requires that you make a minimum payment. If you fail to do so, you’ll incur late fees and penalty APRs. Making late payments can cause your interest rate to skyrocket, increasing your overall debt. Missing your minimum payment will also negatively impact your credit score.
Whether you have multiple credit cards or a single credit card, this is a critical step to put in place before you can determine how much extra money you can put toward your debt.
If you make more than the minimum payment, you’ll pay down your debt sooner — as long as you don’t increase your spending. The steps below outline the strategies you can implement to pay off credit card debt as quickly as possible.
4. Use the debt avalanche method
Now’s the time to get your lists of credit cards, organized by APR and total balance!
The debt avalanche method allocates extra funds in your budget to pay off your highest APR credit cards first. When doing so, you'll continue to make minimum payments on your other credit cards.
The idea behind the debt avalanche approach is that you reduce your long-term interest charges. When you finish paying off one card, you'll move on to paying the next card with the second-highest interest rate and so on.
When paying, you make minimum payments on your other cards and put the rest of your funds toward the card with the highest APR.
For instance, let's say you have a budget of $250 to put toward three credit cards every month, each with a $25 minimum payment. You would put $200 toward the card with the highest APR and then make the $25 minimum payments on the two other cards with the lower APR.
This method is useful because it cuts down on how much interest you accumulate overall. Once you gain some momentum and knock off the balance with the highest interest rate, the rest of your debts will follow — much like an avalanche.
5. Use the debt snowball method
Another option for paying off credit card debt is the debt snowball method. Unlike the debt avalanche method, the debt snowball method uses extra money in your budget to pay off your credit cards from the smallest balances to the largest.
For example, say you have three credit cards with outstanding balances of $3,000, $5,000 and $7,000. As in the example above, you have $250 per month to put toward debt and the minimum payments on all cards is $25.
With the debt snowball method, you pay $200 toward the card with the $3,000 balance. You pay the $25 monthly minimum on your $5,000 and $7,000 credit card balances. Once you pay off the card with the $3,000 balance, you put $225 toward the card with the $5,000 balance and the $25 minimum to the card with the $7,000 balance.
You'll see progress quickly and gain momentum, motivating you to continue paying down your debt. However, your highest balance will continue to collect interest when using the debt snowball method, which can increase your debt in the long run.
6. Use a balance transfer credit card
If you're struggling to keep track of your minimum payments, you can transfer the balances of multiple cards onto a single balance transfer card. Balance transfer cards act as a form of debt consolidation, making it easier to manage your money.
Card issuers often offer an intro APR of 0%, which means you won't have to pay any interest during the introductory period, which is usually 12-18 months. After that period, the standard APR rate will kick in, and any remaining balance will incur interest.
There is typically a balance transfer fee associated with this type of card, but it usually ranges between 3% and 5% of the amount you transfer. If the APR on your other credit card (or cards) is higher than this amount, you'll still end up saving money by transferring all of your balance onto the balance transfer card.
Keep in mind, you'll need a good credit score to qualify for a balance transfer card, typically a FICO score greater than 670.
7. Use a credit card payoff app
If you'd like to find an even easier way to pay off debt, consider a credit card payoff app like Tally. Tally gives you a low-interest line of credit and uses it to automate your credit card payments.
Tally follows the debt avalanche method and pays your highest APR cards first to save you the most money. All you have to do is make a single monthly payment to Tally. It’s an effective option to become debt-free so you can start building your savings account or retirement fund.
Why paying off credit card debt is critical
If you don't have a lot of debt, you may be wondering why prioritizing debt payments is important. Below are a few reasons why paying off card debt payoff is crucial no matter how much you owe.
Credit card debt is high-interest debt
The interest rates on credit cards (known as annual percentage rates, or APRs) are some of the highest around. For instance, the interest rate on your mortgage may be about 3%, but the interest rate on your credit card can be upward of 20%. And if you miss any of your monthly payments, you'll be slapped with penalty APRs and fees, driving your debt even higher.
Furthermore, credit card interest compounds, which means it builds on top of itself. Interest is based on your total balance, including the principal and any interest accumulated to date.
For instance, if you have a $100 outstanding balance and collect $10 in interest, your next interest calculation will be based on the $110 balance. If you're not careful, your debt can increase quickly.
Paying off credit card debt allows for future savings
The longer you have your money invested or saved, the more it will grow over time. Every day that you don't save money is a lost opportunity for future earnings growth.
Paying off credit card debt frees up cash that you can put toward other resources. As you pay off your debt, you'll have more free cash available to put toward an emergency fund, college fund, retirement or other savings account.
You can improve your credit score
Credit utilization is a significant factor that affects your credit score. It’s the ratio of the credit you’re using compared to your total credit available. If you carry high balances on your credit cards, you can end up hurting your credit score.
A poor credit score limits your future financial opportunities. Those with low credit scores find it more challenging to secure a mortgage or rent an apartment. Finding a reasonable auto loan without good credit is also problematic. Even if you do find lenders willing to work with you, they’ll likely charge higher interest rates and fees, costing you more money in the long run.
Paying off credit card debt reduces your credit utilization ratio, which will improve your credit score and overall financial options.
Start paying off credit card debt today
To improve your credit score and start paying off credit card debt, there are several steps you can take. Start by evaluating your personal finances and setting a budget. Doing so will give you a clear picture of how much money you have each month to put toward debt. Also, stop spending on credit, which will only increase your debt.
Once these steps are complete, you can choose your payoff method. Start with the debt avalanche method, unless you’d rather focus on making one payment each month. In this case, move toward a balance transfer card and a credit card payoff app like Tally. If you’d prefer to pay down smaller debts to get the ball rolling and gain momentum, consider the debt snowball method.
Paying off credit card debt opens up future financial doors. The sooner you get started, the sooner you can begin saving money and hitting your financial goals.