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What is the best way to pay off credit card debt?

Get your credit card balances to zero with these popular debt repayment strategies.

Author Justin Cupler
Contributing Writer at Tally
November 12, 2020

Credit card debt can cost you in multiple ways. Not only does it come with significant interest charges, but carrying too much debt can also hurt your credit score, potentially resulting in higher interest rates on other loans. 

Paying off your credit card debt will save you on interest fees and may even help boost your credit score. But with so many options for debt repayment, you might be asking, “What is the best way to pay off credit card debt?”

Below, we’ll review the best strategies for paying off credit card debt and help you determine which approach is most effective for you. 

What is the best way to pay off credit card debt?

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Because everyone’s goals, motivations and budgets vary, there’s no single answer to the question, “What is the best way to pay off credit card debt?” However, there are a handful of debt payoff methods that stand the test of time. 

Here are some of the more common debt repayment strategies along with the pros and cons of each. 

Debt avalanche method 

With the debt avalanche method, you pay the minimum balances on all your credit cards and apply any extra money in your budget toward the credit card with the highest interest rate. If you have credit cards with the same interest rates, put your money toward the card with the highest balance. 

Once you pay off the credit card with the highest interest rate, move on to the card with the second-highest interest rate. Put all of your budget toward that card while satisfying the minimum payments on any other debts. Continue this process until you pay off all your credit card balances. 

For example, consider you have four credit cards: 

  • Card 1: $500 balance at 22% interest with a $30 minimum monthly payment 
  • Card 2: $2,500 balance at 19% interest with a $120 minimum monthly payment
  • Card 3: $1,500 balance at 19% interest with an $80 minimum monthly payment
  • Card 4: $2,000 balance at 15% interest with a $100 minimum monthly payment

If you budget $500 per month toward paying off your credit card debt, you’ll pay $200 per month on credit card 1 and the minimum payments on the remaining cards. 

When you pay off credit card 1, move on to credit card 2. Put all of your budget toward card 2 while satisfying the minimum payments on any other debts.

After paying off credit card 2, move on to credit card 3. Apply your entire budget toward card 3 while satisfying the minimum payments on any other debts. 

Once you pay off credit card 3, continue to credit card 4. Put your entire budget toward that card while satisfying the minimum payments on any other debts. 

Continue applying your entire budget toward credit card 4 until you pay it off. 

Pros of the debt avalanche method

Many financial experts prefer the debt avalanche method because it saves money by reducing interest charges. Doing so reduces the amount of interest you pay in the long run. 

Also, because the debt avalanche approach sets up a debt repayment regimen for you, it eliminates the guesswork when trying to sort out which debt to pay off first.

Cons of the debt avalanche method

Since this approach prioritizes debts with the highest interest rates, it may take a long time before you finally pay off your first credit card. During this time, you may lose focus and stray from your path to becoming debt-free. 

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Debt snowball method

The debt snowball method is another popular option among personal finance experts. This plan involves paying off the lowest balance first while making the minimum payments on your larger credit card debts.

After paying off the credit card with the lowest balance, move on to the card with the second-lowest balance. Put all of your budget toward that card while paying the minimum payments on any other debts. 

Repeat this payment process until you pay off all your credit card debt. 

For example, using the same credit cards and $500 monthly debt repayment budget above, you’ll pay $200 per month on credit card 1 while making the minimum payments on all other credit cards. 

Once you pay off credit card 1, move on to card 3. Put all of your budget toward card 3 while satisfying the minimum payments on any other debts.. 

After paying off credit card 3, continue to credit card 4. Put all of your budget toward card 4 while satisfying the minimum payments on any other debts.

When you pay off credit card 4, continue to credit card 2. Apply your entire budget toward card 2 until it’s paid off.

Pros of the debt snowball method

Since the debt snowball method prioritizes paying off your smallest balances first, you may quickly pay off one or more credit cards. These small wins can motivate you to stay on track. 

Like the debt avalanche method, the debt snowball method is an organized way to pay off credit card debt and eliminate any guesswork.

Cons of the debt snowball method

When you focus on your smallest debts first and make only the minimum payments on higher-balance credit cards, you may incur significant interest charges over time. Interest can increase significantly if your credit cards with the highest balances also have the highest interest rates. 

Line of credit

A line of credit is a revolving account you can use to pay off credit cards. Because it’s a revolving account, you can use it more than once to pay off several debts. 

There are two types of credit lines to consider: a traditional and home equity line of credit (HELOC). 

A traditional line of credit gives you access to revolving credit, typically with a lower interest rate than most credit cards. As such, you can reduce your interest charges and potentially speed up your debt repayment.

A HELOC is similar to a traditional credit line but with a few key differences. As its name implies, HELOC requires you to own a home and have equity. Equity is the difference between the value of the home and the debt held against it. So, if you have a $150,000 mortgage balance on a home worth $225,000, you have $75,000 in equity. 

Most banks will let you take out a HELOC on up to 80% of the equity in your home, so you can pay off a lot of debt if you have significant equity. Since a HELOC is tied to your home, it often comes with a low interest rate and longer repayment terms. 

Pros of a line of credit

Lines of credit offer a handful of benefits, depending on the type you choose. A traditional line of credit offers a lower interest rate than most credit cards, which can save you money. A lower interest rate credit can also help you pay off your debt quicker. 

A HELOC offers an even lower interest rate than a traditional line of credit. It also stretches out the payments over a longer period, potentially reducing your monthly payment. 

Cons of a line of credit

Traditional lines of credit and HELOCs have one shared drawback: Both require a good credit score to get approved. Without good credit, you could get denied or deal with interest rates near or higher than your credit cards.

A HELOC also requires your home as collateral, which means the lender could foreclose on your house if you don’t repay the HELOC. 

Debt consolidation loan

A debt consolidation loan is another effective way to pay off credit card debt. For this option, you take out a personal loan with an interest rate lower than your credit cards and use it to pay off some (or all) of your credit card debt. 

Not only does the lower interest save you money, but depending on the terms of the debt consolidation loan, your monthly payment may be lower.

Pros of debt consolidation 

Debt consolidation has several benefits, including lower interest payments, which can save you money over time. It also simplifies your debt repayment strategy by reducing your monthly payments to just one.

Also, because you’re paying off multiple credit card debts with one installment loan a fixed-term loan with a set payoff date your credit score may increase. 

Cons of debt consolidation cons

Debt consolidation requires a personal loan, so it can be difficult to get approved with poor credit history. Also, you’re not guaranteed to get a large enough loan to consolidate all your credit card debt, which can leave you paying the personal loan and your remaining credit cards. 

Debt consolidation loans can also come with costly fees that may negate any savings. 

0% balance transfer card

Many credit card companies offer 0% balance transfer cards that allow you to transfer balances from other credit cards and pay no interest for a promotional period (generally 12-18 months).

While the interest-free promo can save you money, most credit card issuers charge a balance transfer fee, which is typically 3-5% of the balance you transfer. 

So, if you transfer $5,000 onto a 0% balance transfer credit card, you’ll pay a one-time $150-$250 fee. Despite the fee, you can still save hundreds of dollars compared to paying interest for 12-18 months. 

When calculating the benefits of using a 0% balance transfer card, make sure you compare the balance transfer fee to the amount of interest you’ll pay to ensure the balance transfer fee isn’t more than you’d pay in interest. 

For example, if you transfer a $5,000 credit card balance at 20% APR to a 12-month 0% APR card with a 5% transfer fee, you’d pay a $250 balance transfer fee. On the 20% APR credit card, you’d pay roughly $43 in interest each month. 

If you plan to pay off the $5,000 balance in five months or fewer, you’d pay $215 in interest or less, saving you at least $37 compared to the balance transfer fee. 

Pros of a 0% balance transfer card 

The biggest advantage of a 0% APR credit card is the interest savings. With large enough credit card balances, this could be hundreds of dollars per year. It also allows you to estimate how much to pay each month to become debt-free, as there are no monthly interest charges to calculate. 

Cons of a 0% balance transfer card 

The biggest downside to a balance transfer card is the balance transfer fee. It’s likely less than the interest you’re paying on your credit cards, but you must still account for it. If you plan to pay off the balance transfer credit card before the promotional period ends, the fee may cost you more than paying the interest on your original credit card. 

Another drawback is that you probably need a good credit score to qualify for the best balance transfer credit cards. Also, if you don’t pay off the card before the promotion ends, you’ll pay the standard credit card interest rate on the remaining balance. 

Some credit cards, including those with balance transfer promotions, include an annual fee. This can negate some of your interest savings, so read the credit card terms carefully beforehand. 

Finally, you may not get a high enough credit limit to transfer all your credit card debt, leaving you with some leftover high-interest debt to manage separately. 

Combine credit card payoff methods

If using only one of the above credit card debt repayment options doesn’t suit you, consider combining several of them. 

For example, you can move as much debt as possible onto a 0% balance transfer card and use a debt consolidation loan to pay off the remainder. You can then use the debt avalanche method to repay these debts. 

If you’re unable to secure a line of credit or debt consolidation loan large enough to cover all your debt, you can still use whatever loan amount you get to pay off your highest-interest credit cards and use the debt avalanche method to pay off the rest of your credit cards and loan. 

Multiple debt payoff may fit your needs

When you’re deep in debt, it’s not uncommon to ask about the best way to pay off credit card debt. However, the best debt-repayment option depends on your specific financial situation.

There are five tried-and-tested credit card debt payoff strategies that may fit your financial situation and personality: 

  • Debt avalanche
  • Debt snowball
  • Line of credit
  • Debt consolidation
  • 0% balance transfer card

You can also get creative and use multiple debt repayment strategies to help eliminate that costly credit card debt. 

No matter which option you choose, the sooner you start toward your debt-free goal, the closer you’ll get to financial wellness.

Save money, manage your cards and pay down debt faster!

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