How to pay off credit card debt
Credit card debt may feel like a heavy burden that’s perpetually weighing you down. If you have large balances with high interest rates, you may be accruing significant monthly charges that are difficult to pay off. Not only does this affect other financial opportunities, it may also result in a cycle of ongoing debt that seems nearly impossible to break out of. In such a scenario, what becomes important is how to manage this debt and eventually eliminate it.
The key to correcting this situation is a three-pronged approach of changing your spending habits, developing saving habits, and pursuing a strategy to pay off your debt.
Change your spending habits
The next step is to review the spending habits that led to your credit card debt.
- Create a budget: Make a list of your monthly bills and track your daily expenses for several weeks to see where you’re spending money. Separate the essential from the excessive. Then plan a realistic budget that doesn’t exceed your means, and stick to it. Track your expenses vs. the budget you set up. Always be on the lookout for opportunities to tweak things and stay on track.
- Get ready to cutback: From giving up designer coffee to cutting back or eliminating impulse purchases—if you can avoid spending a few dollars every day, you’ve earned a few more dollars that can go toward additional debt payments.
- Pay with cash: Paying for what you buy with cash instead of adding more charges to your credit card may help you be more mindful of how much you spend.
- Watch what you throw away: As gross as it might seem, checking to see what you throw out might reveal opportunities to avoid buying things that just end up in the trash.
Build up your savings
Avoiding spending is a good start, but proactive saving is another habit that’s key to getting out of debt. Even if you are living paycheck to paycheck, there are some actions you can take that may help you start saving money.
- Get started now: Start collecting spare change and open a high-yield savings account where you can deposit it. The more you put into the account, the more you may earn in interest. It may not seem like a lot at first, but if this amount is left to grow over time, it may help you make a lump sum debt payment.
- Save your surprises: When you get a windfall from a tax refund, work bonus, monetary gift, or other one-time payment, save it instead of splurging.
- Avoid false savings: Applying for a new credit card to get a one-time introductory offer on interest savings can be very expensive in the long run if you carry a balance with a higher interest rate. Even the inquiry for the application can impact your credit score and lead to higher interest rates in the future.
- Build an emergency fund: Three to six months of living expenses can help cover unexpected costs. That way, if an emergency occurs, you will not have to add to your credit burden to get through a difficult time.
- Contribute to your 401(k)-retirement account: If you’re thinking about how to eliminate debt in the long-term, consider contributing money from your paycheck to a retirement account. Your employer may match your contribution up to a certain percentage, and that additional money may be instrumental in helping you become debt-free once you retire.
- Look for a new job: If your income isn’t enough to keep you out of debt or doesn’t provide you with enough money to pay down your credit card balances, you may want to start looking for a new job that can give you a higher salary.
- Pay more than the minimum payment: When your monthly payment comes due, consider contributing a few more dollars to the minimum amount you’re required to pay. If you aren’t adding using your credit card for more purchases, then making additional payments each month may cut down the amount of interest charges you are paying and pay off the balance faster.
Make a strategy to pay off credit card debt
You have choices to make when deciding how to pay off debt. If you have multiple cards, pick what strategy you’ll use for paying them off.
- Select your debt with the highest interest rate and pay it off first, reducing your overall interest payments.
- Pay off a card with the smallest balance first, giving you a sense of accomplishment on your payoff path and reducing temptation to spend.
- Pay down the debt on any cards that are close to your credit limit.
These decisions depend on a combination of the financial effects and psychological factors that impact your ability to carry through with your debt efforts. Always make sure you’re paying at least the minimum amounts on time to avoid getting into credit score issues.
Explore your options to pay off credit card debt
If you’re having trouble with high-interest credit card debt, there are several options that may help you.
- Debt consolidation loan: This involves taking out a new loan to pay off your existing debts. It can replace multiple bills with one single monthly payment, and you may be able to secure a lower interest rate. Options for debt consolidation loans include secured borrowing options such as home equity loans or unsecured alternatives such as personal loans.
- Balance transfer credit cards: If you’ve reined in your spending habits and you’re looking for a way to get ahead on your existing credit card balances, a balance transfer credit card may be a good idea. With introductory offers that include low-or-no annual percentage rate (APR) charges for a set amount of months, you may be able to reduce your total monthly payments by consolidating them into one account. This may give you the time you need to eliminate your principal balance without incurring extra charges.