How to Pay off Credit Card Debt

Credit card debt is not something unusual these days.  Whether you have $5,000 in credit card debt or $100,000, there are some basic ways to pay off your debt.  Read on!

1.   It’s All About The Interest Rate – Interest rates are the main problem with credit card debt.  The longer your debt sits unpaid, the more interest you’ll have to pay.  Therefore, if you can get a lower interest rate, your credit card debt will increase at a slower rate than if you have a high interest rate.  As suggested in recent HelpSaveMyDollars.com articles, call your credit card company and ask them to lower the interest rate on your outstanding balances.  It’s that simple!  They may not say yes, but ask to speak to the supervisor – don’t give up!

2.  Balance Transfers – If the credit card company refuses to lower your interest rate, consider doing a balance transfer.  Let’s say you owe $10,000 on a credit card at a 16% interest rate.  A balance transfer would allow you to transfer that $10,000 (or a portion of it, depending on what the terms of the balance transfer are) to a new credit card at a much lower interest rate (sometimes at 0% to 3%!).  This low interest rate on the balance transfer may only last for 6 months to 1 year, but during that time, very little interest will accrue.  Think about it.  You went from a 16% interest rate to a rate between 0 and 3%.  While you have that very low interest rate (again, they don’t last that long), try to pay it off, since once that balance transfer is over, you’ll have to transfer it back to the high interest rate again.  Or use the 6-12 months of the low interest rate time to save up money and pay the entire balance off right before that low rate expires.  In order to do a balance transfer, you’ll need to have good credit (usually above a 700 credit score).

It is important to note that some credit card companies charge a fee to transfer the balance.  That fee could be a percentage of the balance, and it could cost a lot of money to do a transfer.  One final note on balance transfers:  the low interest rate on the balance transfer card will only apply to the credit card debt you put on it ($10,000 in this case).  In other words, do not make purchases using the balance transfer card – you won’t get the low interest rate for everyday purchases.

3.  Minimum Payments - With credit card debt, you’ll have to pay a minimum payment each month.  Regardless of what that payment is, don’t get tricked.  Simply paying the minimum payment each month will not get you out of debt.  The credit card companies want you to think that paying the minimum payment each month is the answer to paying off your credit card debt.  You should be paying more than the minimum payment – even if it’s $5 more, that will still make a meaningful difference.  Remember, you’re paying off your principal (the credit card balance) and the interest – so the minimum payment is simply not enough.  In some cases the minimum payment might only apply to the interest so you are not even making a dent in the principal!  Now because of the recession, there has been mixed opinions on paying more than the minimum payment.  If it comes down to paying the mortgage or buying groceries vs. paying more than the minimum payment, then obviously pay the mortgage first.  Just know that paying more than the minimum will get you out of debt faster!

But if you’re able to pay more than the minimum, which credit cards should you do that for?  Always pay at least the minimum on all cards to avoid credit score penalties, but focus on the higher interest card first.  Let’s say you have the following credit cards:

Credit Card A @ 25% interest rate

Credit Card B @ 18% interest rate

Credit Card C @ 12% interest rate

Let’s say Card A has a minimum payment of $300 per month but you’ve been paying more than the minimum at $350 per month.  Let’s say the Card B has a minimum payment of $200.  Once you’ve paid off Card A, you can now pay $350 you’ve been paying on Card A to Card B.  Think about it.  Card B had a minimum of $200, but since you used to pay $350 for Card A, why not continue to pay $350 on Card B – that’s $150 more than the minimum!  Continue this process until all your cards are paid off.  It sounds confusing, but try it!  Don’t forget to continue to pay the minimum payments on Card C and any other cards in addition to trying the strategy above!

One last note:  Don’t close down any cards when they are all paid off!  Closing credit cards down will clear previous credit history, which is 30% of your credit score, in addition to negatively affecting your debt-to- credit limit ratio.

Tags: balance transfer, balance transfers, credit card companies, credit card company, credit card debt, Credit Cards, credit score, Debt, high interest rate, how to pay off credit card debt, interest rates, money, rate interest, supervisor

This entry was posted on May 29, 2010 at 11:00 pm and is filed under Credit Cards, Debt. You can follow any responses to this entry through the RSS 2.0 feed.