Here are 3 reliable ways to pay off credit card debt
If you have a lot of credit card debt, you probably already know why you need to pay it off.
Paying off credit card debt can save money and reduce stress. When you add in the fact that less credit card debt is possible increase your credit scoreIt’s easy to see how eliminating your credit card debt is a smart idea.
But knowing why you should get out of credit card debt may not be enough to fix your situation. What you really need is a plan.
Paying off credit card debt is not a one-size-fits-all solution. There are many ways to solve the problem and you should choose the option that works best for you. Here are three smart debt relief methods you may want to consider.
Snowball method
If you owe outstanding balances on multiple credit cards, the snowball method can be a great way to start reducing your debt. With this method, you pay off your cards in a specific order, starting with the smallest balance and working your way up.
First, you make a list of all the credit cards that have a balance. Your list should arrange the cards from largest balance at the top to smallest balance owed at the bottom. It might look something like this:
- Capital One: balance $5,000
- Chase: $3,000 balance
- Citi: balance 2,000 USD
- Retail store credit card: $500 balance
You’ll need to continue making the minimum payments on every card on your list. This will help keep your account open and in good standing. Making minimum payments will also protect your credit from score-damaging late payments.
On the card with the smallest balance, you want to pay off as much money as possible each month to clear the debt. In the example above, you would make the minimum payments on your Capital One, Chase, and Citi accounts. You’ll then transfer all of your excess funds to pay off your retail store credit card.
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Once you pay off the card with the lowest balance, move the list to the next account (Citi in the example above). Repeat the process. Only now, you’ll have more money each month to use the second card on your list because you’ve cleared the first debt.
Follow this pattern until all of your credit cards have a $0 balance.
Related: The 7 best starter travel credit cards
Benefits
Every time you eliminate a credit card balance, you’ll start saving money that would previously have been used to pay interest. Additionally, each card paid in full can positively impact your credit score.
Credit scoring models like FICO, look at the number of accounts on your credit report that have balances. From a scoring perspective, reducing the number of accounts with balances is a good thing.
Most importantly, paying down your credit card balance will reduce it credit utilization rate. Credit utilization describes how much credit limit you are using (according to your credit report). If your report shows you owe $5,000 on a credit card with a $10,000 limit, your credit utilization ratio is 50%. The more you reduce your credit utilization, the more your credit score will usually increase.
Related: Is 30% credit card utilization the magic number?
Balance transfer credit card
Do you have a good to excellent credit score? If so, you can take advantage of that good credit rating to get out of credit card debt sooner.
Many organizations issue referral advertising cards balance transfer incentives on the new credit card account. With a balance transfer offer, you can take the debt from your existing credit card and consolidate that balance into a new account. The most important thing is that if you find the right offer, your new card can work for you Financial support 0% on transferred debt for a limited period of time.
Please note that most card issuers charge a balance transfer fee. A balance transfer fee is an immediate fee added to your account when you transfer debt to a new card. For example, if the card issuer charges a 3% balance transfer fee, it would cost you $300 to transfer $10,000 worth of debt to your new account.
Here are some current examples to give you an idea of how credit card balance transfer offers work:
- Citi Double Cash® Card (see exchange rates and fees): The card offers a 0% annual introductory percentage for 18 months on balance transfers made within the first four months of account opening. After that, the variable APR will be 18.74% to 28.74%, based on your creditworthiness. There is a 3% introductory balance transfer fee (minimum $5) for transfers completed within the first four months of account opening. After that, your balance transfer fee will be 5% per transfer (minimum $5).
- Citi Simplicity® Card: This card is best for consumers who want to take advantage of the card’s 0% introductory APR on balance transfers within the first 21 months from the date of the first transfer (transfer must be completed within the first four months since account opening). There’s also a 0% introductory APR on purchases during the first 12 months of account opening – but the APR increases to a variable APR from 18.74% to 29.49% after the introductory period ends.
It’s worth noting that some of your current card issuers may also offer you low-interest balance transfer opportunities.
You can log in to your account to search for options or call the customer service number on the back of your credit card to see if any offers are available.
Information about the Citi Simplicity Card has been collected independently by The Points Guy. The card details on this page have not been reviewed or provided by the card issuer.
Related: How to choose a balance transfer credit card
Benefits
A 0% or low-interest balance transfer can help you save more money as you work to pay off your credit card debt. By reducing the amount of interest you owe each month, you can get out of debt faster.
To save as much money as possible, you should aim to pay off your account balance in full before the introductory interest rate expires. Also, be sure to avoid adding more debt to your plate. You don’t want to transfer a balance from an existing card only to have the balance re-charged on your original account.
Usually, a new one balance transfer card can improve your credit score.
Balance transfers can reduce the number of accounts with balances and reduce your overall credit utilization ratio. Of course, a new balance transfer card will also result in a new hard credit inquiry and a new account on your credit report. Neither of these are necessarily good from a credit scoring perspective, but the other potential points benefits of transferring balances (e.g., lower credit utilization and fewer accounts with balances) are often large than these two less influential factors.
Related: Does transferring a balance affect your credit score?
Personal loan
Another way to speed up your debt repayment process is to use a personal loan to consolidate your credit card balances. Similar to the balance transfer strategy above, this method involves using the new account to pay off existing debt.
Unfortunately, you won’t be able to secure a 0% APR on a personal loan like you normally would with a balance transfer card. So if you know you can pay off your credit card debt quickly (i.e. before the introductory period expires), a balance transfer offer could help you save even more money. If you believe it will take longer to get out of credit card debt, a personal loan may be more suitable long term.
Benefits
If you have good credit, you may be able to secure a lower interest rate on a personal loan than you’re currently paying with a credit card. A personal loan with a lower APR can save you money on interest. The lower your new interest rate, the greater your savings.
Consolidating your credit card debt with a personal loan can also help your credit score. Let’s say you pay off your revolving credit card debt with a personal loan. In that case, your credit utilization ratio will drop to 0% (personal loans are installment accounts and do not count towards your credit utilization ratio).
Credit utilization is an important factor in your credit score. It is largely responsible for 30% of your FICO score. If you can pay off all your cards with a personal loan and reduce your credit card usage to 0%, your score could increase significantly.
Converting your credit card debt to a single installment loan can help your credit in another way. When you pay off multiple cards, you reduce the number of accounts with balances on your credit report. As mentioned, the fewer accounts that have a balance on your credit, the better. Again, a personal loan will trigger a new hard credit inquiry and a new account on your report. Both can have a slightly negative impact on your score, but reducing your credit utilization ratio to 0% will overshadow this small negative impact in many cases.
Bottom line
If you carry a balance from month to month, the interest you pay can cost you a lot of money. Additionally, high interest fees can wipe out any value you get from the points and miles you earn on rewards cards. A well-managed credit card can help Establish better credit scoreprotects you from fraud and allows you the opportunity to earn valuable rewards. The golden rule is to never charge more than you can pay in a given billing cycle. As long as you follow this rule, you can get a lot of value from your account without getting hurt financially.
