Many of us were never taught how to manage credit cards or how they even work. Let’s start off with some basics before jumping into how to pay down your debt faster.
First off, you should download your credit card statement so you understand what’s on it. While credit card statements are organized differently depending on the creditor, each of them have the same features. You can expect to see areas reflecting Account Activity, Payment Information, Credit Line and somewhere towards the end of the statement (3rd or 4th to last page) an Interest Charge Calculation.
At the very top of your statement you should see a “Statement Period” with a beginning date and end date. This indicates the time period of the transactions the statement is for. This is why you may have a statement balance that is different than the current balance on your dashboard.
This means that if you pay the statement balance you will not accrue interest on the items charged to your credit card for that “Statement Period”. You’ll also notice that your due date for that statement is about 3 weeks after the end of the “Statement Period”. While it’s a good idea to always pay your credit card in full, you may want to focus on always paying your statement balance so that you can manage your cash-flow.
Account Activity will show you the dollar value of purchases for that statement period. You will also see the dollar value of interest and fees charged to your card. Finally, you will also see your statement balance.
Payment Information shows you how long it will take you to pay off your balance if you only pay the minimum payment and make no additional purchases. This will sometimes show you another timeline of how much you would need to pay monthly in order to pay your credit card in 3 years.
Credit Line shows you how much available credit you have to make purchases.
Interest Charge Calculation is the APR or percentage you will incur if you do not pay off your statement balance.
Now that you understand your statement we can discuss how to most effectively pay off your credit card debt. There are a number of options and methods, some of which require a credit score of 680 or higher. Let’s start with the strategies to most quickly pay off your credit card when you have a credit score less than 680.
If you’re in credit card debt and cannot pay off your statement balance or your current balance in full, stop using your credit cards!
The Debt Avalanche Method
This strategy prioritizes paying off the credit card with the highest interest rate first. Go check that statement (that we referenced above) and look for the Interest Charge Calculation. Write down each of your credit cards interest rates. Then automate your minimum payment for all your credit cards and make an additional payment (whatever you can contribute even if it’s $5!) to the highest interest credit card. Once the first card is paid off; take the minimum payment and additional payment and apply that to the next highest interest rate credit card. Repeat until all of your debt is paid off. This strategy saves money over the long-run by saving you on interest charges.
The Debt Snowball Method
This strategy prioritizes credit cards with the lowest balance. Follow the same steps as the debt avalanche method above but, instead of focusing on the highest interest rate, focus on the lowest balance. This strategy is good for feeling like you’re making progress. It keeps you motivated and helps you stick to your debt free goal.
If you have 680+ credit score you can try the following methods:
Zero-interest credit card transfer
Assuming your credit score is at 680 or above and your credit utilization is within an acceptable range for the credit card issuer; you could qualify for a new credit card that offers a balance transfer promotion of 0% interest for 3 to 24+ months. You may have to pay a balance transfer fee up to 3% of the balance being transferred. Depending on your debt balance it may not be worth paying the balance transfer fee. Keep in mind that if you have debt with a specific bank, you will not be able to transfer that balance to another card with that same bank.
Debt consolidation loan
This is a personal loan that can potentially offer a lower interest rate than your credit card(s). This should be a fixed interest rate so you know exactly how much you need to pay each month and how long it will take to pay off your debt. Credit cards have variable interest rates and can rise and fall throughout the year. The benefit of getting a loan is you can potentially pay off all of your credit card debt with one loan. This counter-intuitively can also help boost your credit score. Always compare multiple offers before moving forward.
Call your creditors then negotiate/ask for a lower interest rate
Believe it or not, you can contact your credit card issuer and request a lower interest rate. You will still have to pay your current balance but it will help reduce how much extra you have to pay each month. Be prepared to speak with supervisors and managers and some wait time. Be persistent. Keep in mind that they will review your credit history, credit score and if you’ve been making on-time payments as a reason to approve or deny you. In the end, don’t forget that they want your money. You’re a recurring customer paying monthly and this is an important asset for any business.
If you’re not a Financial Gym client yet, you may want to sign up. Not only will your Financial Trainer give you a financial plan but, they can also guide you on which strategy, or combination of strategies would be best for you. While we are not the only financial coaches around, we certainly offer more guidance and support than most!
Debt Settlement Programs
Approach this strategy with extreme caution. This can be a stressful way to remove debt. These for-profit services work directly with your debt issuers and attempt to negotiate a settlement to reduce/eliminate your debt obligation. That said, they often recommend stopping payment on all debt so they can use that as leverage with your creditors. This can cause your accounts to go into collections as well as endless phone calls and a credit score drop. You will also need to save a lump some of money in order to pay the agreed settlement price. These debt settlement programs also charge high fees. In the end you may not save all that much money and you may end up paying equal or more than your original debt.
Debt Management Programs
Unlike debt settlement companies, debt management companies are “non-profit” companies that typically charge you a membership fee. They will not ask you to stop paying your debt obligations. Instead they will negotiate with your creditors to lower your interest rates and set a monthly payment schedule. You will then pay one monthly payment to the debt management company and they will disperse those payments to your creditors. A downside is that they normally request you close all of, or most of your credit cards. This will impact your credit score but, you’re honoring your debt and now have a fixed interest rate (sometimes lower than a personal loan) and a fixed monthly payment.
While there are many strategies to paying off debt, the above are the most common and/or most effective to getting debt free faster. If this feels overwhelming you’re not alone; speaking with a Certified Financial Trainer could be the best first step to getting a handle on paying off your debt and hopefully saving money at the same time. Schedule your first call to get started!