When used properly, credit cards can be a helpful means of managing payments for everyday expenses. If you keep your balances low and your payments regular, they can help you to build a better credit score, making access to better forms of credit cheaper and easier. However, maxing out your available credit and only making minimum payments quickly leads to problem debt.
Here are some simple and effective strategies to help you eliminate credit card debt on your own.
Create a Budget that Focuses on Debt Reduction
If your debt is manageable, meaning you think you can pay it down on your own, start by creating a budget that sets very specific targets for debt repayment. Budgeting for debt reduction means you need to find ways to put more money towards debt reduction every month.
Make a list of all your credit cards and other revolving balances. You can download our free debt repayment worksheet to record everything.
Use our credit card calculator to see what your payments need to be to pay off your balances in your preferred timeline or see how long a fixed monthly payment will take to pay down your credit card balances.
In order to pay off your debts as quickly as possible, you need to create the biggest possible bucket of available cash flow to put towards your debt. That means shaving off costs from your monthly expenses wherever you can. Remember, every little bit helps.
We suggest allocating a minimum of 50% of your available cash flow towards debt reduction so that you still have a buffer zone.
Avalanche or Snowball?
Now that you know how much you can afford each month to pay off your credit cards, you need to create a repayment plan about which cards or balances to pay down first. Here are some tips:
Always make at least the minimum on every card or account to avoid missed payments harming your credit report
Use the avalanche method to speed up debt reduction. You begin by paying the minimum on each card except from the one credit card with the highest interest rate. You pay off as much as you can afford to towards that high rate card each month. Pour all of your surplus cash into reducing that card’s balance. As soon as you pay a card off, you then add the amount paid towards that card to the next on the list. You simply keep rolling your payments down the list until you end up with one single monthly payment. You continue doing this until your debt is cleared.
The snowball method works similarly, except that you focus on the smallest balance first before moving on to bigger debts. While the snowball method will cost you more in interest, it can provide beneficial motivation as you see credit card balances reduced to zero much sooner.
Once you know which cards you are paying off first, automate your debt payments so you don’t leave it to chance that you will be disciplined enough to put it all towards paying down debt.
Stop using your credit cards during this process or your balances will continue to grow.
7 Strategies that Can Reduce Your Interest
1. Don’t skip a payment.
You can reduce your debt faster if you avoid interest and penalty charges. Credit card and mortgage companies often tempt you with “skip a payment” offers. Our first advice related to you dealing with your debts is: don’t fall for it. All you are doing is adding interest on interest. Your debt increases, and with credit card rates averaging 18%, you are digging yourself into a hole.
2. Pay off more than the minimum debt payment.
The minimum payment may be easier on your cash flow each month, but it comes at a heavy cost: huge interest costs keep you in debt longer. When you make only the minimum payment each month you pay more in financing charges in the long run. Let’s say you owe $1,000 on your store credit card at 18%. You pay the minimum which is set at interest plus 1% of the balance. Your monthly payments start at $15 and go down from there as you pay off your debt. Pretty easy right? Unfortunately at this rate paying off your debt will take you 113 months (that’s almost 9 1/2 years!) and you will have paid $923 in interest — almost doubling the cost.
Under the same scenario, if you can pay $100 per month, you can reduce your debt to zero in less that a year (11 months) and the interest cost is $92.
3. Debt Snowball or Highest Rate?
There are two theories of how to reduce your debt faster. The first, and usually most recommended method, is to pay off high interest rate loans (usually high interest credit card debt) first. Why? Because the higher the rate the more you pay in financing charges. Reducing this debt first saves you money in the long run allowing you to pay off your debt faster.
The debt snowball repayment method is another way of dealing with your debt. This method recommends that you pay the smallest debt first. Once this debt is paid off, you move on to the next smallest debt in terms of size. Why? This method provides quick results that you can see. By paying smaller debts first, you see fewer bills coming in each month as more and more individual debts are paid off. This debt reduction method works well because it gives you positive feedback to stay motivated to pay off your debt.
Whichever the method, be diligent. Make payments every month to the maximum you are able and your debts will be eliminated.
4. Lower interest with a balance transfer
Many lenders offer credit cards specifically aimed at consolidating credit card debt. Look for options where the interest rate is lower than the interest rates of all your other small debts.
Most balance transfer credit cards offer lower interest rates for a set period (usually 12-18 months), after which time the interest rates will shoot up. Commit to paying off your new credit card in full within this window for the maximum savings.
If you miss a payment, the promotional period also ends which will result in your interest rate increasing immediately.
Promotional rates only apply to transferred balances. Any new purchases are likely to be at the regular rate which can be 19% or more.
You may have to pay a balance transfer fee, which is generally 1-4% of the amount transferred. Do the math and make sure you will save more than the fee in interest savings.
5. Get a debt consolidation loan
A debt consolidation or home equity loan can help you reduce credit card debt. The interest rate charged will generally be lower on your consolidation loan allowing you to reduce your debt faster. Beware however of the debt consolidation trap. Many get a debt consolidation loan, pay off existing debt, and then ramp up their credit card debt again. If you need to consolidate your debts, once you do, get rid of any extra credit cards and only use the ones you keep if you can pay them in full each month.
5. Make a deal with your creditors
If all else fails and you still cannot make your payments, you can try an interest-free debt settlement option thorugh a consumer proposal.
A consumer proposal only makes sense if you have significant debts, cannot afford to repay them in full and do not have access to enough equity in your home or other assets to refinance.
Remember that the process of clearing your credit card debt takes time. The important thing is to stick with the tactics and debt reduction method you choose.
At the same time, commit to changing your spending behaviors in the long-term. There’s no use in consolidating your loans to pay off your current debt or paying down your balances if you don’t also address the underlying issue of spending more than you earn. Implement a spending plan or budget to keep your spending at a manageable level. Once your credit card debt is paid off, you can begin to set money aside for the future so you don’t rely on credit card debt again.