Credit card debt is considered to be one of the worst debt forms because it’s easy to max those cards out, and even easier to get buried under a mountain of accumulated compound interest. If this sounds like a familiar story, don’t worry, you’re not alone. It’s easy to feel overwhelmed in the beginning, but each positive money move you make brings you closer to financial freedom.
So, when you’re ready to start paying off debt, where do you start?
If you only have one credit card bill to pay down, the answer is easy enough: make the largest payment you possibly can each month until the balance is paid off. The problem here is that most people don’t have just one credit card; the average American has four credit cards to pay off. The bigger problem is that most people with credit cards don’t even know what they owe. Blindly making minimum monthly payments won’t be enough, and can often add years onto the end due to mounting interest.
If you have multiple credit cards to manage, you’ll need to pick a strategy and create a plan that works for you. Setting a budget can help you live within your means, and should be a part of your debt payoff plan. This will help prevent you from overspending and finding yourself right back in the same position after you’ve worked so hard to clear yourself of credit card debt.
One of the most famous debt elimination strategies is Dave Ramsey’s debt avalanche method. This one requires that you take a look at each of your separate credit card statements to determine their interest rates, rank them from highest interest rate to lowest, and then start focusing your attention on the one that is costing you the most in interest charges. So, the idea here is to focus your attention in the right areas so you end up throwing less money away by the end.
Make minimum payments on each card, except the one with the highest interest rate. This card gets as much extra money as you can afford. Once that debt is eliminated, pick the one with the next highest interest rate and start again. Each time you pay a card off, you’ll free up additional funds to put toward the next debt, and you’ll gain momentum from there, hence the avalanche. Financial fees pack a punch, so this strategy is great for anyone concerned about the late fees, cash advance fees, and annual fees that typically come with credit card debt.
The debt snowball, also created by Dave Ramsey, works in the opposite way. With this method, you’ll focus on paying off your smallest credit card balance first. You’ll make the minimum payment on each card, and put all the extra money you can toward the smallest one until it’s gone. Once that small debt is paid, take the amount you were using on its payments each month and put that toward the next smallest debt.
While it won’t save you as much in interest, many people prefer this method because it helps them stay motivated. Seeing a series of relatively quick, small successes early on can help you stay on track if you’ve previously been discouraged easily. The debt avalanche method requires a bit more patience since you’ll be shooting for paying off the cards with the highest interest rates first. This one, the debt snowball, offers smaller but quicker rewards.
Many credit card companies offer balance transfer options, boasting a 0% APR for their introductory period. If your interest rates are high enough, even large payments can quickly be eaten up, so a balance transfer can buy you the time to pay off your credit card debt without losing too much to interest charges. Just be careful if you choose this method. Typical introductory periods are six to 18 months, so if you don’t pay off the balance in that time, your interest rate will likely skyrocket right back up.
Typically, it’s best to pay off credit cards outright and move on. However, if your bills are so overwhelming that all of your other options feel impossible, a personal loan can help you consolidate, pay one bill, and save you money on interest. Whichever debt payoff method you choose, it’s important to also learn about avoiding building credit card debt so that you don’t have to repeat the process later.