Having a credit card or two is a financially sound idea but only if you are careful and follow some credit card advice such as:
- Pay off your balance every month
- Never skip a payment
- Use a rewards card
- Use the card for needs, not wants
- Have one for emergencies only
Following this guidance, you shouldn’t have any credit card problems. But sometimes things get out of hand and we had to use the card a lot – like they say “when it rains, it pours”, and now you have amassed some credit card debt.
Now you need to pay off all your credit card debts. But before we can start working on our debt relief plan, we need to know what we’re working with.
First, add them up
Seems obvious, but some of us are just blindly paying the minimum every month without knowing the full details. So, grab all your credit card statements and write down the balance, the minimum payment, and the interest rate of each one and add them all up. I’ll make an example here to refer to for the rest of this article:
Credit Card Debt:
- Card A – $5,000 balance, $200 minimum payment, 18.9% APR
- Card B – $2,500 balance, $100 minimum payment, 12% APR
- Card C – $500 balance, $20 minimum payment, 0% APR, 14.74% APR after 1 year
The total you have is:
$8,000 total balance, $11,927.18 total in payments, and 11 years and 5 months to pay it all off.
Seems shocking once you have it down on paper isn’t it? Not to worry, here are 8 different ways to pay off your credit card debts.
1. Transfer to a 0% interest card
As you saw in my earlier example, you’ve lost $3,876.22 to interest payments alone. So transfer all your credit cards over to the 0% interest card and save money. Let’s redo our example:
- Card A & B were transferred to Card C
- Card C new balance is $8,000
- Card C 0% interest rate is only for 1 year, then it becomes 14.74% APR
- Minimum payment is now $320 a month (for 1 year)
- In one year, you’ve paid $3,840, balance left is $4,160
- With the new 14.74%, the minimum is now $166
- It now will only take 9 years and 6 months to pay off with a total payment of $9,753.26
You’ve saved $2,173.92 with this simple action.
2. Pay more than the minimum
I’ll let you in on a secret, the minimum payment amount on your credit card isn’t there to help you financially, it’s there to maximize profit for the credit card company.
Credit card companies set the minimum amount to where it only pays a little off the principal, which extends the time to pay everything off, which incurs interest.
Therefore, you’re paying more than you should. Dirty trick isn’t it? So, every month try and pay as much as you can on your credit card.
Here’s how much of a difference this can make:
- Card C minimum was $320 with 0% interest for 1 year = $3,840 paid, balance left is $4,160
- Change minimum payment to $450 for 1 year = $5,400 paid, balance left $2,600
- Keep paying $450 with the new 14.7% interest = $2,713 total paid with interest
- $8,113 total balance payoff and will take 1 year and 7 months.
That makes a $1,640 savings plus 8 years less to pay it off. Let’s look at the savings difference from the original set-up = $3,814.18 in savings and 10 years less to pay it off. Much better isn’t it?
3. Pay more often
Let’s try a different strategy you can use. Maybe $450 a month is too much? Instead of waiting to pay once a month, pay a little bit every week.
What ends up happening is you actually end up paying more on the card than the minimum payment would.
Let’s start with the original set-up with Card A, B, and C:
- Card A minimum payment was $200, instead pay $60 a week. It would only take 99 months to pay it off with a total of $5,959.51 paid!
- Card B minimum payment was $100, instead pay $30 a week. It would only take 92 months to pay it off with a total of $2,778.44 paid!
- Card C minimum payment was $20,, instead pay $20 a week. It would only take 25 weeks to pay it off!
Now the new total payments are $9,237.95, a $2,689.23 savings and it only took about 8 years.
Now let’s do it with the consolidated balance after we transferred the cards.
- Minimum payment is $320 a month, instead, pay $100 a week. In one year at 0%, you would have paid $5,200 with $2,800 left on the balance.
- The interest rate of 14.74% kicks in after 1 year, continue to pay $100 a week. It would only take 30 weeks to pay off the rest with $2,920.92 in payments.
Total payments now are $8,120.92 and would take about a year and a half. The difference this makes from the original plan is that you save $50 a month and paying weekly may be easier to do than one large lump sum monthly.
4. Lower your interest rate
Let’s say you can’t do any of the changes mentioned, maybe you couldn’t consolidate your cards and you’re barely making the monthly payments let alone paying more on them.
You can still try to work with your credit card company and ask for a lower interest rate. Many companies are willing to do this if you have been consistently paying your monthly bill.
Let’s say they agree to cut the interest rate in half:
- Card A with a $5,000 balance and the new interest rate is 9.45% APR. With the same $200 minimum payment it will be $5,590 in total payments and takes 28 months to do it.
- Card B with a $2,500 balance and a new interest rate is 6% APR. With the same $100 minimum payment it would be $2,677 in total payments and 27 months to complete.
- Card C with a $500 balance and after 0% for 1 year of a minimum payment of $20 it becomes a $260 balance and we have a new interest rate of 7.37%. It takes $271 in total payments in 14 months for the new interest rate. The total we paid altogether is $511 and took a little over 2 years to do.
Now the total payments are $8,778 and took just over 2 years to complete.
I hope you’re following the math without any problems. Here are some calculators to figure out your own credit card debts.
Now let’s say that none of these options are available, your credit is so bad that credit card companies are not willing to work with you in any way. Not to worry there are still some great options available.
5. Make More Money
If you’re struggling to make your credit card payments every month, then you just need to make more money every month.
There is a huge number of ways to make extra money every month, so I’ll just list a few easy ones to do in your spare time:
- Survey Apps – Not only will you make easy money here but some also offer sign-up bonuses.
- Shopping Apps – Get cash back on your regular shopping purchases.
- Acorns – Let this app grow your savings every week.
- Get a Side Hustle – Create a side hustle working from home in your spare time.
- Cut back on Spending – trim your expenses, spend less, and other ideas.
There are many other ways to cut down on spending and increase your monthly income. Once you have more money each month the credit card payments are less of a struggle to maintain.
6. Debt Consolidation
This is different from consolidating all your credit cards onto one card. This debt consolidation is working with your bank or a debt relief company to get a loan to pay off all your debts.
It’s a form of debt refinancing and depending on how you do it can greatly affect your credit score. The different ways to refinance are:
- Personal loan – your utilization rate can go down making your credit score go up.
- Debt relief company – if they negotiated a lower balance, the creditor may report it as bad debt or a charge-off, which will make your credit score go down.
A word of warning though, besides the fees that debt consolidation companies charge, they pretty much charge a higher interest rate and you may end up paying more in the long run.
As a second to last resort, you may need to claim bankruptcy. Claiming bankruptcy should only be done when you have undeniably mucked up your finances so bad that there’s no way out or there is no income left.
There are two types of bankruptcies:
- Chapter 7 – You have little to no income. They’ll liquidate some of your assets to cover some of your debts.
- Chapter 13 – You get a repayment plan established to pay off your debts over the next three years.
You’ll need to check with your state on the qualifications for either of those bankruptcies.
Just remember that after this bankruptcy filing is completed that your credit score will plummet, the bankruptcy stays on your credit report for up to ten years, and you may still have some uncovered debts left to repay as well.
8. Ignore your debts
This should be the very last option to pick. I don’t suggest doing it at all, but it is a choice you can make. That is to just ignore your credit card debt.
Unpaid accounts are removed from your credit report after seven years. At that point, the delinquency stops affecting your credit.
In the meantime, your credit suffers badly and since you’re still “legally obligated” to pay the debt, a debt collector can pursue you until the statute of limitations runs out in your state.
To find out how long the statute of limitations is in your state, here’s a great site.
I hope it doesn’t come down to having to pick one of the last three choices as this will limit any future financial choices you can make. The first five are much easier to accomplish and doesn’t affect your credit as much.
Do you have any credit card debt payoff success stories? We would love to hear them!