7 Tips for Paying Off Credit Card Debt
Paying off credit card debt should always be a priority. But for many people, credit card debt is a fact of life they can’t seem to escape.
According to debt.org, more than 189 million Americans have credit cards and, on average, each household with a credit card carries $8,398 in credit card debt.
Mounting credit card debt will progressively drain your finances, leaving you in a weak financial position and stressed-out. In spite of this, there are ways to pay off credit card debt and reduce credit card debt.
If you’re serious about paying off credit card debt, you’ll need to start paying off credit cards in full each month whenever financially possible. Failing to pay off your credit card bill in full each month means you will incur interest charges.
Of course, the best way to avoid accumulating credit card debt is to keep track of your purchases, so you don’t spend more than you can afford to pay-off each month.
Having the best banking tools to help you track spending can help reduce credit card debt. CU SoCal’s mobile banking app is an easy and convenient way to track spending, make payments and manage your accounts.
CU SoCal has been providing financial services, including personal loans to pay off credit card debt, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County for over 60 years, and is the fastest growing credit union in Southern California.
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Read on for tips for paying off credit card debt:
Why it's Important to Pay Off Your Debt
Paying off credit card debt is extremely important for a number of reasons. Carrying high debt means you ultimately pay more for your purchases. Because card issuers charge high interest on the carried-over balance, every purchase you don’t pay off has that interest added to it.
Credit card interest rates are typically stated as a yearly rate called the Annual Percentage Rate (APR). Looking at your credit card statement, you will see several different APRs listed: one for purchases, one for cash advances, and one for balance transfers.
This means any balances that aren’t paid in full on your payment due date will be charged the interest rate corresponding to the stated APR.
To quickly calculate the amount of interest you will be charged on a credit card balance, click here to use the APR calculator.
7 Tips For Reducing and Paying Off Credit Card Debt
1. Create a Budget
Creating a monthly budget starts with writing down your known monthly expenditures, including groceries, phone and utility bills, rent or mortgage payments, car loan payments, student loans, and any other regularly occurring payments you must make.
Once you’ve itemized your approximate monthly expenses, add them up and deduct this number from your total monthly income. Do you have money left over? Or do your expenses add up to more than your income?
Creating a budget (what you can spend each month and while still having money left to pay-down your debts) allows you to see where your money is going and where spending on non-essential items can be reduced.
2. Freeze Spending
If you find that your spending has gotten a bit out of control consider freezing or temporarily pausing your credit cards so that you don’t use them. This should be done to the card(s) with the highest interest rate. Of all the ways to get out of credit card debt, this may seem the most drastic, but it works!
According to Experian, when you pause your credit card this way, the card issuer won't authorize any new charges to your account, but any recurring payments that you've already set up will continue to be processed. There is no penalty for freezing your account, and you can unfreeze it anytime you want. However, interest charges will continue to accrue and you'll still have to make monthly payments (if you have a balance) just as you always do.
3. Pay Off Credit Cards with the Highest APR First
If you’re wondering which credit card to pay off first, start by paying off the card(s) with the highest APR. Doing so can save you hundreds or thousands of dollars in interest payments.
If you have several credit cards, use the card with the lowest interest rate and freeze the card(s) with the highest interest rates. Combining strategies will save you money and when the higher APR card is paid off, you can use the money you were paying monthly on that card to pay down the balance of the next highest interest rate card.
The goal is to avoid paying high monthly fees and interest, so you can reduce and eliminate debt.
4. Pay Off Card with Lowest Balance First
While this strategy may sound like the opposite of the strategy above, paying off a low balance card is an effective way to get focused on your savings, and immediately see the reward of paying off a balance — which is more money that you’ll have to reduce the next highest debt you have.
For example, if you have a credit card with a balance of $150 and interest rate of 19.99% and another card with a balance of $5,000 and a similar interest rate, paying off the $150 in a lump sum will give you $150 to use to pay down the $5,000 (in addition to what you may already be paying toward that bill each month), and you’ll pay down your balance faster.
This strategy only works if the monthly payment amount from the paid-off card is used to pay down another card balance. If you spend the “extra” money and use it for new purchases, you’ll find yourself no closer to your goal of becoming debt-free.
5. Consolidate Credit Card Debt
Debt consolidation is a financial strategy that involves merging (consolidating) debt that’s spread across various debtors, and merging it into one debt with a lower interest rate.
Consolidating debt is a helpful way to manage debt, pay off debt faster and eventually improve your credit score. Making payments to one debtor at a lower interest rate will save you money each month due to the lower interest rate typically associated with consolidated debt.
For example if you have several credit cards each with a high-interest balance, you can do a balance transfer — transferring each high interest balance to one card with a lower interest rate.
6. Use Savings To Pay Down Debt Faster
Paying off credit card debt fast can be accomplished by using your savings. While you may have been saving this cash for a vacation or other purchases, using cash to reduce credit card debt will save you money, which you can put toward a vacation in the future.
7. Refinance Your Mortgage
One of the ways to get out of credit card debt if you’re a homeowner is to refinance your mortgage to take advantage of low mortgage interest rates (around 3% for a 30-year fixed rate mortgage).
When you refinance to a new lower rate you will request to get “cash-out” in the process. Getting a “cash-out refinance” gives you cash to pay for other needs, including paying off high interest credit card debt, paying off a student loan, or making essential home repairs.
Getting cash-out means you’ll be borrowing extra money, in addition to what you need to refinance your current mortgage. The cash will be deposited as a lump sum into your bank account at closing.
Paying off credit card and other debt with a cash-out refinance only makes sense if you are committed to using the cash to reduce debt, not spend it in a way that increases debt.
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