How To Pay Off Credit Card Debt Faster?
Borrowing money can be useful, allowing you to buy a home or finance a car that would otherwise be out of reach. But debt is only useful if it improves your life. Accumulating too much of it can sink your dreams, your spirits and your financial standing.
So what do you do if seeing the mailman coming puts your stomach in knots because you’re certain another unpayable credit card bill is in his mailbag? When credit turns from helpful to horrific, it’s time to confront your debts and devise a plan.
How quickly you pay off your debt depends on two things: the size of your monthly payments and the interest rate at which the debt grows. To pay off your debt as quickly as possible, you should aim to make the largest possible payments while keeping your debts at the lowest possible interest rate. Here’s how to do both.
How to Pay Off Credit Card Debt Fast by Reducing Interest Rates
If you have a pile of credit card debt at varying interest rates, there are many options you can look into for interest rate relief. You probably already know that the better your credit score, the more options there are for you and the better the terms.
When Your Credit Is Good
With good credit, the debt world is your oyster… well, sort of. Besides good credit, you’re going to want to have a low debt-to-income ratio to access the best debt relief options at the best interest rates. After all, anyone who loans you money is going to want some assurance that you have the available income necessary to pay them back. Here are some options for paying your debt back as fast as possible when you have good credit and a low debt-to-income ratio:
- Debt Consolidation Loan: You may be an ideal candidate for a debt consolidation loan. With good credit and a low debt-to-income ratio, you may be able reduce average credit card interest rates of 15% to about 10%.
- Home Equity Loan: If you have equity in your home, good credit and a low debt-to-income ratio, a home equity loan is likely going to be your lowest interest rate option for debt consolidation – with rates typically ranging from 6-12-%. Home equity loans, sometimes called second mortgages, secure the loan with the equity in a house. Interest rates are often far lower, but failure to repay on time can lead to foreclosure. Lenders also set strict underwriting requirements for borrowers.
- Home Equity Line of Credit (HELOC): With this option, you’ll be looking at interest rates similar to home equity loans, at about 6-12%. Though be careful because these are variable rates. Make sure you can pay your debt off quickly and/or afford the payments when interest rates rises. If you are already paying 20-30% APR on your credit card debt, however, you are unlikely to be phased by HELOC rates of the future.
When Your Credit Is Bad
Don’t worry. If your credit is poor, you can still find a debt relief solution that will lower your interest rates and help you pay off your credit card debt faster than just paying the minimum payment. Here are some options for you:
- Debt Management Program: A debt management program consolidates your monthly debt payments into one payment and helps you lower your interest rates so you can pay your debts off faster. Debt management programs are administered by nonprofit organizations. They help you consolidate debt with poor credit and without taking on a new loan. Plans and terms vary, but often the debt counselor can help lower the interest rates from each creditor to a more manageable number, usually around 9%. The creditors are repaid as long as the debtor’s agreed-upon monthly payments are met. Debt management plans usually take 3-5 years to eliminate all debt.
- Debt settlement. Lenders and credit card companies might agree to smaller repayments, assuming it’s better to receive some repayment than none at all. Debt settlement may or may not work, and it is certain to damage a borrower’s credit rating, which makes future credit harder to get and more expensive. Also, many creditors refuse to deal with debt settlement companies. Typically, debt settlement takes the same amount of time as debt management: 3-5 years to negotiate and settle $10,000-$15,000 in credit card debt.
- Bankruptcy: Borrowers have several alternatives, from a repayment plan (Chapter 13) to insolvency (Chapter 7). Both severely damage credit scores, and insolvency requires that you sell most of your possessions. Exemptions for what one might be able to keep vary by state. A Chapter 13 bankruptcy can take up to 5 years (to pay off debts), while Chapter 7 may be completed in less than a year. Of course, you’ll need to qualify for both of these options, based on size of your debts and your income, or ability to pay. A nonprofit credit counselor can help you determine whether bankruptcy is the right option for you.
- Debt Snowball: If your credit score doesn’t qualify you for lower interest rates and you don’t want to join a debt management program, you can do DIY debt management by employing the debt snowball strategy. This won’t get you out of debt faster than prioritizing your debts based on interest rates but it may keep you motivated. Here’s how it works: once a borrower determines how much she can afford to pay each month, she should restructure her payments, concentrating on the biggest debt. If Julia owes $4,000 on one card and less on each of the others, she should tackle the $4,000 card first. She should pay only minimum balances on the other cards and apply whatever extra principal she can afford to the $4,000 balance. Once that card is paid off, she should turn to the next biggest debt. Each card that is paid off means one less interest payment and frees more money to apply to the next card. Some recommend a different debt stacking method called debt avalanche. In this strategy, you start with the card carrying the highest interest rate rather than the highest balance.
- Personal loan: If close friends, family members or an online service like Lending Tree will make a personal loan, it might be possible to repay the card companies immediately, avoiding their high interest rates. A personal loan will often mean lower interest payments.
Remember that debt payment is mathematical. Using a credit card pay-off calculator will help you see how much time you can cut out of your repayment schedule by increasing your payments. Do the math and pay off your debt as quickly as possible. There’s no underestimating the peace of mind that comes with starting out each month in the black.
Pay Off Debt Fast by Making Larger Payments
Making only the minimum payment on a credit card debt takes 19 years to pay off the debt. Obviously, making more than the minimum payment requires disposable income, in other words having enough money to spare. There are two ways to free up money in your budget: make more of it or cut expenses. Both are possible and you should pursue both options while paying down your debt.
How To Make More Money
- Sell stuff. Everyone has at least $50 worth of stuff they can sell on eBay, Craigslist or Facebook Marketplace each month. Give it a try.
- Do odd jobs for your friends, family and neighbors. Let them know you are available to mow the lawn, pressure wash the driveway, babysit or run errands. Or go online and find a gig-listing website. List yourself.
- Get a second job. This is probably everybody’s least favorite suggestion and may not even be possible if you have children to watch or night school or if you already have a second job. But if you can grow your income by getting a second job: do it! As hard as it is, remind yourself that it is only temporary and the money you make will go toward blasting your debt away, forever.
- Contribute “windfalls” to your debt. use your tax return to pay down debt, cash rewards on your credit cards, bonuses, birthday money from grandma: throw everything toward your debt.
How To Cut Your Expenses
- Save $100 per month by cutting your cable bill. If you love cable television, remind yourself: it’s only temporary while you pay off your credit card debt.
- Lower your cell phone bill by using WiFi or cancelling cell phone insurance. Switch to a cheap $20 flip-phone and get a $20-$30 month plan. This can save most people over $100 per month.
- Make your teenage children pay for their own stuff, especially if they have a job. If you’re in debt and you have teenage children, it’s time for them to pull their own weight. Make them pay for their own gas, car insurance and some incidentals.
- Trade-in your car and lower your car payment. Choose a less desirable model, find something cheaper and cut $200-$400 out of your monthly car payment. If you can, ditch payments altogether and drive an inexpensive used car while you work on your debt.
- Visit Budgeting and Saving for money saving tips in every category.
What to Do About Rewards Cards
With a rewards credit card, you earn points or cash back for each dollar you spend. The points can be used to redeem rewards for gas, travel, gift cards or other options.
It’s an incentive to use a credit card, which might not seem like a good route for anyone looking to reduce their debt, but the benefit is saving money. Rewards programs can help consumers save for a vacation, get cash back for regular spending or purchase gift cards for the holiday season.
Rewards cards are typically available for consumers with good to excellent credit (scores of 680 or higher). They could have higher APRs or annual fees, so be careful. You don’t want the drawbacks to outweigh the benefits.
You shouldn’t consider a rewards cards until you are able to pay off your balance every month. Consider them a tool to utilize when your debt has been significantly reduced or eliminated.
Don’t Close Your Credit Cards
When you’ve paid off one credit card, it might seem like a good idea to close that card entirely. It is not. Your credit score is partly based on your credit utilization ratio and have a card open – but not using it – really helps your credit utilization ratio.
Here’s how: that ratio is calculated based on the amount of credit you are using vs. the total credit available.
When a card is closed, there is less credit available in your name. That causes your debt utilization ratio to increase and that’s a negative for your credit score.
It’s also important to maintain a long credit history. Keeping your card open will improve that part of your score, too.
The unfortunate feature of credit cards is that they are only an asset for those who regularly pay most of their monthly balances. If you allow the cumulative balance to rise month after month, the resulting debt payments – and the interest that accumulates – eventually will swamp your finances.
About The Author
In his 40-plus-year newspaper career, George Morris has written about just about everything -- Super Bowls, evangelists, World War II veterans and ordinary people with extraordinary tales. His work has received multiple honors from the Society of Professional Journalists, the Louisiana-Mississippi Associated Press and the Louisiana Press Association. He avoids debt when he can and pays it off quickly when he can't, and he's only too happy to suggest how you might do the same.
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