Debt: It’s something most of us are familiar with. In fact, even the world’s governments are estimated to owe a total of $69 trillion in debt! That said, it’s no wonder that we’re all looking for ways to pay off credit cards faster.
In this article, we will explore 4 of the best methods to do just that!
4 Strategies to Pay Off Credit Cards Faster
The following strategies to pay off credit cards faster will help you get rid of your debt faster, without accruing too much extra interest!
Of course, it’s important to use these strategies correctly, while also making improvements to your spending habits and overall fiscal responsibility.
Unfortunately, no strategy is foolproof.
If your debt is brought on by spending on non-essential items, the only way to ensure you don’t fall back into debt once you’ve paid off your credit cards is to seriously examine your relationship with money and to work on making it one of restraint and necessity.
Broadly, here are the four strategies we’ll be exploring in this article:
- Consolidating Debt
- Taking out a home equity loan or line of credit
- Paying more than the minimum
- Target debts individually
1. Consolidating Debt
Credit card debt is overwhelming, especially if you’ve been spreading your debt across a few credit cards and loans.
Luckily, there’s a way to bring it all together to make it all manageable. This is known as consolidating your debt!
How do you consolidate your credit card debt so you can make one single, regular payment instead of many payments?
No matter what, it’s much easier if your newest lot of debt has a lower APR than the credit cards you use.
A low APR on new debt will increase the ease of managing payments, lower the cost of interest, and even potentially shorten the payoff period.
Here are some of the ways debt consolidation is possible:
Apply For A Balance Transfer Card
Balance transfer cards work by letting you transfer all of your credit card debt onto one card.
These cards most often have promotional periods, during which they charge no interest. It’s a good move to use this period to make a serious dent in your debts, without them gaining any more interest!
Some cards will charge a single fee on the balance you transfer (often 3-5%), but many don’t charge an annual fee.
It’s best if you calculate how much you’ll save by not accruing interest, versus how much the balance will cost you to transfer.
Additionally, once the introductory period is over, the APR is likely to be higher than average to compensate for the free year you’ve just had.
Therefore, it’s important to pay off as much as you can before these higher rates kick in. Otherwise, you’ll defeat the purpose of the card.
Here are the pros and cons of balance transfer cards:
- The introductory period of 0% APR enables customers to (potentially) avoid the accrual of more interest as they pay back consolidated debt
- Streamlines payments into one regular installment, rather than multiple scattered payments across many cards
- To qualify, applicants must boast a credit score of 690 or above (this is considered good-to-excellent, and not a common credit score among those heavily in debt)
- Balance transfer fee may add significantly to overall costs
- Post-introductory period APR is likely to be high
Credit Card Consolidation Loan
Online lenders, banks, or non-profit credit unions offer unsecured personal loans which can be used to consolidate credit card debt.
Often, these loans enable you to lower the APR currently on your debt.
Credit unions are our pick for who to go to in this situation, as their rates are likely far lower than those of a bank or online lender, and they cater to those with not-so-excellent credit (689 or lower).
Lenders of consolidation loans may offer to pay your creditor directly. This takes the hassle out of sorting through who’s owed what and consolidating your debt.
They may also offer discounts on the rate of such a loan; this is not universal, however.
Carefully research whoever you’re thinking of borrowing from, so you make the right choice and avoid getting into more debt!
Here are some pros and cons of consolidation loans
- Fixed interest rates
- Direct payment to creditors effectively consolidates your debt without you doing any work
- Those with good credit will be offered low APRs to take advantage of
- Credit unions may require your membership before you can apply
- Debtors with low credit scores will likely get higher rates, meaning they may become trapped in another spiral of accruing interest
- ‘Origination fee’ of some loans only increases financial pressure
2. Take Out A Home Equity Loan Or Line Of Credit
A home equity loan and a line of credit are two ways to consolidate your credit card debt if you own a home. We will explore home equity loans first.
Put simply, homeowners can apply for a home equity loan– a lump sum with a fixed interest rate– in which their house is collateral securing the loan.
Since you’ve secured the loan in such a manner, you can likely take advantage of low-interest rates.
Getting a large, low-interest loan can be a great way to start paying off your credit card debt.
If the interest on the loan is lower than that of your pre-existing debt, and you can pay off the credit card debt and make your loan payments on time, this is a great option.
However, you do risk losing your house if you fail to keep up with payments on your new loan.
A line of credit can also be secured in the same way– by putting your house up as security. The interest rates of these vary, unlike in the case of home equity loans.
Here are the pros and cons of home equity loans and lines of credit:
- Can be secured with a house rather than a debtor’s credit score, which may be low
- Long window in which to repay the loan, potentially keeping monthly payments lower
- Lower rates of interest than personal loans
- Home appraisals are required to qualify for either loan, not just homes
- The debtor may be at risk of losing their home if they fall behind on payments as they did in the past
- Does not consolidate the debt into one payment – rather, the lump sum of the loan must be broken up and paid out to each creditor individually
3. Pay More Than The Minimum
This one seems a bit silly, but let’s examine it closely. You may be asking: “Why should I pay more than the minimum? Isn’t that what it’s there for?”
Well, paying the minimum doesn’t save you money as you might think. In fact, it keeps you in debt for longer, and only pays the increase in interest without making any dent in the principal!
Instead of falling into this trap where smaller payments over longer times seem to be a good idea, learn how compound interest works.
Each month, the minimum required credit card payment is simply a bill for the extra interest accrued (or maybe a tiny bit more). Very little of this money goes towards actually paying off the principal.
Understanding that a minimum payment is simply the icing on top– and that paying that each month does not take any slices out of the cake of your debt– is the first step towards understanding the benefits of paying more than the minimum.
The second step is implementing this knowledge in a constructive payment plan, to achieve the ultimate goal of paying less interest overall.
Even if it’s a minor amount, paying above the minimum will chip away at the mountain of your debt until it’s finally gone.
Here are the pros and cons of this strategy:
- Changes the debtor’s view of money, and fosters a deeper understanding of debt and repayment.
- Does not rely on external sources/further lenders
- Amounts to less overall interest paid
- Requires debtors to be willing to learn, and change their ways from within– rather than be tossed a financial lifeline
- Can be difficult if money is tight due to genuine poverty and hardship
- Requires immense mental fortitude and spending restraint– traits which some debtors lack
4. Target Debts Individually
As the opposite of debt consolidation, individual debt targeting is a way of narrowing your focus to pay just one debt at a time.
Rather than constantly chipping away at a mountain of consolidated debt, paying off one debt at a time gives a sense of achievement– encouraging the debtor to pursue this feeling by subsequently settling all the rest of their accounts.
Two of the most logical points to start at are either your biggest debt, or your smallest. We’ll examine each starting point and its associated method individually:
The Snowball Method
We all know how snowballs behave when rolled down a hill. Provided the hill is covered with snow, the ball will grow as it goes down– speeding up until it reaches the bottom.
Now imagine that the snow is your debt, and rolling down the hill is how you pay it off. Start with the smallest debt you have; focus only on that, paying no mind to the rest.
Once you’ve paid your smallest debt, save that amount again, and put it towards your next largest debt.
Once you’ve eliminated your second debt, save that amount again– and so on, until your snowball has reached the bottom of the hill!
The snowball method is a real psychological booster. Starting small will show you that repayment is possible, while repeated and incrementally increasing bouts of saving will build a routine of fiscal responsibility.
The little victories, debt-by-debt, keep you engaged with the payment process!
While this method may seem easier than starting with larger payments, it can, unfortunately, lead to higher accrued interest on those payments.
This is the opposite of the debt snowball. Here, you pay off your debt with the highest interest first.
It takes more work up front, but once you’ve got the momentum your repayment plan will seem like an avalanche, and your debt will quickly fall away.
Additionally, a debt avalanche saves more money in the long term than a debt snowball, as the higher-interest loans are not left to increase.
Instead, you get them out of the way as soon as possible!
However, here’s where it gets difficult.
Tackling your loan with the highest rate of interest (which also may be the largest loan of all your debt) can seem insurmountable, particularly at the beginning of your repayment journey.
Unlike a debt snowball, tackling the debt avalanche takes lots of heart and discipline right from the get-go. You have to break your spending habits to save up a large sum of money, which can be hard.
Below are the pros and cons of targeting debts individually, regardless of strategy:
- Creates a sense of achievement, which may result in permanent change (i.e. the beginning of better spending habits)
- No external agents to further entrench the individual in debt with ‘repayment loans’ or similar products
- All the onus is on the debtor, who may not have the skills necessary to extricate themselves from debt– even with strategies such as the snowball or avalanche
- Can take too long to get started (avalanche), or allows excessive interest build up (snowball).
How Should You Pay Off Your Credit Card Debt Faster?
There are many ways you can get rid of your credit card debt.
The ones listed above are just four methods in which you can pay off your credit card faster– but they can also be considered as a few of the best!
Whether you consolidate your credit card loans, use strategies to target one payment at a time, secure a home equity loan, or simply pay more than the minimum, the best insurance against future debt is smart spending and fiscal responsibility.