Try to avoid using your credit cards at all until you can use them without putting your finances at danger before you begin your road to being debt-free. Although specifics will differ depending on your circumstance, we only advise utilizing credit cards if:
- The only debt you have is a mortgage and education loans. (Today, it’s nearly difficult to escape having debt from school loans and mortgages.)
- You have three to six months’ worth of spending in an emergency fund. If no income were to enter your bank account during that time, this is how much cash you would require to survive.
- You may make full, not just minimum, payments on your credit card debt each month.
Make paying off your credit cards as well as learning how to use them safely a top goal, whatever you choose to accomplish it.
Find out how much debt you have on your credit cards first.
Next, pick your weapons! We’ll cover five various ways to pay off your credit card debt, ranging from debt consolidation loans to repayment plans to settlement.
1. The Debt Avalanche Approach
We advise taking a piecemeal approach to your debt rather than looking at it as a whole. You’ll achieve speedier victories and maintain motivation if you divide your debt into smaller portions.
The debt avalanche and debt snowball approaches are two well-liked strategies to divide up debt repayments.
You’ll arrange your credit card obligations using the debt avalanche approach, going from the card with the highest interest rate to the one with the lowest. You’ll pay the minimum amount due on each of your credit card accounts, and any additional funds will be applied to the card with the highest APR.
You won’t have to worry about that monthly payment after the card has been paid off. The debt with the subsequent highest interest rate will then be attacked, and so on.
2. The Debt Snowball Method
Regardless of the interest rates on the cards, you will rank your bills using the debt snowball approach from lowest balance to highest. Each of your credit card balances will get the minimum payment, and any additional funds will be applied to the card with the lowest amount.
You can enjoy victories more quickly with the smallest starting balance than with the avalanche. This approach is perfect for those who are driven by immediate gratification, but it has a drawback in that those who use it can wind up paying more interest over time.
Here’s an illustration of how each approach might function in the case of four credit cards with various balances and interest rates.
1. $754 with 0% interest
2. $5,248 with 15% interest
3. $3,467 with 27% interest
4. $1124 with 18% interest
If you followed the avalanche method, you’d pay off card No. 3 first, followed by No. 4, No. 2 and No. 1. If you followed the snowball method, you’d pay off card No. 1 first, followed by No. 4, No. 3 and No. 2.
Choosing the right method comes down to deciding whether you’d rather get quick results or save money on interest. We encourage you to check out the comparison calculator from Dough Roller, so you can calculate what each method would cost you.
3. The Balance Transfer
A balance-transfer credit card is a fantastic choice if you have decent to exceptional credit (usually a FICO score of 670 or above) and can realistically pay off your debt within a year. By allowing you to move the amount of a card with a high-interest rate to a card with a 0% interest rate, balance-transfer cards can help you save money on interest payments.
The majority of these cards have no annual fees and 0% interest rates for 12 to 18 months. You can readily locate balance-transfer cards without a fee, but they often include a 2 percent to 5 percent fee. You can obtain a card with better terms if you have a higher credit score.
4. Take a Loan
Consider applying for a loan to refinance and consolidate your obligations.
You might possibly save hundreds of dollars in interest if you take up a loan with a lower interest rate and pay off your credit cards.
If you presently have little to no money to put toward your credit card debt, there is a practical strategy to pay it off.
Here, personal loans and home equity loans are the two possibilities for debt consolidation.
Personal Loan
If you want to shop around, start at online marketplaces since many will let you prequalify for a personal loan without running a hard check on your credit. Online personal loan shopping has no impact on credit ratings.
If you have strong credit and are able to adhere to the loan’s repayment schedule, you might consider applying for a personal debt consolidation loan. A debt consolidation loan will have a preset repayment plan with a set schedule of payments, unlike credit cards, which allow you to continue borrowing while only making the minimum payments.
As you combine all of your debt into one payment, a debt consolidation loan is comparable to a credit card with a balance transfer feature. Personal loans are an option.
Home Equity Loan
If you have equity in your house, you may borrow against it in three different ways: with a home equity loan, a home equity line of credit, or a cash-out refinancing.
With a home equity loan, the lender provides you the money all at once, and you pay it back over a certain period of time at a fixed interest rate.
You have a borrowing cap with a home equity line of credit. You are free to take as little or as much as you require within that restriction at any time.
With cash-out refinancing, you replace your existing mortgage with one that is a little bit more expensive and keep the difference in your pocket.
5. Debt Settlement
Debt collection and creditors’ worlds may be perplexing, frightening, and occasionally even criminal. For instance, it’s a frequent misperception that if you don’t pay your credit card bills, someone may steal your house or you might end yourself in jail. However, credit card debt is unsecured, so if you don’t pay it, no one can evict you or seize your home.
Don’t give up before exploring your alternatives for help if creditors are bugging you or if your situation makes it difficult for you to settle your debt.
Debt Management Program
A credit counseling business will handle your consolidation under a debt management program in the goal of securing you a reduced interest rate and less expenses. Your counselor will be responsible for creating a payback and educational plan for you. Particularly for unsecured debt such as credit card and medical expenses, this option is available.
To make sure you keep up with your debt payments, a debt management program pays your creditors on your behalf. While enrolled in the program, your credit score can potentially rise. However, if you skip a payment, you risk being dismissed and losing all the advantages you’ve accrued.
The majority of the time, debt management strategies don’t lower your debt, but they may cut your interest rates in half or extend
Credit Card Debt Settlement
Debt settlement is a possibility, but we think of it as a last resort, if you’re in more than just a short-term season of financial instability and you can’t see yourself paying off the amount of credit card debt you owe.
Debt settlement lowers the amount of debt you owe, but it has a major negative effect on your credit record and score.
The method is more complex than debt consolidation. You must persuade each creditor that, absent a settlement with you, they are likely to get nothing at all. Naturally, you won’t be making any payments during that period, and interest and late penalties will continue to accumulate.
You don’t have to get assistance, but most people do.