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How to Pay Off Credit Card Debt

What you'll learn: Ways credit card debt can affect your life and how to pay it off


Creating a plan when paying off credit card debt will help you manage your finances better and in turn, pay off your credit card debt faster. Doing so may be easier than you anticipated — it does, however, require some focus and persistence.

How Credit Affects Your Financial Life

Your credit affects your ability to take out loans (such as ones with competitive interest rates). Lenders look at your credit score — a three-digit number representing how reliable you are with debt — to determine whether you’ll pay back your loan on time. The lower your score, the risker you’ll be in the eyes of the lender. This means you’ll be less likely to be approved for a loan or ones at lower interest rates, costing you more money in the long run.

Your credit can also affect other things such as renting an apartment or taking out utilities in your name. Landlords and utility companies look at your credit score when determining how much of a security deposit they’ll require or even approving you for a lease or account.

How to Get Out of Credit Card Debt

There are a few different ways to tackle your credit card debt. Each one depends on your individual situation and the number of credit cards you’re paying off.

Debt Avalanche

With this method, you pay off the credit card with the highest interest rate first and make the minimum payment on all other cards. Once the card with the highest rate is paid off, you move onto the card with the next highest rate. The theory is that with the freed up resources you would have used toward your now paid-off credit card, you’ll be able to pay off more debt. As you make more payments toward the principal amount on fewer credit cards, you’ll pay down the debt faster much like what happens with an avalanche.

Debt Snowball

Instead of prioritizing credit cards with the highest interest rates, the debt snowball method focuses on the smallest debt. You’ll start small by making the minimum payment on all credit cards except for the one with the smallest balance. Once that balance reaches zero, you’ll take the amount that went toward that first card and put it toward the card with the next lowest balance. While you may not save as much money in interest as the avalanche method, it serves as a motivator. Once you see that you’ve tackled a “win” — paying off an entire credit card balance — you’ll feel more confident to continue tackling the rest of the debt. If you feel like you’re facing a mountain of credit card debt, the debt snowball method could make you feel less frustrated.

Balance Transfer

To save money on interest and help you pay off credit card debt faster, consider moving your current balance to another card with a lower interest rate. Depending on your credit score, you may qualify for ones with much lower rates. There may also be offers for low introductory rates (even as low as 0%). Transferring credit card debt may cost you. For instance, some issuers charge balance transfer fees, either a flat rate or a percentage of the balance transferred. Make sure that those fees are lower than the amount you’ll save in interest charges or else it may not be worth it. Other considerations to think about before conducting a balance transfer includes understanding how long the introductory period lasts and what the card’s interest rate will be once it ends. That’s because if you can’t pay off credit card debt all at once the introductory period is over and the card’s regular interest rate is higher, you may not save much at all.

How to Consolidate Debt

Debt consolidation is when you combine several credit card balances into one monthly payment by taking out a personal loan or one designed for this purpose. One of the main advantages is that it can help you simplify the debt payment process — you only need to worry about making one payment on time instead of multiple ones. Depending on the terms, you may be able to lower your monthly payments, giving you some breathing room. You may also be able to pay less in interest and pay your debt off faster.

Weigh the pros and cons carefully before taking out a debt consolidation loan. You may end up paying more because of fees and interest, especially if your loan term is longer than several months.

How Debt Affects Your Credit Score

One of the major factors that goes into determining your credit score is the amount of debt you have. Carrying a lot of credit card debt can hurt your credit — lenders see it as you’re being stretched too thin financially. Credit reporting bureaus use what’s called your credit utilization, which makes up 30% of your overall credit score. Credit utilization is calculated by measuring the ratio between your credit limit and credit card balance. The higher your credit utilization, the lower your score may be. To improve your score, try to ensure your credit card balances are as low as possible, with your credit utilization ideally below 30%.

There are many different ways to pay down your credit card debt. From the debt avalanche method to credit card consolidation, carefully consider the advantages and disadvantages of each choice to determine which option is best for you.