If you struggle to pay off credit cards or regularly carry balances from month to month, you’re likely racking up high interest charges. That could keep you from building savings or investing for the future.
Instead of making card issuers more profitable, use these seven steps to reduce or eliminate expensive card balances as soon as possible.
1. Stop making new card charges
The first step to improving your finances is acknowledging your situation and deciding to reverse any money mistakes. Regularly financing a lifestyle you can’t afford using credit cards is a big trap because they get more challenging to pay off the longer you make new purchases.
As credit card interest accrues, it can double or triple the original cost of a charged item, depending on your card’s rate and how long you take to pay it off.
So, stop making new charges until you take control of your cards and can pay off your new charges each month. Consider ways to earn extra income, like starting a side gig, finding a better-paying job, asking for a raise, getting a second or seasonal job, or selling valuable unused items.
Also, look for ways to cut your most significant expenses, like housing and transportation. Of course, you should also cut smaller or unnecessary costs, like memberships, subscriptions, and entertainment, to free up more money to pay off your debt.
Challenge yourself to stop all unnecessary expenses for at least a few months and shop your recurring bills, like auto insurance and wireless plans, to save money.
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2. Pay more than a card’s minimum
If you only pay a card’s minimum balance, it may only cover interest and not your balance for purchases. For example, if your card charges a competitive 15% APR, you owe $5,000, and your minimum payment is 4% of the balance, it would take you over ten years to pay off — if you never made another purchase. Over that period, you would have paid almost $2,400 in interest!
That’s a conservative example because many cardholders pay interest rates in the mid to upper twenties.
3. Pay down balances from highest to lowest interest rate
The higher a debt’s interest rate, the more it costs you in interest per dollar of debt. So, getting rid of your highest-interest debt first saves you the most. Plus, you can use the savings to get out of debt faster.
So, if you have several cards, a good strategy is to rank them from highest to lowest interest rate and tackle them in that order
4. Choose a debt payoff method
Paying off debts from the highest to the lowest interest rate is known as the debt avalanche method. For instance, you’d pay off a 23% credit card balance before a 19% balance because it costs you more. As previously mentioned, that’s the most cost-effective strategy in the long run.
However, you could also pay off debt in order of the smallest to largest balance, no matter the interest rates, known as the debt snowball method. For instance, if you have a $1,000 card balance at 19% and a $2,500 balance at 23%, you’d wipe out the smaller one first. Getting rid of a small debt quickly can motivate you to stay disciplined and eliminate more significant debts.
There isn’t a right or wrong way to pay off debt. Any method you can stick with and make steady progress will be a good one.
5. Use your assets to pay off cards
If you have assets, such as savings and investments, that you can use to pay down high-interest credit cards, that may make sense. But you still need a healthy cash reserve, such as several months’ living expenses in a high-interest savings account.
If you don’t have any or enough emergency funds, don’t jeopardize your financial security by paying off credit card debt. Also, consider what tangible assets you can sell, such as unused sporting goods, jewelry or a vehicle, to raise cash and increase your financial cushion or decrease your credit card balance.
6. Consider doing a balance transfer
You can optimize your card debt by moving it from a higher to a lower interest option, such as a balance transfer credit card. It temporarily reduces your interest, giving you some financial breathing room.
For instance, you might see a promotional offer, such as paying 0% interest for 12 months on the amount you move to a new or existing card. Balance transfers are typically subject to a fee, such as 3% or 4%, which gets added to your balance.
By transferring higher-interest debt to a zero-interest card, you avoid interest and save money, helping you pay off a balance faster. However, the amount you can transfer depends on the credit line you get offered. If you don’t have good credit, you may not get approved for a balance transfer — or you may only be able to transfer a small portion of your debt.
READ ALSO: Personal loan or balance transfer–which is better for consolidating debt
7. Consolidate high-rate card balances
Another option to shift higher-interest card debt to a lower-interest account is a loan consolidation. By taking out a fixed-rate loan, you can pay off card balances and make monthly payments during a set repayment term, such as three or five years.
For example, if you have a credit card balance charging 23%, paying it off with a 12% fixed-rate personal loan over three years saves a lot of interest. The rate and terms a personal loan lender offers usually depend on factors like your income and credit. Even though a personal loan may cut your interest, the shorter your repayment schedule, the higher your monthly payments will be.
If you’re a homeowner with at least 20% equity, you may qualify for a home equity line of credit (HELOC). It’s a revolving line of credit with a variable interest rate that allows you to borrow an amount up to your credit line, using your home as collateral, without needing to refinance your existing mortgage.
You can use HELOC funds however you wish, such as for home renovations or paying off higher-rate debt. If you use a HELOC or equity loan to buy, build or improve your home, a portion of interest paid is tax-deductible — but that’s not the case for other uses like debt consolidation.
The main downside of tapping your home equity with a HELOC or loan is that if you default, you risk losing your home to foreclosure. Plus, closing costs, like with a primary mortgage, add to the cost of borrowing. Consider getting multiple quotes, including from your current mortgage lender.
Depending on the terms you get offered, consolidating can be an excellent way to reduce interest and get out of debt faster. Transferring or reorganizing debt to lower your interest rate can save money and make it easier to pay off faster.
