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If you’re struggling to pay off your credit card debt, you’re definitely not alone. According to a recent report by Lending Tree, Americans owe a total of $925 billion on credit cards at last count, with an average outstanding balance of $6,569 per borrower.
To make matters worse, the average credit card interest rate, or annual percentage rate (APR), is currently 16.27%. That means the average consumer with credit card debt has a significant portion of their payments going towards interest charges. It also means that for consumers paying this even higher rate, paying off credit card debt is harder (and more expensive) than it needs to be.
Fortunately, there are a number of strategies you can use to manage your debt and pay off your credit cards once and for all. So if you’re struggling with debt that you can’t seem to get rid of, consider one of the following proven debt repayment strategies.
Debt snowballing helps consumers pay off their debts by helping them reap the psychological benefits early on. With this strategy, participants list all the debts they own from small to large, and then focus on the smaller debts early on.
To use debt snowballing, you make minimum monthly payments on all of your largest debts, and then use any excess money to pay your smallest debts. Over time, the smallest debt gets paid off, at which point you “snowball” the extra money you pay for the next smallest debt.
Using the debt snowball method, the smallest debts disappear over time, leaving only the larger debts. Ultimately, users only need to pay off their largest debts until they are completely debt free.
example: Suppose you have four credit cards with balances of $7,000, $4,000, $3,300, and $2,500. With debt snowballing, you’d focus your biggest repayments on the $2,500 balance first, then the $3,300 balance, then the $4,000 balance, and finally focus on paying off the $7,000 balance.
All debt reduction strategies have positives and negatives – there are no perfect solutions. So here are the pros and cons of debt snowballing.
- Reap Mental Benefits by Paying Off Small Debts Early
- Helps you reduce the number of bills you pay early in the process
- May result in higher total interest charges over time
Unlike debt snowballing, debt avalanche law helps consumers pay off their debts in the most mathematically favorable way. With this strategy, participants list all the debt they own based on the interest rate they paid on each, and then focus on the debt with the highest interest rate first.
To use Debt Avalanche, you make the minimum monthly payment on all your lowest-interest debts, then spend any extra money you have on the debt with the highest APR. Over time, the debt with the highest interest rate gets paid off, at which point you “avalanche” the money you paid on the debt with the next highest APR.
If you go, you will pay off your debt with the highest interest rate, then debt with a lower interest rate, then one debt, then zero debt. This strategy helps you save the most on interest because you tackle the debt with the highest APR first.
example: Suppose you have four credit cards with APRs of 22.99%, 19.99%, 12.99%, and 11.99%. In the case of a debt avalanche, regardless of the size of each debt, you would pay first on the 22.99% debt, then on the 19.99% debt, then on the 12.99% debt, and finally on the 11.99% APR debt.
- Save on interest by addressing the debt with the highest interest rate first
- You may pay off larger debts first, which may take longer and be frustrating
- Reducing your monthly payments may take more time
Consumers can also use debt consolidation loans or personal loans to get out of debt. With this strategy, you can borrow enough to pay off all your credit cards and then start paying off your personal loan each month.
Personal loans can be a good option for debt consolidation because they have fixed interest rates, fixed monthly payments, and fixed repayment schedules. This means you know exactly how much you owe at any given time, and when you can pay off your debt.
example: Let’s say you owe $10,000 on four credit cards with relatively high APRs. If you took out a seven-year personal loan for this amount, you would use the loan funds to pay off all credit cards and then use all of your monthly payments toward one personal loan. In this example, if you qualify for a $10,000 loan at 6% interest, you’ll pay $146 a month for seven years (84 months) until you pay off the debt. At the same time, you will pay a total of $2,271 in interest charges.
- Simplify your finances with monthly payments
- Consolidate debt at a lower APR than you pay now
- Know Exactly When You’ll Be Debt Free
- Many personal loans have no annual fee and no hidden fees
- You need good credit to get a personal loan with the best rates and terms
Another debt repayment strategy involves applying for a balance transfer credit card. This niche card lets you consolidate and pay off debt at 0% APR for a limited period of time, usually up to 21 months. Balance transfer fees are required, but individuals who are able to pay off their debt within the card’s introductory period have the opportunity to save significant interest and make progress toward paying off their debt faster.
example: Let’s say you owe $10,000 on four credit cards with relatively high APRs, and you apply for a balance transfer card that offers 0% APR on balance transfers for 21 months in exchange for a 5% balance transfer fee. After the debt is consolidated, you will owe $10,500 including fees, but if you are able to make monthly payments of $500 for 21 months, you can pay off this debt with $0 in interest charges.
- You can pay no interest on your debt for a long time
- Most balance transfer cards have no annual fee
- You usually need good credit to qualify
- You can only get 0% APR for a limited time, after which the standard variable APR is applied
If you want to get out of debt, you need to be willing and able to change your lifestyle — at least temporarily. Simple tips that can help you stay on track include:
Make sure the debt repayment strategy you use fits your personality and lifestyle. For example, don’t apply for a balance transfer credit card if you know you’ll really want to use it to make purchases.
If you keep using your credit card, you may never be able to pay off your debt. When you’re in debt-paying mode, it helps to steer clear of credit cards and stick to cash or debit cards.
Take a close look at your lifestyle for signs of wasting cash. Try shopping for grocery sales, cooking more meals at home, and avoiding places and situations that might tempt you to overspend.
Write down your income in one column and all your daily bills and expenses in another, and see how they compare. A written budget can help you stay focused and move toward your goals, including your current debt repayment strategy.
Getting into debt is often a piece of cake, but paying it off can be a downright pain. Fortunately, these debt relief methods can help you save money, pay off debt faster, or both.
We hope one of the strategies in our guide helps you create an effective plan—even if it takes a while. If you’re worried about falling behind on your debts, failing to meet your obligations, or even facing bankruptcy, seek help from a credit counseling agency.
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