Credit card debt is the worst type of debt. Most of the time the debt relates to retail purchases that do not retain resale value, which is why the debt is so hard to shift, and why it builds up so fast. Credit cards usually have higher rates of interest than almost any other kind of money lend – this is another reason the amount you owe seems to rise almost faster than you can pay it back.
Today on my way back from work, on NPR radio I heard about declining credit card delinquency rate in the US, in fact, delinquency is at 7 years low right now. That was a very good news for us. and a sign of recovering the economyBut if you see deeper, the problem is still in tact. Problem with paying only paying minimum due amount every month.
Most of us just pay the amount that is mentioned in their statement. I urge everyone to understand how minimum due is set on their card. After regulation Z or card act of 2009, all card issuers and banks must have a tabular amortization calculator in account statement. Have a look at that tabular calculator.
It’ll take years to even pay off a small $1,000 charge on your card. Now when you continue to charge your card, while paying just the minimum balance, your amortization period keeps on increasing. The debt simply doesn’t go off, it falls on the heirs after a deceased card member. There are ways to pay off your debt, more financially responsible you’re, faster you can pay off your debt.
Here’;s we will talk about strategies to pay off credit card debt faster. For more information on credit card debt and how to avoid it, you can even consolidate your debts on your own.
Tips for paying off your credit card debt faster
Pay More than minimum
Look at previous month’s statement for my Chase Freedom account. I had a balance of only $799. I had a minimum pay of $25, which is very low and can be paid easily. People do go by that number and pay only $25.
The table below shows that if I continue to pay the minimum amount every month, without making any additional purchase, I can pay off my balance ($799) in 3 years and I would end up paying total $968. Now if I continue to charge next month, few more years will be added on top of 3 years.
So, basically I’d continue to pay interest charges throughout my life.
The only way to really get free and clear of your credit card debt it to make more than the minimum repayments each month. Just making the minimum repayments will keep you in debt to the card companies forever – which is, of course, what they want. A significant portion of their earnings come from interest charges on balance amount.
This is exactly how cards are supposed to work. To beat the credit card companies at their own game, you’ll want to pay your card balance down to zero every month.
If you’re carrying accumulated credit card debt however, you may not quite be at this point yet – so…
Kill Your Big Ones First
Tackle your credit card debt by aiming for the one with the highest interest rate first. folks at Bank of America also does suggest using one debt at a time. But, paying the highest interest debt first may not be the best option psychologically. Debt elimination is a journey and you may need some quick success to get going.
While financially, paying off highest interest rate is the best option, yet some expert suggest “Debt Snowball” method to eliminate debt.
As per Dave Ramsey, a personal finance guru, this debt snowball method helps emotionally when you’re undertaking debt elimination journey.
How can you do it?
Gather all the spare cash you can, and pour it into this account. Sell your spare bits and pieces, get a night shift job if it helps, but get this big monkey off your back. Keep making the minimum repayments on your other cards – you’ll get to them once this one’s paid down.
As soon as the biggest money-eater is paid down to zero – never use it again. Cut it up if you don’t think you can resist. Then take the amount you were paying onto that card, and pour it into the account with the next highest interest rate, and so on. This way you’ll build debt reduction momentum.
However, with debt snowball, you first payoff the debt which has smallest balance, it may not be of highest interest. Once you see one debt eliminated, you can then concentrate on the next higher debt. Like a snowball, it gets bigger and faster as it moves.
Merge/Consolidate Your Debt
There are a lot of free balance transfer offers around these days. Find one that works for you (remember to read the fine print), and consolidate your credit card debts onto one card.
This will simplify your repayments and save you interest charges. If you can get everything onto a 6 month (or 12 or 18) interest free balance transfer card, do everything you can to get that debt paid down within the interest free period. The faster you reduce the debt, the less it will cost you in the long run.
Now if you’re in a deeper trouble, you’ll probably not get a balance transfer card. Then the best option to consolidate your debts would be to take loan from your retirement account, if you have one. Repayments on retirement accounts charges typically below 5% interest, compared to credit card companies charging you sometimes more than 20%.
Another useful way I always recommend to my readers and friends, who doesn’t have a retirement account, take out a personal loan, at least try to inquire the interest rate first before applying.
If you get a personal loan at a rate less that what you are paying to your credit card company (30%+ of the cases I have seen), then take out that personal loan and pay off all your high interest credit cards. That’s why personal loans are also known as “debt consolidation loans”.
Now you have only one loan to pay off, which has a lower interest rate. Check out the best personal loan providers where you can easily apply for a loan.
I have a peer-to-peer lending investment in with Prosper, all the people I lend money there, have taken on the loan to consolidate their debts.
Reduce Debt Rather Than Save
You should definitely save money rather than spend it. However, if you’re carrying a chunk of credit card debt and you have any money sitting in savings accounts earning a few percent interest, paying off your card debt is a better investment of those monies.
Term deposits pay around 4%; your credit card debt is likely costing you over 15% – over 20% sometimes – so clearing that debt is saving you money – and more than you’d be earning in interest on that cash.
Budget to save
Paying off your credit card debt requires some kind of repayment plan and a financial road-map, or a strict annual and monthly budget. Many people recoil at the ‘B’ word, but a budget is essential if you’re going to find the money to make extra repayments and clear that debt. Be strong, and get tough on yourself – you’ll soon see the benefits.
Credit card debt often seems insurmountable but with focus, discipline and a little planning, you can get out from under it. Paying off your credit card debt is an achievement as well – the faster you do it, the sooner you’ll be able to afford to celebrate a win.
You can even look for ways to earn money on the side, there are plenty. Whatever amount that you make on the side, use it to pay off the credit card balance.
Ask for hardship help
When everything fails, there’s still a ray of hope available for you. Most banks offer some kind of hardship program, it’s their goodwill gesture. They don’t advertise it for the fear of misuse by other card members, who other wise can pay their dues.
Call your bank (number on the back of your card) and ask for specifically these two words “Hardship program”. You need to obviously be in hardship to ask for it, like job loss, sickness, disabilities, etc.
By enrolling in hardship program, you get an extremely low-interest rate and all fees are waived as well. You basically pay a much lower interest rate on your unpaid balance.
Readers, Got any advice for paying off your credit cards sooner? Share it in the comments box below.