Credit card debt may feel like a big responsibility but thankfully, there are multiple ways to tackle it so it can feel more manageable. Having a credit card may be beneficial but carrying a balance month to month and paying interest can defeat its benefits. Knowing how to pay off credit card debt is the first step in knowing how to manage your credit card account effectively.
How does credit card debt accumulate?
Credit card debt accumulates when a cardmember collects a balance and doesn't pay back the credit card issuer for the money that's been spent before their statement due date. If this happens month after month, the balance continues to grow and interest accrues.
To avoid accumulating credit card debt, try to only spend what you can afford to repay each month.
Does credit card debt affect your credit score?
The amount you owe on your credit card is one of the factors that affects your credit score. Your credit score may go down if you use your entire credit limit, which could cause you to have to pay higher interest rates on other credit cards or loans you take out. A drop in your credit score also has the chance of impacting your applications when it comes time to apply for an apartment, phone plan and more.
The VantageScore® and FICO® credit scoring models take your credit utilization into account, which is the ratio between the amount of debt you owe and your credit limit. The higher your credit card balance, the more potential it has to hurt your score.
Five ways to pay off credit card debt
There's no quick-fix solution to getting out of credit card debt, but there are a few practices that can help make the process smoother:
Make an extra monthly payment
It's easy to get into the habit of making your minimum payment when it's due, but you don't have to wait until the due date to pay off some of your balance. You also aren't limited to only making one payment a month. If you keep up with your payments and pay off your purchases as soon as you make them, you may be able to avoid having a balance to begin with.
Try the avalanche or snowball method
There are two methods when it comes to paying off your credit card debt: the avalanche method or the snowball method. With the avalanche method, you pay the balance with the highest interest rate first. Start by listing your debts from the highest interest rate to the lowest. You'll still want to make the minimum monthly payment on each balance you have, but it's helpful to throw some extra cash at the highest-interest debt.
With the snowball method, you'll put the most money towards the smallest debt and move on to the next balance once it's paid off. You may see immediate progress with this method, but it could take longer and may cost you more in interest.
Consider a balance transfer credit card
A balance transfer is when you move outstanding debt from one credit card to another. They're typically used by consumers who are looking to move the amount they owe on a credit card to one with a lower promotional interest rate. This is done by opening a new credit card account to make this transaction.
An example would be moving your debt to a credit card that offers a zero percent introductory APR, which gives you the chance to pay off your debt without interest. Keep in mind that the lower promotional interest rates are for a period of time and not ongoing. You'll be charged interest once the introductory period ends.
Budgeting with a credit card
Some credit card debt is a result of overspending, meaning you're spending more than what you have in your account. To avoid doing so, create a budget and be sure to include your credit card spending to help you understand where your money is being spent. When you budget, you're creating a plan to spend your money. Finding new ways to save is an important step in becoming debt-free. This can include reducing the number of nights you order takeout or using your debit card for some of your purchases instead.
When to pay off your credit card debt
You may be wondering whether it's a good idea to pay off your balance all at once or do it over time. Paying off your credit card debt as soon as possible will not only help you save money in interest but may also help you maintain a good credit score. Using your credit card helps your credit score, but high balances can impact your credit utilization ratio which could impact your credit score, which has the potential to hurt your credit standing temporarily if you're applying for a new line of credit. It may seem overwhelming but try to focus on paying off your debt as soon as possible.
Now that you know how to pay off your credit card debt, it's time to get started. Credit cards are a powerful financial tool, but it's key to play an active role when it comes to monitoring your finances.