The introduction of credit cards has been a huge convenience to our daily life. However, if you don’t use the credit card carefully then you might end up with high debts and fall into serious financial problems. If you already have a high credit card debt then you should try to pay as much as you can to minimize the debt. Moreover, you should be more sensible while using your credit card and try to cut off all the unnecessary costs and minimize your credit card debt.
Jump To A Section
- 1 What is Credit Card Debt?
- 2 How Do Credit Card Debts Work?
- 3 How to Minimize the Credit Card Debt
- 4 5. Transfer the Balance to a 0% Credit Card
- 5 FAQs about How to Get Out of Credit Card Debt
What is Credit Card Debt?
If you are a credit card holder and use your credit card to purchase a product then the credit card debt will acquire. Here, you are the borrower and the card-issuing company is the lender. If you don’t pay the credit card debt in time then the debt amount will increase via interest and penalties. Credit card debt is a type of unsecured liability and revolving debt. You can borrow credits months after months as long as your credit debt doesn’t cross the credit card limit. If you can properly use your credit card and make all the payments in time then it will help you build your credit score very quickly.
How Do Credit Card Debts Work?
If you are a credit card user then you must have a clear idea of how credit card debts work. The first thing about credit card debt is, that it is unsecured because this type of debt is not backed by any collateral. Therefore, if you don’t make the credit card payments in time then you have to pay a penalty and it will seriously damage your credit score.
When you use a credit card, you have to make a monthly minimum payment to keep the credit card debt within your credit limit. Usually, the monthly minimum payment varies from lender to lender but in most cases, the minimum payment would be 1% to 22% and interest charge. You should keep in mind that if you don’t pay the full debt of the previous month then you have to pay extra interest. The less you pay, the more you have to pay as interest.
How to Minimize the Credit Card Debt
If you are wondering how to minimize your credit card debt then you should follow the below tips. Let’s check them out!
1. Try to Pay more than the Minimum
You should always try to pay as much as you can to minimize your credit card debt. For example, if you have a credit card with a credit limit of $5,000 and your interest rate is 15%; then you might be paying the minimum payment of 2% ($100). If you are doing so, then it will increase your yearly credit debt as well as you have to pay many hundreds of dollars as interest. However, if you could make $40 more as a monthly payment then you will be able to save $1,727 in interest and get out of debt more than six years faster.
2. Pay off the Highest-rate Cards First
If you have more than one card, then you should pay off the highest-rate cards first. Therefore, you should analyze the interest rates of all your credit cards and identify the card that has a higher interest rate.
So, if you want to save money on an interest charge and quickly minimize your interest rate then you should pay off your cards in order to yearly a higher interest rate. Try to make as much payment as you can for the highest-rate card and for other cards, make the minimum payment. The below example will give you a clear idea –
Let’s say your monthly credit card budget is $200 and you have three credit cards:
- Card A: $4,000 balance, 20% APR, $80 minimum payment
- Card B: $3,000 balance, 18% APR, $60 minimum payment
- Card C: $2,000 balance, 15% APR, $30 minimum payment
So, the minimum payments for these cards will cost you $170. It means you will still have $30 remaining. Now what you can do is use the $30 to pay off the cards in order of interest rate. This way you will be able to pay a total of $3,316 in interest. The more you can pay off your credit debt, the bigger the impact it will have on your credit card debt.
3. Increase your Credit Card Payment Budget
If you have a credit card payment budget for each month and if the allocated budget is not reducing your total credit card debt then you should consider increasing your credit card payment budget. If you can increase your credit card payment then you will be able to save money on interest and later you can use the saved money to pay the credit card debt again. This is a very effective you to quickly minimize credit card debt.
For example, you have a credit card with a $5,000 limit on it and its APR is 18% and you make a monthly minimum payment of $100. Now, if you just pay the minimum then the interest will cost you $4,311. But if you can increase your budget by only $25 and make a $125 payment each month then you will be able to save $1,618 in interest charges. Similarly, if you could add $50 towards your monthly payment then you will be able to save $2,328 in interest charges.
4. Split the Payment Amount and Pay Twice
You will be surprised to know that the interest rate of a credit card is calculated based on your average daily balance. So, it means if you can make smaller payments more frequently then you will be able to save money on an interest charge and reduce the debt very quickly. An example will give you a clear idea about the process. Let’s say you owe $4,000 on your card and your monthly payment budget is $500.
Now if you pay the full $500 in a single payment then your average daily balance would be $3,900. However, if you split your monthly payment budget and make two payments of $250, one on the 10th day and another on the 25th day of the billing cycle then your average daily balance will be $3,775. So, if you make two payments instead of one then you will be accruing interest on $125 less than the actual amount!
5. Transfer the Balance to a 0% Credit Card
You can apply this method if you have a good credit score. If your credit score is above 690 then the lender might allow you to transfer all your balance to a credit card with a 0% interest rate. You can keep the balance on this type of credit card for at least 12 to 18 months and you don’t have to pay any interest. So, in this time frame, you will be able to reduce as many core debts as you can. Now, if you are planning to choose this method then make sure you have enough preparation to pay the full debt balance.
FAQs about How to Get Out of Credit Card Debt
What are the 3 fastest ways to pay off credit card debt?
There are many ways you can pay off your credit card debt. However, the 3 fastest ways to pay off credit card debt are –
- Make an extra monthly payment
- Get a balance transfer credit card
- Take out a personal loan
How can I pay off debt with no money?
If you are not able to pay off the debt or if you want to pay off debt with no money then a debt consolidation loan will be an excellent option for you. You can also consider taking a balance transfer of 0% credit card and pay off your credit debt without the interest charge. This way you will be able to save lots of money on interest charges.
How can I pay off 10k a year?
Paying off 10k a year means you have to pay ($10,000/12) = $833 every month. If you can continually pay $833 per month then you can easily pay off 10k a year. You should keep in mind that this calculation excludes all the interest charges.
Is it best to pay off credit cards in full?
If you can, then it is really a good decision to pay off all the credit debts in full every month. This is an excellent way to save money on interest charges. Moreover, you will remain tension free.
Last Updated on August 7, 2022 by Ana S. Sutterfield
Magalie D. is a Diploma holder in Public Administration & Management from McGill University of Canada. She shares management tips here in MGTBlog when she has nothing to do and gets some free time after working in a multinational company at Toronto.