This summer is a great time to begin the road to financial freedom by paying down credit card debt and getting a handle on longer-term loans once and for all. Let us show you debt pay-down strategy after strategy, so you’ll have lots of tips at your disposal.
Ask for lower interest rates on your existing credit cards
Before you get started on revving up your credit card payments, reach out to your credit card companies, particularly those with whom you carry large balances and have higher interest rates. Assuming your account is otherwise in good standing, you may get a credit card’s interest rate lowered just by calling and inquiring. The reason? Credit card companies want to hang on to their good customers. So if you pay your credit card bills on-time, it is worth asking for a lower rate. “Ask for lower interest rates—you have nothing to lose and might be pleasantly surprised,” says Tara Alderete, director of enterprise learning at Money Management International.
Transfer balances to cards with lower interest rates
If you have high balances on your existing cards, consolidating your debt to a new credit card with a lower interest rate can save you money on interest charges. The best balance transfer cards offer lower rates on balance transfers, but know that you must have good credit to qualify. “In some cases, you might even qualify for an interest-free introductory repayment period,” says Bruce McClary, senior vice president of membership and communications at the National Foundation for Credit Counseling. “The more your interest rate can be reduced, the easier it is to pay off your debt faster.”
Before applying for a new card, watch out for balance transfer fees, which could cost you 3% to 5% of the amount transferred. Also, consider the credit card limit of the new card: It it’s significantly lower than the amount you already owe, you won’t be able to transfer much of your debt. Another downside: A card with a good balance transfer offer might not offer rewards points, which you might miss if you’re going from one that has bonuses for spending in certain categories.
Pay more than your credit cards’ minimum payments
The first step to tackling credit card debt is getting in the habit of paying more than a card’s minimum payment. Even though making a minimum payment will keep your account in good standing, it’s not the fastest or most financially sound means to get debt-free.
A way to understand how this works is to consider this example from Becky House, director of strategic initiatives for American Financial Solutions. If you have a credit card with a balance of $2,000 and an interest rate of 18%, it will take 10 years and 11 months to pay off if you only make the minimum $35 monthly payments. You’ll also pay $2,574.43 in interest—yes, more than double what you owed in the first place! By bumping the payments to $50 a month, you’ll reduce the amount of time to 5 years and 2 months and the amount of interest to $1,077.15.
“No matter how much more you are able to add to your minimum payment, it helps you pay down your debt faster and save on interest and fees over time,” McClary says.
Zero in on cards charging the highest interest
Let’s say you have more than one card in debt and you’re not able to increase your monthly payments very much above the monthly minimum. “Focus first on the credit cards charging the most interest,” McClary says.
The exceptions are if you also have an account that’s past due or already in debt collection. In those cases, you’d want to first settle up with your past-due account to make it current, then move on to pay the credit card account costing the most in interest. You’ll want to pay as much as you can on that card per month, once you’ve covered at least the minimum payment for every other card that has a balance (lest you let one of those fall into a past-due situation).
Roll over payments when you pay off a card
Paid off a credit card? Congratulations! Now you can apply the money you have been paying on that credit card to another account. It’s a great way to keep your payment momentum going—or “roll over” those payments you were making to the card with the next highest interest rate.
“For instance, if you pay one credit card off, instead of putting that money back in your budget, begin sending it to another creditor you owe,” House says. “Those bigger payments will help knock that debt out quicker.”
Manage your other debt
Once you have your credit card accounts in good standing, you can focus on the other debt in your life. Do you have student loans, car loans, and/or home loans? Now you should turn your attention to those types of debt. “Refinancing and consolidation are options for borrowers with good credit, says McClary. “For those who qualify, the right approach can lead to savings in interest and monthly minimum payments.”
By refinancing your loans, you may save on interest charges over the remaining term of the loan. And less interest means more money in your pocket. Start with your lending bank or credit union and ask about refinancing options. You’ll also want to look at online lenders. Choose the lender offering the best rates based on your credit. When you refinance, you may also consolidate loans into one new loan at a new lower interest rate.
Regardless of whether you refinance or keep chugging away at the original loan, pay more than the monthly payment and you’ll really be making headway in paying down your debt.
Enjoy the debt-free life
Once you pay off your last credit card and have a handle on any other loan you owe, your financial life will be a whole bunch better. Living without credit card debt in particular has plenty of advantages.
“Besides not having a big monthly credit card payment cutting into your budget, you also don’t have to worry about all the money you pay in interest, says McClary. You have extra money to grow your savings or put back into your budget. With inflation driving up the cost of living, having a little extra money for groceries or gasoline can be a big help.”
What’s more, the stress of living with credit card debt is over and you can focus on your next financial steps breathing easier. Enjoy your new found freedom.
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