Credit cards are a convenient way to make both large and small purchases. Unfortunately, they can also lead to a significant amount of debt. When your monthly statement comes, there’s a natural tendency to pay only the minimum amount due.
Credit card statements show how long it would take to pay off your balance if you only make the minimum payment. This is important information to consider, but there are plenty of other smart strategies for paying off credit cards.
Continue reading for more tips to help you establish a good credit rating and stay out of debt!
Pay Off Small Balances
Set a budget and stick to it. Easier said than done, right?
But, it can be easier than you think. With this approach, you can build momentum paying off your credit cards following a few simple steps.
List your credit cards in order from the lowest balance to the highest.
Work around your budget to pay only the minimum payment due on cards with the highest balances.
Do you have any funds left over? Use those to make additional payments on cards with smaller balances.
Pay Off the Highest Interest Rate First
Paying off your credit card with the highest interest rate first saves you the most money long term. To tackle high interest rates faster, try paying only the minimum payment due on your cards with lower interest rates.
Use extra funds from your planned budget to pay more on the cards with the highest rate. When that card is fully paid, apply an additional payment to the card with the next highest interest rate.
Understanding Credit Utilization
Improve your credit score and reduce your future borrowing costs by paying off credit cards with the highest credit utilization ratios. This is how much you owe on all of your revolving accounts, including credit cards, compared with your total available credit. It’s one of the biggest factors in your credit score.
For example, a credit card with a $4,000 balance and a $10,000 credit limit has a 40% credit utilization ratio. According to Experian, a credit utilization ratio at or under 30% is ideal.
Put aside extra money in your monthly budget to pay extra on cards with the highest credit utilization ratios.
Making timely payments on your credit cards is important. However, if you’re unable to pay the balance in full every month, you could benefit from switching to a low- to zero-percent interest rate card.
Keep in mind that many zero-percent or low interest offers only last for a limited time, after which, the interest rate and payment could increase. There may also be fees charged, such as a balance transfer fee which is usually a certain percentage of the amount transferred. As a result, the new card could end up costing you more in fees and interest.
Pay More than the Minimum Payment
Minimum monthly payments tend to be set pretty low. These are sometimes as low as 1% plus any fees, interest, and charges, but most will be higher. If you only make the minimum payment, it could take decades to pay off your credit cards, and you will spend significantly more on interest.
Aim to pay off the entire balance each month so you won’t pay any interest at all. If that’s not possible, pay off as much as you can and work out a repayment plan. Also, avoid using the cards for cash withdrawals.
Negotiate Your Interest Rate
Calling your creditors to ask about potentially lower interest rates is one of the easiest steps you can take in paying off credit cards fast! Negotiating your rate has zero impact on your credit score, so asking for a better rate is risk-free.
Have a list of talking points ready before making the call to ensure the conversation runs smoothly. Include things like your record of making your payments on time, how long you’ve had the card, if you usually make more than the minimum payment, and mention your credit score if it’s good.
Many creditors are willing to work with customers who’ve shown they’re capable of making consistent payments. After all, they want you to continue using their card, so providing you with even a temporary reduction in interest is a good option for both you and them!
Paying Off Credit Cards With Debt Consolidation
Now that you understand the best strategies for paying off credit card debt, consider the convenience of debt consolidation.
Instead of having multiple bills, debt consolidation makes it easy to have one single payment each month. If you’re dealing with a manageable amount of debt and want to reorganize multiple bills with different interest rates, payments, and due dates, debt consolidation may be the way to go.