Instead of paying high interest to credit card companies, it’s time to whittle down your balances and use the money to build wealth for yourself. Laura answers listener questions and reviews seven ways to pay off credit card debt.
APR, you have a $5,000 balance, and you never make another purchase on the card. If your minimum payment is 4% of your card balance, it will take you 10½ years to pay off. And here’s the worst part—you’d have paid almost $2,400 in interest!
4. Target debts with the highest interest rates first
Make a list of all your debts, including credit cards, lines of credit, and loans. Include your balances owed and interest rates charged. Then rank your liabilities in order of highest to lowest interest rate.
Getting rid of the highest interest debts first saves you the most.
Remember that the higher a debt’s interest rate, the more it costs you in interest per dollar of debt. So, getting rid of the highest interest debts first saves you the most. Then you can use the savings to pay more on your next highest interest debt and so on.
If you have several credit cards, evaluate them the same way—tackle them in order of highest to lowest interest rate to get the most bang for your buck. And if a credit card isn’t the most expensive debt you have, make it a lower priority.
In general, debts that come with a tax deduction such as mortgages, home equity lines of credit, and student loans, should be paid off last. Not only do those types of debt have relatively low interest rates, but when some or all of the interest is tax-deductible, they cost you even less on an after-tax basis.
5. Use your assets to pay off cards
If you have assets such as savings and non-retirement investments that you could use to pay down high-interest credit cards, it may make sense. Just remember that you still need a healthy cash reserve, such as six months’ worth of living expenses.
If you don’t have any or enough emergency money saved, don’t dip into your savings to pay off credit card debt. Also, consider what you could sell—such as unused sporting goods, jewelry, or a vehicle—to raise cash and increase your financial cushion.
6. Consider using a balance transfer card
If you can’t pay off credit card debt using existing assets, consider optimizing it by moving it from higher- to lower-interest options. That won’t make your debt disappear, but it will reduce the amount of interest you pay.
Balance transfers won’t make your debt disappear, but they will reduce the amount of interest you pay.
Using a balance transfer credit card is a common way to optimize debt temporarily. You receive a promotional offer during a set period if you move debt to the account. By transferring higher-interest debt to a lower- or zero-interest card, you save money and use it to pay down the balance faster.
7. Consolidate your high-rate balances
I received a question from Sarah F., who says, “I love your podcast and turn to it for a lot of my financial questions. I have credit card debt and am wondering if it’s a good idea to get a personal loan to pay it down, or is that a scam?”
And Rachel K. says, “I love listening to your podcasts and am focused on becoming more financially fit this year. I have a couple of credit cards with high interest rates. Would it be wise for me to consolidate them to a lower interest rate? If so, will it hurt my credit?”
Depending on the terms you’re offered, using a personal loan can be an excellent way to reduce interest and get out of debt faster.
Thanks to Sarah and Rachel for your questions. Consolidating credit card debt using a personal loan is not a scam but a legitimate way to shift debt to a lower interest rate.
Having an additional loan added to your credit history helps you build credit if you make payments on time. It also works in your favor by reducing your credit utilization ratio when you reduce your credit card debt.
If you qualify for a low-rate personal loan, here are some benefits you get from debt consolidation:
- Cutting your interest expense
- Getting a fixed rate and term (such as 6% APR for 60 months with monthly payments of $600)
- Having one monthly debt payment
- Building credit
A couple of downsides of using a personal loan to consolidate debt include:
- Being tempted to continue making credit card charges
- Having potentially higher monthly loan payments (compared to minimum credit card payments)
While it may seem counterintuitive to use new debt to get out of old debt, it all comes down to the interest rate. Depending on the terms you’re offered, using a personal loan can be an excellent way to reduce interest and get out of debt faster.
What should you do after paying off a credit card?
Credit cards come with many benefits, such as purchase protection, convenience, and rewards. Don’t forget that they’re also powerful tools for building credit when used responsibly. If maintaining good credit is one of your goals, I recommend that you keep a paid-off card open instead of canceling it.
You don’t need to carry a balance from month to month or pay interest on a credit card to build excellent credit.
To maintain or improve your credit, you must have credit accounts open in your name, and you must use them regularly. Making small purchases charges from time to time that you pay off in full and on time is enough to add positive data to your credit reports. You don’t need to carry a balance from month to month or pay interest on a credit card to build excellent credit.
To learn more about building credit and getting out of debt, check out Laura’s best-selling online classes: