When was the last time you actually paid cash? More likely than not, every single one of your purchases is paid using the tap of a credit card and given this fact, it’s no surprise that as of 2020, Americans were in more than $400 billion dollars worth of credit card debt! Therefore, in this article, I am going to share with you 5 of the best ways to pay down credit card debt fast!
Tip #1: Look at your credit card debt in chunks
Let’s face it, the thought of paying down your credit card debt can be intimidating, especially if you have a large balance to repay. For many, this intimidation can lead to total avoidance of repayment altogether but luckily there’s a solution. What you’re going to want to do is break out your total debt into more manageable chunks the same way you break down other aspects of your life.
For instance, have you ever dreaded the thought of having to go on a 30 minute run? Looking at the time in its entirety is making me sweat just sitting here. However, I’d be willing to bet that once you get on that treadmill, you break down that total time into more manageable increments. But maybe you’re not into the whole exercise thing, let me share with you another example. Let’s say you’re just about to start college. It can be completely overwhelming to think about completing a 4-year program but when you take it one semester at a time, all of a sudden it seems that much more doable. Well, the same principle can be applied to your credit card debt.
For example, instead of thinking about the $20,000 of debt you owe as a single amount, consider it as four different chunks of $5,000 each. While splitting up your total amount into more manageable chunks doesn’t naturally cause your debt to decrease quicker, it can get the debt elimination process started if the large balance you’ve been carrying has been turning you off from making any size of repayment whatsoever. As a rule of thumb, especially if you have multiple credit cards with an owing balance, ensure you make the minimum payment so that you avoid hurting your credit score which can be very influential on things like getting a mortgage and even securing a job!
Tip #2: Pay down your highest interest credit card first
While it sucks to have debt hanging over your head, the real issue is the exorbitant interest fees you pay when you carry a balance. The average credit card has a 16.11% annual percentage rate which is much higher than you would pay when securing financing for a mortgage or a car. This steep interest rate, when allowed to compound, can turn a $1,000 purchase into a $1,500 pretty quick if repayments are ignored.
Now, this advice goes against one of the most popular debt elimination approaches out there: The Snowball Method. This method, popularized by money guru Dave Ramsey, recommends you paying down your smallest debts first. The premise of this approach is that by tackling smaller debts, you will gain the psychological benefit of seeing your balances reduce which will motivate you to continue with your debt elimination efforts. While this approach works for some, it isn’t the most financially savvy move because it will cost you more money in the long run. Let me share with you an example to illustrate this point.
Let’s say you have three credit card debts: one for $5,000 at 17%, one for $4,000 at 21% and one for $3,000 at 15% and you clear off one balance every 4 months. If you were to use the debt snowball approach, you would tackle the debt with the smallest balance first, or the $3,000 balance at 15% then would work to eliminate the other two. By taking this approach, you would be paying $1,552 in interest in the year.
With the debt avalanche approach or paying the debt with the highest interest rate first, you’d be paying down the $4,000 debt first, then the $5,000 debt and finally the $3,000 debt. This approach would cost you $1,288 or more than $200 less than taking the snowball approach.
So if you have multiple credit cards with balance outstanding, the fastest way to pay them down is to start with the card with the highest interest rate. By doing this, you will cut down how much you pay in interest on a monthly basis allowing you to put the bulk of your repayment towards the principle.
Tip #3: Ask family or friends for a loan
Another effective way to pay down your credit card debt faster is to ask for a loan from family or friends. While mixing money and family can often be inadvisable, the benefits that lending from a friend or relative to pay off your debt can be worth it. For example, if you have $10,000 worth of credit card debt, with a 20% APR, you will be shelling out $2,000 a year on that balance. However, let’s say your uncle Bob lends you the $10,000 to pay off your debt at just 2%, your total annual interest would then be reduced to just $200 meaning that good old uncle Bob will have saved you a cool $1,800.
Now, a note of caution is that lending from family can cause tension, especially if repayment extends beyond the agreed upon timeframe. One way to ease the tension around borrowing money from family members is by instituting a written loan arrangement. Specify who the lender and borrower is, how much is being borrowed and at what interest rate if applicable. Another way to put all parties at peace is to offer something as collateral in exchange for the money being borrowed. For instance, you may put forward ownership of your car or any other valuable item you own so that if you don’t repay your relative that they have something they can use to recoup their money. Therefore, if you borrow money from family or a friend, make sure to create a contract of how much is being borrowed, at what rate and for how long to ensure both parties are on the same page!
Tip #4: Consolidate your credit card debt
Another fantastic way to reduce your interest charges from your current credit card debt is to consolidate your balances using a credit card consolidation loan. This method involves moving all your credit card debts onto a single debt that is subject to much lower interest fees, much like what we just talked about in the family and friend loan situation.
You see, typically banks will offer this type of loan at an interest rate lower than your credit cards if you promise to repay the loan within 3-7 years, making it an excellent debt elimination tool. Let’s illustrate the power of this method using an example. Let's assume that you have $10,000 of credit card debt at a 15% interest rate. If you can consolidate your credit card debt with a personal loan at a 7% interest rate and 3-year repayment term, you will save $2,634 and pay off your credit card debt earlier.
However, there is another strategy you can employ that will save you even more interest when used properly. Many credit card companies offer what’s known as a credit card balance transfer where they will entice you to move over your credit balance to their products. Their incentives usually involve offering you a zero percent interest rate for a disclosed period of time (anywhere form 6-18 months usually). In their mind, they hope that once you transfer your money over to them, you will them start making interest payments after the zero interest period ends which will make them money. However, you will have other plans.
If you pursue the credit card balance transfer approach, what you’re going to do is move your interest from your current card to this card offering you the zero interest promotion and then ensure you pay off the balance during the promotional period. So, you are in effect moving from paying a large amount of interest on your debt balance to paying absolutely none (that is if you can pay it all down during the zero-interest rate period).
Tip #5: Earn more money
When people talk about paying down debt, they hardly ever talk about earning more money however this is probably the most powerful strategy for paying down your debt quicker. Whether it’s due to unfortunate life circumstances or poor money management, many people just can’t scrape enough money together every month to pay off their balance causing them to slowly fall into the interest charge vortex. Luckily, one way to make larger payments on your credit card debt is to make more money.
Whether it’s through picking up a part-time job or doing freelance work, making more money that you specifically use to pay down credit card debt will ensure you become debt-free in no time. In the past, I have done freelance work in graphic design, coaching and copywriting to make extra cash to put towards my debt and while practicing the other methods I have mentioned in this article, earning more money was definitely the most effective way to clear all of my balances. So if you are serious about eliminating your credit card debt for good, roll up your sleeves and get to work!