Paying Off Credit Card Debt

Uncontrolled credit card debt is a common worry for many people. It's so easy to say "charge it", but once the monthly statements start arriving, the excitement of the initial purchase is usually gone. Now you are faced with the dilemma of how you're going to pay for it.

Some people exercise discipline and pay their credit card statement in full each month. Others pay whatever they can afford, in addition to the minimum payment. The majority of people pay only the minimum amount due each month on their debt.

Are you guilty of only making the minimum payment on your credit cards? If you are, the lending institutions will love you. This is because they make money on the interest that they charge. The longer it takes for you to pay off your debt, the more money they make in interest.

The first place to start controlling your credit card debt is to make sure that you are getting the lowest interest rate on your charge account. If it is inevitable that you will carry a balance on your charge card, you don't want finance charges eating your lunch. Check out the various low interest rate credit cards to compare rates before selecting a credit card.

Keeping Your Debts to a Minimum

If you are just starting to establish your credit, prevention is the best way to protect yourself from too much debt. If you are tempted to whip out your card to make some impulsive purchase, ask yourself, "If I had to pay cash or write a check for this item, would I still want to buy it?" If the answer is no, then don't use your credit card to buy it.

If you have an emergency come up (like your refrigerator dying or your vehicle needing repairs), you may have to incur a little credit card debt. If you have to pay with a credit card, use one with the best interest rate and vow to pay it off as soon as possible.

Once that monthly statement comes in, pay as much over the minimum payment as you can. You can probably find ways to save money (like taking your lunch to work) to add to your minimum payment, and thus pay off your credit card much faster. If you're drowning in debt, it can help to start learning how to manage your debt wisely.

Ways to pay down credit card debt

There are different methods of paying down your credit card debt and the one you ultimately use will depend on your circumstances. Below are the most common ways that people use to get out of debt.

Use Money In Low Interest Savings Accounts

If you have money sitting in a savings account or CD that is earning you very little interest, use some of this to pay down your credit card debt. Just be sure to have a little set back to cover emergencies instead of using your credit card.

Use the Debt snowball method

Work on paying off the highest balance credit card debt first. You may also choose to target the one with the highest interest rate. Determine a set amount (above and beyond the minimum payment) that you can afford to make each month. Apply this set amount towards the balance until it is paid off. Once that credit card is taken care of, add the set amount that you were paying to the credit card with the next highest interest payment. By continuing to add the payment amounts to the next bill, the total amount that you pay out on credit card debt each month doesn't vary. You also pay down the subsequent debt much faster.

Here is an example of how this system works:

1st Stage

$45 - Visa ($800 -18%)
($20 minimum + $25 extra)

$17.50 - MasterCard
($700 -18%)

$15 - Sears ($500 -18%)
$77.50 per month

2nd Stage

Visa Paid Off 

$62.50 - MasterCard 
($17.50 + $45 extra)

$15 - Sears
$77.50 per month

3rd Stage

Visa Paid Off

 Paid Off

$77.50 - Sears 
($15 + $62.50 extra)
$77.50 per month

Another approach to paying down your debt is to pay off the lowest balances first using the same principle as above. Some people prefer this method because they can see progress much faster. The only drawback is that you may end up paying more interest over the long run. 

If you would like to determine how adding extra money to your minimum payment will help reduce your debts, you can use the credit card debt calculator from BankRate.

The Power of the Debt snowball method

To show you the power of the snowball method, here is a chart showing the results if you only pay the minimum payment each month, rollover an extra $25 per month, or rollover an extra $50 per month. We used the same balances and interest rates from the above example.

Only Minimum Payment

91 months to pay off 
$2000 total initial debt  
$1294.63 total interest 
$3294.63 total paid

$25 Extra for Debt Snowball

36 months to pay off 
$2000 total initial debt 
$561.06 total interest 
$2561.06 total paid 

$50 Extra for Debt Snowball

24 months to pay off 
$2000 total initial debt 
$394.27 total interest 
$2394.27 total paid 

Credit Card Debt Consolidation

You can also consider credit card consolidation to help pay down your debt. Consolidation generally reduces the total amount paid out each month, and may also reduce how long you will be in debt. Remember that if you choose a consolidation loan, you should close out all but one credit card account. Use your remaining credit card for emergencies only. If you have to use it, pay the balance in full when your statement arrives.

The idea is to get out of debt, not to free up your credit so that you can get yourself in more financial trouble.

Credit Card Transfers

Another method some people utilize to pay down credit card balances is by using credit card transfers. This can be accomplished by taking advantage of low introductory offers on balance transfers to consolidate all your balances. Before the introductory rate expires, you then qualify for another low introductory rate balance transfer. Close out the old account, pay on your new one, and shop for the next offer in which to transfer your balance.

If you use this method, realize that your credit file will show this numerous activity. Also read the agreement terms of each credit account very carefully to insure that you don't incur any early closure fees.

Debt Mediation

You can also get a handle on your debts by enlisting the help of a debt mediation company. Debt mediation can help people in becoming debt-free in approximately 24-36 months, with the final settlement on consumer accounts being paid off with as little as forty cents on the dollar.

Consumers considering mediation need to realize that initially their credit rating will suffer, but will build up eventually as the debts are paid off and reported as "paid in full" by the various customers at the end of the program.

The best way to control credit card debt is to not get yourself in trouble in the first place. Use your cards for convenience in traveling, making reservations, or for emergencies. If you would hesitate to pay cash for a purchase, then you should hesitate to use your credit card. When in doubt, don't say "charge it".

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