Best way to pay off credit cards

Young couple lying on the floor, drinking coffee and planning the best way to pay off their credit cardsImage: Young couple lying on the floor, drinking coffee and planning the best way to pay off their credit cards

In a Nutshell

The best way to pay off credit cards is to make a budget, come up with a debt-payoff plan and then stick to it. Here’s a step-by-step guide to help you get out of credit card debt so that you can save on interest and use your money to achieve other financial goals.
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With average credit card interest rates in the U.S. hanging around the mid-teens, paying off credit card debt is an important financial goal.

Unfortunately, many people end up paying credit card interest for years — especially if they make only minimum payments on their debt. Depending on your interest rates and how much you owe, being strategic about paying off your credit card debt could mean saving hundreds — or even thousands — of dollars in the long run.

Paying off credit card debt should top your financial to-do list. But what exactly is the best way to pay off credit cards? Here are five steps you can take that can help get you closer to financial freedom.

  1. Stop using your credit cards
  2. Make a budget to send extra money to creditors
  3. Try lowering your interest rates
  4. Choose a debt-repayment approach
  5. Implement your payoff plan

1. Stop using your credit cards

You can’t get out of a hole if you continue to dig deeper — and you can’t get out of credit card debt if you continue to run up balances that you can’t pay back. The first step to getting out of credit card debt is to commit to not using your card for anything you can’t pay off in full at the end of the month.

That’s easier said than done.

Everybody faces financial emergencies from time to time. To help protect you from falling back on your credit cards, consider saving up an emergency fund of around $1,000 while you work to pay off your credit cards. This financial cushion can protect you from getting deeper into debt once you start your debt-payoff plan in earnest.

2. Make a budget to send extra money to creditors

If you want to get out of credit card debt quickly, paying more than the minimum payment is essential. Once you’ve saved up enough money for an emergency fund, you’ll want to pay as much as possible on your credit card balances. The best way to do this is to make a budget so that you can limit spending and prioritize debt repayment.

There are many different ways to budget. One strategy is the 50/30/20 method, which allocates 50% of your income to needs, 30% to wants, and 20% to either savings or debt repayment. But you may decide you need a more detailed budget to ensure you have money for debt repayment. If so, you can make a budget that outlines where each dollar of income will go, putting as much money as possible to debt repayment. The Consumer Financial Protection Bureau offers a simple budgeting worksheet, which is a good place to start.

Whatever approach works best for you, make sure you’ve got a budget that helps keep your spending under control — this way you’ll have a substantial chunk of cash to send to creditors each month.

3. Try lowering your interest rates

Because credit card interest rates are often very high, it can be an uphill battle to pay down your debt when so much of your monthly payment goes to interest. One way to make repayment easier is to try to reduce the interest rate you’re paying.

You can take a few approaches when attempting to reduce your interest rate.

  • You can call your creditor and ask. If you’ve been a good customer, the creditor may reduce your rate.
  • You can get a balance transfer. This involves getting a new credit card with a limited-time 0% interest rate and transferring the balance from existing credit cards to the new card. You’ll most likely need good credit to qualify for a balance transfer card. While a promotional period with a balance transfer may give you some additional time to pay down your debt, be aware that the promotional rate is only for a limited time, jumping up when the promotional period ends.
  • You can take out a personal loan. Many borrowers use personal loans to consolidate debt. You can apply for a personal loan with a bank, credit union or online lender — but you’ll need good credit to get a favorable rate. Make sure your personal loan has a lower rate than the cards you’re paying off and use the loan to repay as many of your existing creditors as possible. You’ll ideally be left with one loan to pay off over a set period of time with monthly payments.

If you can successfully lower your credit card interest rate, more of each payment will go to the principal amount owed. This way, debt freedom should come much more quickly.

4. Choose a debt-repayment approach

If you’ve consolidated all of your credit card debt using a personal loan or balance transfer credit card, pay as much as possible to this loan each month. If you avoid getting into more credit card debt, you could be debt-free when this loan is paid off.

If you haven’t consolidated your debt, you’ll need to decide which creditor to pay off first. When you do, send all of your extra payments to this creditor each month while paying the minimums on your other debts. There are two different approaches to deciding which creditors to pay first.

  • The debt snowball method: The snowball method involves paying extra on the card with the lowest balance first. After that card is paid off, you add the monthly payment you were making on that card to the monthly payment on the card with the next-lowest balance. You’d keep working at your debt, concentrating on cards from lowest to highest balance, until everything is paid off.
  • The debt avalanche method: The avalanche method involves paying extra to the card with the highest interest rate first. Once that card is paid off, you move on to the card with the next-highest rate. You’d continue paying off your cards, from highest to lowest interest rate, until all of your debt has been repaid.

Some financial experts recommend the debt snowball method because studies show that successfully paying off a debt in full gives you a quick win — which can help you stay motivated. But because your lowest-balance cards may not carry the highest interest rates, the snowball approach could mean your higher-rate debt hangs around for longer, adding to your total interest costs.

If you’re good at staying motivated on your own, opt for the debt avalanche method. But choose the snowball method if you know you’re motivated by small wins.

5. Implement your payoff plan

Finally, it’s time to put your payoff plan into action. Automate payments for your budgeted amount to the first creditor you’re paying off. For example, you can set up an automatic $150 payment to the card you’re paying off first, even if the minimum payment required is only $50. Once you’ve paid that card off, add the $150 to the minimum you were paying on the next card you’re paying off.

As you pay off each card, continue to roll over your payments to the next one. Track your progress by monitoring your credit reports. You should eventually see your debt balances drop and you may even see your credit improve.

Bottom line

These five steps can help you free yourself from credit card debt. Now that you have an approach pay off credit cards, there’s no excuse not to get started on your payoff plan today.

Learn more: Credit Karma Guide to Debt

About the author: Christy Rakoczy Bieber is a full-time personal finance and legal writer. She is a graduate of UCLA School of Law and the University of Rochester. Christy was previously a college teacher with experience writing textbo… Read more.