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There isn’t one right way to pay off credit card debt, but there are some tried-and-true methods that could help you get your balances to zero.
Those methods fall into two broad categories — either pay off each debt individually or consolidate all of your debts into a single monthly payment.
Let’s take a look at four popular strategies for paying down credit card debt, along with the pros and cons of each, to help you decide which option is best for you.
- Debt snowball method
- Debt avalanche method
- Credit card consolidation loan
- Balance transfer credit card
The snowball method is a debt-repayment strategy that focuses on paying down the account with the lowest balance first. As you direct your larger payments toward that balance, you continue to make the minimum payments on your other accounts so you don’t end up paying late fees, hurting your credit or even defaulting.
To get started, list your account balances in order from lowest to highest. Set up your budget to pay the minimum on all your credit card accounts except the one with the smallest balance. For that balance, put as much extra money as you can toward paying it off each month.
When the balance on that account is zero, put the money you were using to pay it off toward the account with the next-lowest balance. Continue until all your credit card balances have been paid in full.
Say you have three credit cards with balances of $700, $1,500 and $4,000. With the snowball method, you’d pay off the card with the $700 balance first. Then you’d move on to the card with the $1,500 balance, and you’d pay off the one with the $4,000 balance last.
The debt snowball method is effective because you’ll likely see progress quickly. When you get a few quick wins under your belt, you build momentum. This can help you stay motivated to continue working toward your goal of becoming debt-free. Plus, fewer outstanding balances may make the process seem less overwhelming.
The snowball method doesn’t take into account the interest you’re being charged. If your larger debts are also the ones with the highest interest rates, you may pay more in interest using the snowball method than you would with another debt-repayment strategy.
So if your goal is to minimize your interest payments while paying down debt, another repayment method may be a better choice.
When you use the debt avalanche method, you focus payments on high-interest debts first, while making the minimum payments on the rest of your accounts.
When the account with the highest interest rate is paid off, put the money you’d allocated for it toward the debt with the next-highest interest rate. Repeat the process as many times as necessary until all your credit cards have been paid off.
Say you have three credit cards with APRs of 22%, 18% and 12%. With the avalanche method, you’d pay off the card with the 22% APR first. Then you’d move on to the card with the 18% APR, and you’d pay off the one with the 12% APR last.
The biggest advantage of the debt avalanche method is the possibility of saving on interest charges. If you’re concerned about how much interest you’ll rack up while paying down your debt, this method may be a good strategy for you.
A debt-repayment strategy that helps you save money may be appealing. But if your account with the highest interest rate also has a large balance, it may take a while to pay it off. And that can work against you in your quest to become debt-free because it may be psychologically demoralizing.
Say you have a $5,000 balance on a card with an APR of 22%. If you pay $300 a month to that account, it will take 21 months to pay it off — as long as you don’t use the card to buy anything else.
Two years is a long time to wait to eliminate your first debt. With the avalanche method, you may not get those quick wins that help create a sense of accomplishment. So it’s easy to get discouraged and lose motivation to keep moving forward.
If you need to see progress quickly to stay motivated, the debt snowball may be a better strategy.
Personal loans that are used for debt consolidation combine multiple account balances into one loan with a single monthly payment — ideally with a lower interest rate. You use the funds from the loan to pay off your credit card balances, then make the payment on the personal loan each month.
Credit card interest rates are often higher than rates charged on personal loans, especially if you have good credit. If you qualify, you may be able to get a lower rate on a debt-consolidation loan than what the credit card companies are charging.
Plus, a debt-consolidation loan can help simplify your finances. Instead of making multiple payments each month, you need to make only one for all the consolidated debts.
Also, some debt-consolidation loans offer flexible repayment terms, so you can select the one that fits your budget. And some lenders will send the loan payment directly to your creditors, so a debt-consolidation loan can be a convenient option for paying off your credit cards.
You must meet the lender’s eligibility requirements to qualify for a debt-consolidation loan. If your credit history has a few dings, you may not be able to get a loan. Or you may only qualify for an interest rate that’s similar to what you’re paying on your credit cards.
There’s the potential that you may not qualify for a loan large enough to cover the debts you want to consolidate, which means you’d only be able to consolidate part of your debts and would still have multiple payments to different lenders.
Also, some lenders charge fees that add to the cost of the loan and eat into your funds.
A balance transfer credit card could let you transfer balances from one or more accounts to a different card. Typically, these credit cards have 0% introductory balance transfer APR offers if you transfer the balance within a certain amount of time after opening the account.
If you pay off your balance before the intro period ends, you can avoid paying interest. Knowing you have a limited amount of time before the intro offer expires may help motivate you to pay down your debt quickly.
Paying off your debt interest-free may seem like the best option of all, but if you make your payments late, your introductory offer could be revoked. Plus, the promotional period is limited — and if you have a balance when it ends, your account will accrue interest at the card’s regular balance transfer APR.
Also, you may be charged a balance transfer fee when you transfer balances from other cards, and you can only transfer balances up to the credit limit you’ve been offered on the card. If the amount of debt you have is higher than the card’s limit, this payment strategy may be not be the best option for you. Also, even if you can transfer your entire balance, it may be bad for your credit scores if the amount you owe is near your limit on your new balance transfer card. So you’ll need to watch out for that, too.
If you’re tired of living with debt, here are a few simple steps that can help you get started on your debt-repayment journey.
- Decide which debt-repayment method is best for you.
- Establish a budget to determine how much money you’ll allocate to repaying debt each month.
- Eliminate or reduce as many expenses as possible until you’re debt-free.
- Look for ways to generate additional income — like taking on a second job or selling some of your possessions — to pay off your debt faster.
- Avoid using credit cards until you’ve paid all your balances in full.
Paying off credit card debt requires patience and persistence. If you don’t want to go it alone and think having some extra guidance will improve your chances of success, consider working with a nonprofit credit counseling organization.