We all know that paying your credit bills is important, but balancing this with other monthly expenses can be easier said than done. For that reason, we have a quick guide on how you can best pay off your credit card debt—one payment at a time.
How Credit Debt Works
To understand how credit debt works, it’s important to understand what a revolving debt is. Revolving debt is a type of payment that carries, or revolves, a balance from month to month; the balance is the amount you owe with interest. Credit debt specifically falls under this category, where every purchase the cardholder makes is them borrowing money from their credit card company. Every credit card has a different limit and interest rate based on different factors, including the user’s credit history, with monthly payments dependent on how much the user owes.
Credit cards are a very high-interest debt that often falls around a 20% interest rate or higher. If a cardholder fails to pay off their bill for the first time, most credit card companies will offer an interest-free grace period of one billing cycle—that’s the duration between the end of one billing cycle and the date that the next is due—to pay off the entire balance. Failure to fully pay by this grace period will lead to a daily interest rate being charged based on the total owed balance.
For example, Jane has an outstanding credit debt of $1,000 and an interest rate of 20% and misses her payment by the grace period. If she doesn’t pay it off, by the end of the first day, her credit balance—or debt—increases to $1,200; by the end of the week, she owes $2,583; and by the end of the month, $284,851. Of course, a late or missed payment also comes with other consequences: late fees, an increased APR, and a lower credit score can also impact Jane. That’s a staggering amount of debt!
Why Minimum Payments Won’t Work
Minimum payments vary from card to company, often calculated as 2 to 3% of the total balance owed that month. Paying this amount ensures you don’t face any additional late fees, an increase in your APR, and can keep the benefits offered by your card. However, if you’re like Jane, your balance will still be compounded by your daily interest rate until you pay the full amount. Paying only the minimum amount would only partially or wholly cover the accumulated interest for that month, potentially not paying the principal amount.
The more you owe, the more difficult paying your balance off will be—especially on minimum payment. Instead, it’s best to allocate a consistent monthly payment greater than the minimum to bring your balance down. We’ll cover more on that in the next section.
Creating a Budget for Your Payments
As mentioned in the 5 Credit Mistakes to Avoid post, it’s critical to have all of your expenses accounted for. The best way to do this is to first review your credit statements and reports. Most people can only account for 80% of their expenses, missing on the 20% that they could re-allocate elsewhere.
So, from your credit statements and reports, log down your income and expenses on a monthly basis. Create a line item for every recurring expense including your rent, mortgage, car payments, utilities, groceries, and any other critical payments. From this budget, decide on a payment amount that you can consistently and comfortably direct towards your credit card debt on a monthly basis while putting aside some funds for any unexpected emergencies.
It’s important to remember that for most, paying off a debt doesn’t happen overnight. The key to successfully paying any off is being able to make payments sustainably and consistently.
Using the Debt Lasso Method
There are a few methods to pay off your credit debt. Three popular ones include the Debt Avalanche, the Debt Snowball, and the Debt Lasso. After making the minimum payment for all credit debts, the Debt Avalanche method involves first paying off debts with the highest interest to the lowest, while the Debt Snowball recommends paying off the smallest balances to the largest.
The Debt Lasso instead involves lowering your interest rates and transferring your debt balance. If you have a good payment history and credit score, you can contact your card provider and try to negotiate a lower interest rate on your balance. Following this, research credit card promotions that offer a 0% interest rate and no annual fees and look into the cost of transferring your balance to these promotion cards. As these promotions often run anywhere from two to six months, it’s necessary to periodically seek new promotions and transfer again; but in the long run, this method is the best for reducing your interest fees, while paying off your credit card debt.
Book a Consultation With Us
If you have any questions on building your budget and maintaining good credit or any expert advice on paying off credit debt, please don’t hesitate to reach out to our team!