How to pay off credit card debt and save on interest
The Fed’s decision to raise the federal funds rate is aimed at obtaining inflation under control, but there is also a downside. Target rate increases affect consumer rates, so you may notice interest on credit card balances start to cost you more and more. The good news is that paying off credit card debt can minimize the effect of rate hikes on your wallet. Here we share ways to pay off credit card debt and save on interest.
Request a 0% balance transfer offer
Many major credit card issuers offer credit card specials where new customers get 0% APR on balances transferred to a newly opened card for 12 months or more. Applying for a balance transfer card and paying off debt during interest holidays can help you attack principal faster.
Here’s how to put this strategy into action:
- Compare the prices. Compare 0% APR introductory offers on credit cards.
- Ask for the map. Choose the credit card with the best introductory offer and the lowest fees.
- Transfer your credit card balance. Once approved, the new credit card company will ask you for information about the balances you wish to transfer.
- Wait for the debt to move. Continue to make payments on the old cards until the balances are transferred to your new card. Once the transfer is complete, you can start paying off your debts on your new card without interest.
Before you transfer your balances, there are a few important details you should know. Credit card companies may charge a fee for each balance you transfer. Additionally, you may need to execute the transfer in the first few months for it to qualify for the 0% offer.
After the interest-free period, interest will likely increase to the standard rate. So it’s best to pay as much as you can during the 0% introductory special so you can reap the rewards of the deal.
Consolidate your debts with a personal loan
If you have significant debt that would be difficult to pay off during a credit card’s 0% APR special, another strategy could be to consolidate the debt with a personal loan.
Personal loans are installment products that typically offer a fixed payment each month and a set repayment schedule. If you have good to excellent credityou might get a low rate on a personal loan, which could help you save a ton while paying off consolidated debt.
Let’s take a look at some numbers. Let’s say you owe $10,000 on your credit card with 18% APR. With payments of $500, it would take 24 months to pay off your debt with $1,978.27 in total interest paid. On the other hand, if you qualify for a personal loan with an annual rate of 8% and a term of 24 months, you will only pay $854.55 in interest.
Here’s how to put this strategy into action:
- Compare the prices. Review personal loans from different banks, credit unions, and online lenders to get an idea of the terms and interest rates available.
- Pre-qualified. Submit a form to get preliminary quotes. Usually this only involves a soft credit check which does not affect your score.
- Submit supporting documents. If you want to pursue an offer, you may be asked for documents such as pay stubs before getting final approval.
- Get a loan and pay off your credit cards. Funds are often deposited directly into your bank account and you can use the money to pay your credit cards. Then you can start making payments on your new loan until the balance is depleted.
Like balance transfers, personal loans can come with some fine print to consider. Typically, lenders charge an origination fee which is taken from the loan amount before the funds are deposited.
Your credit score also affects your rates and your chances of eligibility. If your score is less than perfect, you cannot qualify on your own, and some lenders will allow you to apply with a co-signer.
Implement a debt repayment strategy
Maybe you’re not interested in applying for a balance transfer card or a personal loan — you still have options. The snowball and avalanche methods of paying off debt can help you figure out which debt to pay off first. Here’s how both work:
The debt snowball occurs when you make the minimum payments on all of your debt and concentrate all the extra money you have on the smallest balance. The idea behind this strategy is that early success in eliminating a balance can keep you motivated to keep paying off your debts.
You can start by listing all of your debt balances, from smallest to largest. Then start prioritizing debts at the top of your list, gradually working your way down to other debts once the first ones are paid off.
Avalanche of debt
Debt avalanche is a debt repayment approach where you list your debt from highest interest rate to lowest interest rate. Then you make minimum payments on all your debts and focus the extra money on the most expensive debt first. This strategy might save you money compared to the debt snowball strategy, but if your most expensive debt is also the debt with the highest balance, it might take you a while to see some progress.
Get a debt management plan
Finally, if you need help developing a debt repayment plan, you can call the experts. A debt management plan (DMP) is a program offered by some credit counseling agencies. Under the program, a credit counselor reviews your debt balance and budget to see how much you can afford. They also contact your creditors to try to negotiate lower interest and fees.
Once the DMP is set up, you make a payment to the credit counselor, and they split the payments among your creditors, so you don’t have to worry about answering calls or managing payments to multiple companies . However, this service is not always free – organizations may charge upfront and ongoing fees to participate in the plan.
At the end of the line
The July Consumer Price Index shows that inflation is stabilizing, but prices are still higher than a year ago. Although the prices are high, the interest savings you realize from paying down debt might be better realized in other areas of your budget. When paying off debt, remember it’s a marathon. You may not be able to pay off your entire card balance all at once, but making regular payments above the minimum payment due can help reduce the debt until it disappears.