If you’re saddled with credit card debt, you’re not alone — the average American household has more than $15,000 in credit card balances. But with a good payoff plan, you can be debt-free sooner than you think without hurting your credit. Let’s dive in!
In this article:
Understanding credit card debt and interest
Before you get rid of your debt, you need to know how credit card debt works. Each month, you receive a credit card statement detailing the retailers and prices of your purchases. Depending on your credit card, you generally have between 21 and 25 days from the date you receive the monthly statement to the due date.
The statement will have a new balance and a minimum payment. The minimum payment is the least amount of money you can pay to keep your account in good standing. But to avoid accruing interest, you need to pay the new balance. If you don’t pay the whole balance, you’ll accrue interest on your average daily balance, and it will be added to your remaining balance.
Let’s go through an example to show how interest is calculated. Say you have a credit card balance of $2,000 and an interest rate of 18%. You make two payments before the due date — one payment of $500 on day 11 of accruing interest and another of $500 on day 21. In this case, you’ll incur $22.05 in interest. For calculations, check out the Methodology section below.
The Nerds strongly urge you to pay off your balance in full each month. Credit card interest rates are very high compared with other financing options, and you should spend your hard-earned money on enjoyable things and awesome experiences, not interest.
How to pay down your debt faster
If you’re dealing with credit card debt, you can eradicate it faster by paying it off in order of interest rate. And you can decrease the amount of interest you’ll have to pay by lowering the amount of debt outstanding or lowering the interest rate. Read on to learn more about your options.
Pay off debts in order of interest rate
There are several schools of thought on the best way to pay off debt. Some people say go from the smallest to largest balance, others say to pay off the debt you hate the most first to build momentum. The Nerds recommend you pay off debts the best way from a mathematical standpoint — which is great for you, because it’s also the cheapest way.
Write down your debts and their respective interest rates. Now, put them in order from highest rate to lowest. The debt at the top of your list will be the first one you pay off. For any debt that isn’t the top one, you’ll want to make just the minimum payment. Use any other available funds to pay down the top debt as quickly as possible. After that debt is gone, you’ll focus on the next one on the list, and so on, until all your debt is gone.
Decrease the amount you owe
There aren’t any quick tips to make your debt disappear. Aside from bankruptcy, there’s only one way to pay down your debt faster: You need to direct more money toward becoming debt-free. Here are a few ideas to get you started:
- Tap your savings. While you should always have a small emergency fund — anywhere between $1,000 and three months of expenses while you still have debt — anything above and beyond that amount can be redirected to credit card debt. You may be hesitant to give up the liquidity, but if you have a credit card with 18% interest, you’ll be hard-pressed to find a better return on your investment than paying down that debt.
- Set up automatic payments from your checking account. Coincide these automatic payments with your pay day so you don’t spend these funds on nonessentials. Alternatively, you could divert part of your paycheck to a savings account earmarked for credit card payments.
- Make more and spend less. It sounds obvious, but in order to direct more money toward your credit card debt, you have to find more money in your budget. Check out the Nerds’ article on how to increase your income and decrease your expenses.
- Avoid spending windfalls. When you receive money from sources other than your regular paycheck, you can use these funds to pay down your debt. Windfalls may be tax refunds, rebates, inheritances, cash gifts or any other money you don’t count in your normal monthly budget.
If possible, make payments whenever the funds come in. By paying down your debt before the due date, you’ll decrease your average daily balance. This means your interest owed will decrease.
» MORE: How to pay off debt
Decrease your interest rate
Speaking of interest, you have a few options to reduce your APR. The Nerds recommend doing these three things in order and stopping when one of them works.
1. Apply for a 0% balance transfer credit card
The easiest way to get a better interest rate is applying for a 0% balance transfer credit card. With a balance transfer, you’ll shift your debt from one card to another one with a different issuer. The 0% introductory rate generally lasts for 12 to 18 months. Here are a few of our favorite balance transfer cards.
Nerd note: Credit card issuers aren’t required to warn you when your introductory rate is about to expire, so keep track of this. Pay off your entire balance before the introductory period ends to avoid accruing interest. And understand that some cards may charge you retroactive interest if you don’t pay off your balance by this time. Check your card’s terms and conditions for details.
Balance transfer cards come with transfer fees of 3 to 4% more often than not. That said, there are a few no transfer fee options. If you do end up qualifying for a balance transfer card, but it has a transfer fee, make sure the fee is less than you would pay in interest if you stuck with your current card. Generally, if your debt can be paid off in six months or less, you should just pay the interest. Otherwise, transfer the balance.
2. Talk to your existing issuer about a lower-rate card or decreasing your current rate
Your issuer wants to keep you around. Call and ask if you can switch to another card with a lower rate. Alternatively, ask for a rate decrease on your current card. Provided your account is in good standing and you haven’t maxed out your card or made a late payment, you might be granted this request. But keep in mind, your issuer isn’t obligated to do this.
3. Consider consolidating your debt
If you can’t get a balance transfer offer and your issuer won’t reduce your APR, it may be a good idea to explore debt consolidation. Several options for consolidation include:
What to do if you’re in over your head
If your credit doesn’t qualify you for any of the options above and you can’t get ahead on your payments, you have a few options:
- Call your issuer. Explain to the representative that you can’t pay according to the current plan and you need help. Your issuer will likely prefer that you pay according to an alternate payment plan instead of defaulting.
- Get credit counseling. You can sign up for a free consultation with a credit counselor who can help you understand your options and put together a budget. Ensure your counselor has the Department of Justice’s seal of approval.
- Declare bankruptcy. It’s a last resort, but if nothing else is working, you may need to declare bankruptcy.
In case you want to run the numbers on our interest calculation, here’s the math:
Daily interest = 18% / 365 = 0.049%
Average daily balance = [(2,000 * 10) + (1,500 * 10) + (1,000 * 10)] / 30 = $1,500
Monthly interest = $1,500 * 0.049% * 30 = $22.05
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