Having too much credit card debt can be stressful, suffocating and debilitating. Whether you’re in debt because you had an unexpected expense or simply lost track of your budget, we’re not here to judge. The fact is, you need a practical solution. We’re here to help.
The good news is, whether your credit card debt is large or small, with one card or many, we’re going to teach you how to pay off credit cards quickly and cost effectively.
1. List All Your Credit Card Debts
Step one is to collect all your credit card statements and put together a list which includes the name of the lender, credit card number, expiry date, size of each debt and the minimum monthly payment for each card. Now exhale.
2. Transfer Balances
Next, you’ll want to apply for a balance transfer card. With a balance transfer, a single low interest credit card will pay off as many of your higher interest credit cards as possible. You then owe and make payments to the low interest credit card. Some cards, such as the MBNA Platinum Plus credit card offer interest rates as low 0% for 12 months.
Balance transfer credit cards offer several advantages. First, with a 0% balance transfer credit card, you stop paying interest, dramatically reducing the cost of your debt. Second, because you’re not paying interest, all of your monthly payments go towards paying down your principle, helping you get rid of your debt faster. Lastly, because you’ve consolidated all of your credit card debts onto your balance transfer card, you’re only making one payment, simplifying your finances.
You should evaluate balance transfer offers on three criteria: the introductory rate (lower the better), the length of the promotional rate (the longer the better) and the balance transfer fee (the lower the better). You shouldn’t pay more than a 1% transfer fee.
Ideally, you will try to transfer as much of your credit card debt to your balance transfer card as possible. You’ll then use the interest free promotional term to pay down as much of your credit card balance as you can.
If you’re left with a balance at the end of the promotional term, you’ll want to do another balance transfer before your promotional rate expires and jumps to a much higher “go to” interest rate – surfing from one low interest balance transfer card to another for as long as you can.
3. Home Equity Line of Credit
If you weren’t able to get a balance transfer card, and you own a home, your next best alternative to pay off your credit cards is a home equity line of credit (HELOC).
HELOC’s are great because they offer a very low interest rate and typically come with a sizeable line of credit. Moreover, many people already have a HELOC built into their mortgage. As you pay down your mortgage, you banks makes the amount you’ve repaid available as a secured line of credit. As a result, many people have a low interest line of credit waiting to be used as a debt consolidation tool, without the burden of having to apply for a new loan.
There are some noteworthy reasons to be careful consolidating your credit card debt onto your HELOC. If you feel you might have trouble repaying your debt, be aware that your HELOC is secured against your home. Default and you could lose it. But if you’re confident you’ll be able to pay back your loan and you want to benefit from lower interest rates, using a HELOC can be a great option – after you’ve explored getting a 0% balance transfer.
4. Personal Term Loan
If you can’t get a balance transfer or a HELOC, you should try getting a personal term loan. The advantage of a personal loan, unlike a line of credit or balance transfer, is that you will make a fixed monthly payment over a set term until your loan is paid down completely. Your interest rates will typically be lower than your credit card rates, but higher than your HELOC.
On the surface, it’s a very attractive structure. However, some lenders offer low rates with very high fees and unfavourable terms, making the effective interest rate HIGHER than your credit card interest rate. Do your research and review your rates, fees and terms in detail.
If you’re unable to get access to any of the products above, try negotiating a lower interest rate with your credit card issuer – credit card companies lower their rates all the time. Some issuers may offer you a lower rate for a small annual fee. Make the calculation and see if it’s worth it for you, it very well may be.
Give them a good reason to lower your rate. Maybe you received a low interest credit card offer from a competitor, got sick, etc… The worst that can happen is your credit card company says no.
6. Pay Your High Interest Debt First
When tackling your credit card debts, pay down your high interest debts first. Mathematically it’s the fastest and cheapest way to pay down your debts.
Make the largest payments you can on the highest interest credit card debt first, while making minimum payments on the other cards in the mean time. Once you’ve paid down one high interest card, use those payments to tackle the next highest interest card, and continue making the minimum payments on the other cards. Rinse, wash, repeat.
7. Buyer Beware
You’ll see many offers from debt settlement and debt consolidation companies. Be very, very careful with either solution. They’re an absolute LAST resort.
Debt settlement companies claim they can negotiate with your creditors and simply lower the amount you owe. While possible, it’s rare, and if successful there will be a significant hit to your credit score. Moreover, you will be charged an arm and a leg.
Debt consolidation companies, on the other hand, will put you on a debt management plan, where you make one monthly payment and they distribute your payments to each of your creditors. Being put on a debt management plan will be reported to the bureaus and impact your credit score. They too will collect a fee for “managing” your payments.
Debt can be expensive and overwhelming, but it can be tackled. Using a balance transfer, HELOC or personal installment loan can be extremely effective strategies to pay off credit cards.
Attack your debts head on. Be disciplined. Cut out the frivolous expenses and use what money’s left over to pay down as much of your debt as you can.