How to pay off credit card debt and save on interest
The Fed’s move to raise the fed funds rate aims to do just that inflation under control, but there is also a downside. Increases in target interest rates affect consumer interest rates, so you may find that interest on credit card balances is costing you more and more. The good news is that paying off credit card debt can minimize the impact of interest rate hikes on your wallet. Here we share ways you can pay off credit card debt and save on interest.
Apply for a 0% balance transfer offer
Many major credit card issuers offer credit card promotions where new customers receive 0% APR on balances rolled over to a newly opened card for 12 months or more. Applying for a balance transfer card and paying off debt during the interest holiday can help you attack capital faster.
How to implement this strategy:
- Shopping spree. Compare introductory offers with 0% APR for credit cards.
- Apply for the card. 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 for information about the funds you wish to transfer.
- Wait for the debt to move. Keep making payments with the old cards until the balance is transferred to your new card. Once the transfer is complete, you can start tackling the debt on your new card interest-free.
Before you transfer your funds, there are a few important details you should know. Credit card companies may charge a fee for each balance you transfer. Also, you may need to make the transfer within the first few months for it to qualify for the 0% deal.
After the interest-free period, interest rates are likely to rise to the standard rate. So, it’s best to cash out as much as possible during the 0% intro special so you can reap the deal’s rewards.
Fix debt with a personal loan
If you have a large amount of debt that would be difficult to pay off during a credit card’s 0% APR special offer, another strategy might 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 payout schedule. If you have good to very good creditworthinessyou could get a low interest rate personal loan that could help you save a boatload while paying off consolidated debt.
Let’s take a look at some numbers. Let’s say you owe your credit card $10,000 at 18% APR. With payments of $500, it would take 24 months to pay off your debt with a total of $1,978.27 in interest paid. On the other hand, if you qualify for a 24-month 8% APR personal loan, you only pay $854.55 in interest.
How to implement this strategy:
- Shopping spree. Review personal loans from various banks, credit unions, and online lenders to get an idea of the terms and interest rates available.
- Classify beforehand. Submit a form to receive preliminary price quotes. Usually, this is just a gentle credit check that doesn’t affect your score.
- submit receipts. If you wish to accept an offer, you may be asked for documents such as payslips before receiving final approval.
- Get loan financing and pay off your credit cards. Money is often deposited straight into your bank account and you can use the money to pay off your credit cards. Then you can start making payments on your new loan until the balance is exhausted.
As with balance transfers, personal loans may come with fine print to consider. Typically, lenders charge a processing fee that is deducted from the loan amount before funds are deposited.
Your credit rating also affects your rates and eligibility rates. If your score is less than perfect, you may not qualify on your own, and some lenders will let you apply with a co-signer.
Implement a debt cancellation strategy
Maybe you’re not interested in applying for a balance transfer card or personal loan – you still have options. The snowball and avalanche methods of debt repayment can help you figure out which debts to pay off first. Here’s how both work:
Debt Snowball
The debt snowball is when you make minimum payments on all of your debts and concentrate any extra money you have on the smallest balance. The idea behind this strategy is that early success in eliminating a balance can motivate you to continue paying off debt.
You can start by listing all of your debt balances from smallest to largest. Then start prioritizing debt at the top of your list and gradually move down to other debts as the first ones are paid off.
debt avalanche
Debt Avalanche is a debt repayment approach where you list your debt from highest to lowest interest rate. Then you make minimum payments on all your debts and focus extra money on the most expensive debts first. This strategy might save you money compared to the debt pyramid strategy, but if your most expensive debt is also the debt with the highest balance, it may take a while before you see any progress.
Make a debt management plan
Finally, if you need help creating a debt settlement plan, there are experts you can call on. A debt management plan (DMP) is a program offered by some credit counseling organizations. As part of the program, a credit officer reviews your debt balances and budget to see how much you can pay. You also reach out to your creditors to try and negotiate lower interest rates and fees.
After the DMP is set up, you make a payment to the loan advisor, who splits payments to your creditors so you don’t have to worry about handling calls or managing payments to multiple companies. However, this service isn’t always free—organizations may charge upfront and ongoing fees for joining the plan.
bottom line
That Consumer Price Index July shows that inflation is stabilizing, but prices are still higher than a year ago. While prices are high, interest savings you get from paying down debt could be better channeled into other areas of your budget. When paying off debt, remember that it’s a marathon. You may not be able to pay off your entire card balance at once, but by making consistent payments that are higher than the minimum payment owed, you can work off the debt until it’s gone.