Two Strategies to Erase Credit Card Debt

  by Tyler Curtis

by Shelley Seagler

Credit card debt can feel like a monster pounding at the front door, threatening to destroy any hope of a secure financial future. Although paying off your credit card accounts may seem overwhelming and can be challenging, there are steps you can take to help you accomplish this goal. 

1. Stop spending today.  Keep in mind, debt is merely the symptom of the real problem, which is overspending.  If you do not commit to stop spending, you will never have financial success.

2. Call your creditors.  Explain your situation and ask them to lower your interest rates.  Sometimes they will, sometimes they won’t, but it never hurts to ask.

 3. Transfer balances to a card with lower interest rates when possible.  Having fewer cards to pay off is better. This is another discussion to have with your credit card company. They may be more willing to lower your interest rate if you’re planning to transfer balances from other accounts.

 4. Pay more than the minimumYou cannot successfully eliminate your credit card debt if you only make the minimum payment.  Make a realistic decision about how much extra you will be able to pay each month and commit to it. If you happen to get a bonus, raise, tax refund, inheritance, etc., you should also apply that money to your debt.

 5. Follow a system.  We all know that to succeed at anything, especially something as daunting as eliminating credit card debt, we must have a plan, but what’s the best approach to take? When it comes to the actual process of tackling debt, there are two primary schools of thought.

 Interest Rates

The first strategy to pay off your credit cards based on interest rates. You begin by ranking your credit cards from highest interest rate to lowest.  Each month, you pay the minimum payment plus your predetermined extra amount to the credit card with the highest interest rate until it’s paid off.  Then you move on to the card with the second highest interest rate.  Because you have eliminated the minimum payment from the first card, you should add that amount to the extra you pay on the second card. Pay off the second card on your list and then begin working on the card with third highest interest rate. Continue until you’ve paid off all of your cards.

 Account Size

The second way to pay off credit card debt is similar to the first, but instead of ranking your credit cards by interest rates, start with the account with the smallest balance.  Pay it off and then move to the card with the second smallest balance and so on.

Regardless of which system you choose, while you are paying off one card, continue to pay the minimum on all of your other cards to avoid paying penalties and damaging your credit. And once your debt is cleared, never carry a balance again.

Which approach is best?

The answer to which strategy is best is not as straightforward as you’d expect.  Using interest rates to determine the order you pay your credit cards off is the most effective use of your money.  It saves you both time and money. It is without a doubt the most logical strategy, but when have you ever known humans to act logically?

The problem with paying off your debt in the order of interest rates is that like most things that are good for us, it usually takes a while before you see any progress. On the other hand, while paying by balance size actually takes a little longer, you’ll most likely pay off a few smaller accounts rather quickly. Seeing this progress can lead to strong sense of accomplishment and give you the added boost of confidence you need stick to your plan.

In a recent study from Northwestern University Kellogg School of Management, researchers found that the number of accounts paid off was a stronger predictor of long-term success than the actual dollar amount of debt that had been paid off.  The study concluded that when people were going through the difficult, long-term task of eliminating credit card debt, experiencing small victories along the way allowed them to stay motivated and committed.

Deciding which strategy is best for you is a choice only you can make. If you’re able to stay focused on your goal, even when it may feel like you’re making little progress, use the interest rate approach. If you need encouragement and added motivation throughout the process, pay off your smallest accounts first. The bottom line is that when it comes to paying off your credit card debt, your best bet is to take the approach you’ll actually stick with.

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