Tips on How to Pay Off Credit Card Debt

October 18, 2019 | Mission Fed

Couple at kitchen table working on paying off their credit card debt.

So, you are in debt. Maybe you spent too much on a bouncy house for your brother’s wedding, and it turns out there were no kids on the guest list. Or perhaps you bought an expensive plane ticket to the wrong Georgia and found yourself in Eurasia instead of your cousin’s cookout. As we all know, life happens.

Whatever the reason, you’ve come to the right place. Check out these tips on how to pay off credit card debt so you can get back on track.

Speed up Your Payoff Plan

Paying off credit card debt may seem intimidating at first, but fear not. Here are three different strategies to make this whole process less overwhelming:

  • The Debt Snowball
  • The Debt Avalanche
  • Debt Consolidation

The Debt Snowball

The debt snowball strategy focuses on winning small battles first. The key is to start by paying off your lowest balance. Be sure to continue paying the minimums on your other debts too. Once you have tackled that first balance, move on to the next smallest debt.

The benefit of this plan is that you feel confident with each balance you pay off. However, be aware that this strategy does not take into account interest rates, which means you pay more in the long run.

The Debt Avalanche

This strategy turns the debt snowball method on its head, this time focusing on paying off the balance with the highest interest rate first (while still paying off other minimums). This is an extremely effective method of debt payoff and offers long-term savings because you will be tackling the most damaging interest rate first.

How Interest Rates Work

An interest rate is the percentage of your unpaid credit card balance that you have to pay on top of that balance. Interest rates vary, but the higher the interest rate, the more your debt adds up over time. For example, if you have a credit card bill of $6,000 with a 19% interest rate and a $2,000 balance with a 10% interest rate, you may want to consider paying off the former first, as that debt is increasing much faster.

Debt Consolidation

A debt consolidation loan is a bit more complicated compared to the other debt payoff plans listed above. In short, debt consolidation is the process of combining multiple debts into one with a lower interest rate. This makes minimum payments more manageable and ideally makes payoff faster. There are a few options to do this:

  • Work with a personal loan from a credit union
  • Consolidate debt into a low-interest rate credit card
  • Utilize a 401k loan

Personal Loan

With this strategy, you pay off your debts with a debt consolidation loan. This may seem counterintuitive, but the bright side is, that this type of loan typically has far lower interest rates than credit cards do. So, even though you are essentially replacing one debt for another, the burden is lower the debt payoff is more manageable. Not to mention, the payoff period is typically between three and seven years.

Talk to your local Mission Fed Credit Union about how to consolidate debt and pull out a personal loan.

Balance Transfer Credit Card

This is a great option if you have good to excellent credit. All you do is transfer your outstanding credit to a single card that offers 0% introductory annual percentage rate (APR) over a certain period. Find one with an introductory APR period of 12 to 18 months to give you sufficient time to pay off your debts. The advantage is clear; now you only have one monthly payment to worry about without interest during the introductory period.

Conveniently, Mission Fed offers 0% introductory APR credit cards for 12 months on purchases and transfers in the first 90 days. After that, your standard APR will be 9.90% - 11.90% for purchases and 11.90% - 13.90% for balance transfers.*

401k Loan

If you are ahead of the game and have an employer that sponsors a 401k plan, this may be the right strategy for you. It is recommended that you only pursue taking a loan out on your 401k if you have already ruled out the above methods. However, one benefit of doing this is that it does not impact your credit score. Not to mention, the interest rate is quite low.

Be careful though, the penalties for failing to repay this loan are quite severe.

If All Else Fails…

If your process of paying off credit card debt tips the scale from being mildly stressful to practically impossible, there are still some actions you can take to remove some of the weight off your shoulders.

Pursue a Debt Management Plan

If your circumstances prevent you from pursuing all of the above strategies, hope is not lost. There are nonprofit credit counseling agencies that can help you design a debt management plan, to get you on your way to a smoother path to repayment.

These nonprofits serve as mediators between you and creditors and in some cases may negotiate new terms with creditors to consolidate your debt. You will then pay the agency a fixed rate each month, instead of dealing with interest-heavy credit card payments.

File Bankruptcy

A last resort is Chapter 7 bankruptcy. This can erase your credit card debt, but can damage your credit score. Chapter 13 bankruptcy restructures your debt so that you have three- to- five years to repay your outstanding balances. Your credit score will eventually bounce back, but bankruptcy may be stuck on your credit report for up-to a decade. Whether you file bankruptcy or not, it is always advised to work on improving your credit score whenever possible.

Tips for the Journey

Whether you are under mountains of debt or a small foothill, here are some extra tips to make your debt repayment plan faster and easier.

Lower your Cost of Living

Now that you have debt to pay off, you will need to cut down on some of your expenses. The logic is simple: the less money you pay each month in bills, the more money you can apply to your debts, and the faster you can pay it off. Remember that due to credit card interest rates, time is of the essence; the faster you pay off your debt, the more money you save in the long run.

Create and Stick to a Budget

This tip is important at all times, but especially when you are working on debt repayment. Whether it’s eating out less, or cutting down on streaming subscriptions, understanding your budget and sticking to it is essential.

  • Pro tip: While working on your debt, make it a habit to check your account every day, so you are always aware of your spending.

Add on a Side Hustle

If your day job is not cutting it, put your hustle hat on and increase your earning power by picking up a few side jobs. Whether it’s selling second-hand clothes online, or grading college admissions essays; a side job that is remote with flexible hours is ideal for making that extra money. With this additional income, you will be able to make additional payments to your lender and get one step closer to getting rid of those expenses.

Avoid Late Fees

Automate your account payments to ensure that you are always paying, at least the minimum payment on all your debts. This will ensure that you avoid racking up even more debt due to unnecessary late fees.

Closing Thoughts

Dealing with rising credit card debt is quite stressful, but you are not alone. While there are many benefits of having a credit card, it is important that you pay off your debts in a timely manner. Mission Fed offers a variety of valuable resources to help guide you through your financial journey. Use these tips on how to pay off credit card debt and start eliminating that debt now!

*Subject to credit approval; terms and conditions apply. Offer is good for new Credit Cards. Balance transfers are for non-Mission Fed Credit Cards. Introductory APR will apply on purchases and balance transfers posted within the first 90 days of account opening, ending on the closing date of the first billing cycle after the account is open for 12 months. APRs are current as of 3/1/20. In order for your balance transfer to qualify for the 0% introductory APR, you must conduct the balance transfer by using a Cashier’s Check issued by a Mission Fed Branch or the Contact Center. Electronic balance transfers do not qualify. The balance transfer and cash advance fee is 2% of the amount of each item ($2 minimum). The foreign transaction fee is 1% of the amount of each transaction in U.S. Dollars. Maximum $20,000 in balance transfers per member.

The content provided is intended for informational purposes. Mission Federal Credit Union disclaims any liability for decisions you make based on the information provided. References to any specific commercial products, processes, or services, or the use of any trade, firm, or corporation name in this article does not constitute endorsement, control or warranty by Mission Federal Credit Union.

Sources

Nerdwallet. How to Get Out of Credit Card Debt in 4 Steps. https://www.nerdwallet.com/blog/credit-card-debt/

Nerdwallet. Pay Off Debt: Tools and Tips. https://www.nerdwallet.com/blog/pay-off-debt/

Forbes. 5 Ways to Pay Off Credit Card Debt Faster. https://www.forbes.com/sites/zackfriedman/2018/05/21/pay-off-credit-card-debt-faster/#7599412a6ebe

The Balance. How Interest Rates Work. https://www.thebalance.com/what-are-interest-rates-and-how-do-they-work-3305855

Mission Fed

Mission Fed

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