With every major bank and big retailer offering consumers a credit card, it’s no surprise that most Canadians have at least one credit card in their wallet. While credit cards can be convenient, not paying your balance in full each month can accumulate a debt that becomes increasingly difficult to pay off. Because one of the biggest reasons people struggle to pay off credit card debt is due to the interest charges, strategies on paying off credit card debt often focus on navigating interest rates.
Today’s post is focused on illustrating four ways you can pay off your credit card debts (and highlighting pitfalls to avoid) to help you become debt-free for good!
Example – Credit Card Interest Rate Costs and Comparisons:
Retail Store Credit Card: $5,000 with 29.9% interest rate:
- Paying Minimum Payments: 50 years 4 months to become debt-free
- Interest Paid: $23,262
Standard Credit Card: $5,000 balance with 18.9% interest rate:
- Paying Minimum Payments: 19 years 9 months to become debt-free
- Interest Paid: $5,300
Low Interest Credit Card: $5,000 balance with 11.9% interest rate:
- Paying Minimum Payments: 14 years 7 months to become debt-free
- Interest Paid: $2,377
4 Strategies to Pay Off Your Credit Card Debt
Negotiating or Switching to a Lower Interest Rate
Even a 2-3% drop in your interest rate can make paying off credit card debt easier. If your credit card balances are reasonably low and you haven’t missed any payments in the past, consider the following actions:
- Contact your credit card lender and ask if they can give you a better credit card rate. Credit card customers who make all their minimum payments on time and have been long-time customers may be able to negotiate a lower rate;
- Be prepared before you call: Do some interest rate comparisons so you’re aware of what is being offered elsewhere and be straight-forward and calm in your approach;
- If one of your credit cards has a lower interest rate than the other (and is not maxxed out), you may want to take advantage of the lower rate by transferring the balance on the higher card over, but be careful to research if there will be costs and fees associated with this transaction.
Understand Interest Rates and Their Impact
Paying Highest Interest Cards First
Once you know where your interest rates are at, you’ll generally want to prioritize paying off your highest-rate card first – here’s how:
- List all your credit cards by interest rate – highest rates at the top;
- Look at your monthly budget and decide how much you can afford to pay each month beyond your minimum payments;
- Make all your minimum monthly payments on each credit card but add the extra money from your budget to the highest interest card payments – once it’s paid off, move those extra payments to the next one;
- Track and celebrate your progress to keep motivated!
Comparing Debt Solutions? Read these 5 Pros and Cons to Consider
Applying for a Line of Credit or Consolidation Loan
Turning to a bank for credit card consolidation will generally offer you two solutions: a line of credit or a debt consolidation loan.
- Lines of credit and consolidation loans typically have better interest rates than credit cards and can lower the cost of carrying the debt (ie. your interest rate) and allow you to pay off the debts faster;
- Avoid the temptation of taking out a line of credit with a limit higher than what you need to pay off your credit card debt;
- Less payment juggling makes it easier to stay organized and on top of payments, and allows you to track your progress easier;
- Ask your credit card providers to lower your credit card limits to avoid carrying too high a balance – and if you can do without a card once it is paid off, close the account.
Filing a Consumer Proposal to Consolidate Credit Card and Other Debts
A Consumer Proposal allows you to not only pay off your consolidated debts without any further interest charges, it also means you can repay the portion of the debt you can afford – the credit card lenders agree to write-off the rest.
- Virtually all types of debts can be consolidated with a Consumer Proposal – from credit cards to lines of credit, overdrafts, income tax debt, student loans and more;
- Your credit history or score isn’t a factor for eligibility, and no co-signer is needed;
- You can pay off a Consumer Proposal early at any time without penalty.
Compare the Monthly Cost of a Consolidation Loan VS a Consumer Proposal
Problems Paying Off Credit Card Debt
Many people experience challenges when trying to pay off their credit card debts. Keep an eye out for these pitfalls that can make it difficult to manage debts:
Only Making Minimum Payments
Making only the required minimum payment on your credit cards means very little is going towards the balance, nearly all is allocated towards paying interest charges and fees. Check your statement to see a breakdown of just how long it would take you to payoff the debt if you make only the minimum payments each month:
- Even small card balances can take years to pay off by paying only the minimum monthly payments;
- Accounts can wind up over the credit limit when interest charges outpace minimum payments being made;
- If you’re unable to make more than the minimum monthly payments on your debts it may be a sign of a more serious problem.
Continuing to Use Credit
Don’t accumulate new debt (whether on your credit cards or otherwise) while you’re working towards paying off your existing credit card debt – this will nearly always overwhelm your budget and make it difficult to focus on paying off the original debts or consolidation:
- Only use your credit card for purchases you have the cash on hand to pay back right away;
- Don’t use cash advances on credit cards – they start accruing interest charges immediately!
- Like only making minimum payments, continually relying on credit to meet your daily expenses is a warning sign that your problem is likely to continue – meet with a Licensed Insolvency Trustee as soon as possible to get debt advice.
Using Debt to Pay Off Debt
Proceed with caution when transferring balances or taking on consolidation borrowing – it’s important to fully understand any costs of borrowing before signing on:
- If your credit score has been impacted by late payments or maxxed-out credit cards you may find it difficult to qualify for a line of credit or consolidation loan at a low interest rate, or at all;
- Ensure that you can realistically stick to the budget needed to get your debt paid off and not simply delay an inevitable cash-crunch.
It’s easy to become discouraged when you feel as though despite all your efforts you’ll never be debt-free. Remember that you are not alone!
If you’re feeling overwhelmed by credit card or other debts, meet with a Licensed Insolvency Trustee and get professional debt advice. There are legal debt solutions that can help you manage virtually all types of debts and we can help you through these processes.
Ready to say good-bye to credit card debt? Book your free confidential debt consultation with a local Sands & Associates debt expert today.