You may not be the only person wondering how to get out of debt as many people around the US have some debt. However, credit card debt might be one of the most common types of debt and the one that affects people the most. Debt from credit cards typically has the most significant impact on an individual’s credit score as it reflects their credit utilization levels.
However, knowing how to get out of debt is not easy, especially for someone who has a lot of it. Paying off credit card debt can be tricky because of interest rates and using credit cards too often. People tend to make payments that are not effective to lower their debt because they spend more with their credit cards than what they paid. Moreover, part of the fee goes to cover interest charges, which higher with the balance owed.
To learn more about paying off debt, read the sections below and Discover some of the best ways around paying ff your debt and get back to the financial freedom you deserve.
Know How Much Credit Card Debt You Have
The first way on how to get out of debt is to know how much you owe on your credit cards. Start by listing the debt that you have on each one of your credit card accounts. Make sure to register the annual percentage rate of each one (APR) and their minimum payments. From there, you can employ different strategies on how you will plan to tackle your debt.
Paying off Credit Cards: Make a Budget
Before being able to pay credit card debt, you need to know how much of your income you will be able to put towards your debt. Knowing how to pay off credit card debt also involves knowing your other expenses. For this reason, creating a budget will be helpful to list all your other expenses.
At this point, you will have a list of your debt and a personal budget. Paying off credit cards is only possible if you have more income than all your expenses combined. You can include minimum payments to your credit cards in your total costs to make sure you are making timely payments and to keep your credit score safe from late payment penalties.
Next, use additional or leftover funds to lower credit card debt by making extra payments to your cards other than the minimum amount. There are different ways around paying debt fast or end up paying less money, depending on the interest rate. It would help if you opted for the way that suits you best depending on how much you owe. Strategies on how to get out of debt include:
- Avalanche method
- Snowball method
- Balance transfer method
How to Get Out of Debt: Avalanche Method
One common way on how to pay off credit card debt is by using the avalanche effect. You can use this method to settle other types of debt you may have, too. Start by making all the minimum payments on each account to make sure you do not have late payment penalties on your credit report. Then, pay the credit card debt on the account with the highest interest rate.
The avalanche method may not be the most effective in terms of paying off debt fast, or at least seeing how fast your debt goes down. However, you will end up paying less in debt because you are lowering the principal on the accounts with the lowest interest. Once you finish paying off the card with the highest debt, continue with the next one and so on until you are done.
Snowball Your Way From Credit Card Debt
Paying off credit cards with the snowball method works differently than the avalanche method because you start with payments to the smallest account. While this is not the best way to get out of debt, it is useful because it provides a confidence boost. Once you repay the smallest account, you will have more confidence to tackle higher ones.
It is likely to pay off debt faster with this strategy as it will help you close accounts more quickly. However, debt from credit card accounts with higher interest might be the last on your list, and you will end up paying more in the long run. Just like with the avalanche method, make sure that you make minimum payments to all your accounts first. Once you do that, devote any left-over funds to the smallest account and make payments to the next account until you are done.
Transfer the Balance of Your Credit Card Debt
You can also pay off credit card debt by opening new accounts that can help you transfer the balance from accounts with higher interest. The goal is to place your debt into an account that offers no interest rates, at least for a year, so you save some money in the long run.
Paying off credit card debt with the balance transfer method is an effective way to pay off accounts with high interest rates. This method will also help you with paying off debt fast because since little to no interest will accrue from your principal, over time, you will not have to pay as much. Moreover, all payments that you make to the balance transfer account will go entirely to cover the cost of the principal, so the amount you owe will decrease faster.
As you can see, there is no single way on how to pay off credit card debt, and you have options to consider. Some of these strategies to pay off credit card debt may work together more efficiently than alone. For instance, you can use the balance transfer method and pay off smaller accounts with the snowball method will help you save on interest. You may also start paying off smaller accounts and gain the confidence to pay off credit cards with a higher balance next.