So you have a boatload of credit card debt and you want to pay if off ASAP. Well for starters, that’s a good mindset for you to have! Paying interest on credit card debt is a huge waste of money …
Let’s say you had a $10,000 balance at an 18% APR. The minimum payment is usually interest + 1% of balance (to put that in perspective, that would be $250 for the first month in this scenario).
Under those circumstances, it would take you 342 months to pay off the entire balance, and you would have paid an extra $14,423.30 in interest! So that $10,000 balance actually cost you a total of $24,423.30!
Some banks have a different formula for calculating the minimum payment, but you get the idea… interest payments are a totally preventable rip-off. Here are seven techniques for how to pay off credit card debt fast…
(1) Prioritize your credit card debt
First and foremost, if your debt is spread across multiple cards, organize them from the highest APR to the lowest APR. Then you will want to make sure you really focus on using the techniques below to wipe out the debt on the highest-rate card(s) first.
As long as it won’t encourage you to procrastinate in your repayment, transfer your balances to a card with a 0% balance transfer offer.
(2) Earn 1 percent on savings account while paying 10 percent on credit card debt?!
It’s unbelievable how many Americans carry credit card debt at 10 percent to 20 percent (or higher!) while they keep money in their bank account that is only earning them 1 percent or less.
Sure, we all need back-up funds for emergencies, but this is where you need to weigh the pros and cons. Figure out how much cash you comfortably need on hand for things like mortgage/rent (that you can’t pay with credit cards). For everything else – like unexpected car repairs – you can probably pay with a credit card if need be, so why keep that money in the bank when it could be used to pay off credit card debt and save you money on interest?
(3) Use a retirement account to pay off debt?
On a historical basis, it’s unlikely that your retirement account is raking in gains of 10 percent to 20 percent annually. So if you’re paying that much interest on your credit card debt, you may want to investigate whether it would make sense to withdraw some funds from your 401k to put towards that credit card debt.
However keep in mind that this is not always the best way to pay off credit cards. You will almost certainly owe tax on any withdrawals. Now there are some “hardship withdrawal” exceptions which some people qualify for that might be penalty free (i.e. if you become totally disabled, medical debt that exceeds 7.5 percent of your adjusted gross income).
If you want to consider this technique to pay off credit card debt, you absolutely need to talk with a certified financial planner. Rules and laws surrounding withdrawals are complicated and constantly changing, so you should get expert advice.
(4) Get a second job or weekend job
The quickest way to pay off credit card debt is to increase your income… but of course that’s easier said than done! However it is possible.
If you work an hourly job, plead with your boss to see if there’s any way you can pick up some extra hours. Even offer to pick up crappy shifts, if necessary. I recommend being honest about why you need to do this… you’re paying off credit card debt. If the debt was incurred from something like medical bills, don’t feel bad about playing up the sympathy card.
If you have a salaried job, then outside of a raise or promotion there probably won’t be any way you can increase your pay. So what you will want to look into is getting a second job, even if it’s only for the weekends. Sure, it may only earn you a few hundred dollars extra per month, but that’s all money you could be using to pay off debt faster.
(5) Reduce your monthly spending
Look for expenses in your monthly budget you can trim or even eliminate completely. The gym membership may not be worth it if you go only a couple times per month… instead go running in the park or exercise at home.
The biggest money drain for most Americans is eating out. It’s easy to get in the habit of dining out once or twice a week… over the course of a month that equals a lot of money that could be used for paying down credit card debt. Even fast food costs add up quickly – buying a $2.50 coffee five days a week equals around $650 per year!
Need an easy motivator to spend less? Just remind yourself this; Every $1 less you spend saves you up to $2.50 in credit card debt. (per the example at the top)
(6) Sell stuff you don’t need (and stop buying it)
Yes, selling stuff you think you need can be painful, but it’s best for you in the long run.
The American culture seems to be obsessed with the idea of accumulating stuff we don’t actually need. All of us are guilty of it to at least some degree. Whether it’s collectibles, gadgets, handbags, or something else… they’re all things you don’t really need.
So go to your closet/garage/basement and identify the things you could really do without. Then hit up eBay and Craigslist to get rid of them and raise some quick cash. Heck, for some people this step in and of itself might be all that’s necessary to pay off your credit card debt. One forum poster decided to sell his snowmobile and it ended up being enough to pay off all his credit card debt!
Understanding this concept is without a doubt one of the most important techniques for how to pay off credit card debt… and how to prevent racking up new debt in the future!
(7) Reduce (or eliminate) your interest
If you’re taking a lump sum from your savings to pay off credit card debt fast (like this week) then this advice that follows won’t be applicable to you. However, if it looks like it’s going to take you at least a few months to completely eliminate your credit card debt, keep reading.
Chopping your interest rate is a crucial step in fast tracking your journey out of debt. Because whatever techniques you are using in your journey to be debt-free, it will be even faster if interest isn’t accumulating so rapidly.
There are basically two ways to do this. You can call up customer service for your credit cards and plead for a lower rate. Sometimes they will knock off a couple points, but these days they will rarely give any sizable reduction.
The second option is to use balance transfer credit cards. Sure, you will have to pay a balance transfer fee of 3 percent to 5 percent of the balance, but if that means having 0% interest for 12 to 18 months then it’s probably worth it (just do the math to make sure). Check out our constantly updated listing of 0% balance transfer cards to see what deals are available right now.
Updated June 10, 2014