Don’t build balances on your credit cards, they said. If you can’t pay every month, they said, cut it and throw it away.
Very late. You have achieved balance. You owe thousands, maybe tens of thousands, of dollars on cards with interest rates approaching your chronological age.
A consumer can lose credit card debt. According to a popular credit card interest calculator, a borrower who owes $10,000 on a card with an interest rate of 20 percent and pays $200 a month will retire the debt after eight years with a total cost of $21,000. And this assumes that the consumer will never use the card again.
Below are six strategies to get out of debt a little faster. All of them can save time and money. Choose the one that suits you best.
Get a zero interest credit card
It sounds too good to be true: The bank will send you a credit card with no interest for 12, 18 or 21 months.
A zero APR credit card may be the single best way to reduce card debt from a pure savings perspective. A typical card allows a customer to transfer thousands of dollars in debt from other accounts for a one-time fee equal to a few percent of the transferred balance.
After that, in most cases, your entire monthly payment reduces your debt. Not a penny is lost in interest.
“A zero-interest balance transfer credit card is an incredibly powerful tool,” said Matt Schulz, senior credit analyst at LendingTree, an online loan marketplace. “To be able to go a year, sometimes up to 21 months, with no interest on the balance is a really big deal.”
Downside: After the campaign expires, the lender will start charging interest on the remaining balance. Prepare a budget to avoid this. If you can afford to pay $300 a month on a zero-interest card and have 18 interest-free months, don’t transfer more than about $5,000 to the card. After 18 months, the debt will expire.
“It’s going to be in your wallet and it’s going to be a credit card that you can use after this promotion is over,” said Bruce McClary, senior vice president of the National Foundation. For Credit Counseling.
In other words, resist the urge to pile up more debt on the card after the zero interest hour ends.
Pay the smallest balance first
A consumer with several debts of different rates and amounts can achieve a quick and painless victory by removing one of them from the list. And why not start with the smallest debt?
Financial planners call this technique snowballing. List all your debts, choose the smallest one and pay it off as soon as possible. Soon, a list of seven or eight debts can shrink to five or six, which snowballs.
“It’s that momentum that gets people excited,” McClary said.
Pay off the debt with the highest interest
A popular alternative to the snowball is the avalanche: Rank your debts from highest interest to lowest interest. Then, make aggressive payments with the highest interest rate.
For a consumer with multiple debts, focusing on the highest interest rate makes perfect financial sense.
“Over time, you’ll pay less interest because you’re aiming for the highest interest rate first,” said Sara Rathner, credit card expert at personal finance company NerdWallet.
The downside: If that high-interest debt is a large amount, it could take years to pay it off. An avalanche can feel more like a glacier.
Snowball or avalanche? “It’s really about finding what motivates you,” Schulz said. “Some people are motivated by small wins, so it’s better to pay that small balance first and then swipe the card and feel the motivation. For others, it’s just about math.”
Call a credit counselor
The techniques listed above are not suitable for everyone. Borrowers with subpar credit scores may not qualify for a zero-interest credit card. Divide and conquer debts only work for those who have the money to pay them off.
Some borrowers are in over their heads. They may not even have the funds to make the minimum payments, leading to expensive payments. Fees and interest can push a credit card balance over a customer’s credit limit, leading to more fees.
One option for them is the nonprofit National Credit Counseling Foundation. A credit counselor “can sit down and review your financial situation and suggest a plan of action,” McClary says.
Nonprofit credit counselors can save borrowers from delinquent notices and debt collectors. They work with lenders to suspend or waive late fees, “overage” fees and other charges and lower interest rates to reduce how much the consumer owes. The client makes a monthly payment to the adviser, who splits the money and sends it to the creditors.
The counseling service can get a distressed borrower out of debt “in four years or less, in many cases,” McClary said.
Call the bank
A consumer with one or two credit cards who wants a head start on paying off their debt should consider making a simple phone call to their issuing bank.
First, look at your credit score. The higher the score, the stronger your bargaining position. Then call the credit card company and start a polite conversation. The card issuer may agree to lower your interest rate. The company can also waive hard payments that pay off your debt or offer a temporary reprieve from monthly payments.
“If you have more than one credit card, it gets a little harder to be successful,” McClary cautioned. And the cardholder can only achieve a temporary concession, while a professional adviser can negotiate on a more permanent basis.
Hide the card
Consumers who do not pay their credit card balances each month should not use credit cards. But going cold turkey on credit isn’t so easy, especially if the card is sitting in your purse or wallet.
Credit experts say one way to reduce credit card temptation is to remove the card from play. Cover it with ice. Lock it in a drawer. Cut it in half and throw it away. It’s harder to swipe a card you don’t have.