Credit cards have become indispensable. We use them to pay for everything from ride shares to gas to travel.
When you manage them wisely, credit cards can help financially, letting us build (or re-build) credit, earn cash back or travel points, and get cool perks, like insurance or purchase protection.
Carrying a balance on your credit card(s) however, changes all of that.
Credit card debt is insanely high-interest debt. Most are typically in the neighborhood of 20% or more.
At that rate, even a modest balance can quickly get out of control.
If you’re holding a balance on your credit card, paying it off is job number one, so you can enjoy its benefits again.
Here are 7 great tips to help you pay off credit card debt.
1. Take a look at your spending habits
Sounds obvious, but you can’t improve on something if you don’t understand it.
Most people can mentally account for 75% to 80% of their spending, and then it gets foggy.
The purchases making up that remaining 20% to 25% typically will give you a lot of information.
Once you identify these expenses—whether they’re a round of drinks for the team, an extra latte, or even the occasional bag of chips in your groceries—you feel empowered.
Knowing how you got debt can help you build a strategy against future financial missteps.
2. Make a Budget
I can’t tell you how crucial it is to make a budget, so that you know where your money is going.
Now that you have a clear picture of your debt load and how you’re spending your money, it’s time to make a budget.
This step doesn’t have to be fancy or complicated. In fact, there are many apps and calculators, including a downloadable template on the Credit Counselling Society site.
The task here is to log your income and your expenses to see where you can find money to pay against your debt. Add a line item for every expense, like rent or mortgage, car payments, utilities, groceries and your outstanding credit card debt.
This way, you have the cash to deal with emergencies, so they don’t upset your credit card repayments.
Most people hate following a budget (I used to), but you can make it easier on yourself.
One of the biggest budget mistakes is not making room for small occasional treats. You don’t pay down credit card debt in a month or two.
You have to plan for the long haul, and you can only put yourself on a really tight budget for so long before you crack.
3. Don’t Pay the Minimum
The minimum payment on your credit card bill is about 2% of the previous month’s balance.
The problem is, if you only pay the minimum, the bulk of that money goes toward the interest (usually accumulating at around 20%), not the principal (the amount you actually owe).
It would take a long time, but you could pay down your debt by paying the minimum, as long as you’re not using the credit card as well.
A better and much quicker strategy is to find or make some extra money every month, and apply it to the debt. Be realistic and be consistent.
Try to pay an extra $50 dollars per month, or $100 per month to reduce that debt more quickly.
4. Try to Get a Lower Rate
Did you know you can negotiate your interest rate with your bank?
It’s totally possible, but most people just don’t ask.
If you’re struggling with your credit card debt, you can call the lender (the bank that issued your card) and ask for a lower interest rate.
The reason why is simple: The bank will lose more than a few percentage points if you default on your debt entirely (meaning, they make less money from your interest owed), so it’s in their best interest to cut you a break.
It’s also helpful if you’ve been a long-time customer and can demonstrate a history of timely payments.
It’s important as a consumer to know where you stand. Have a copy of your credit report and use that to ask for a rate you want. The worst thing that can happen is they can say no. But then you can just go elsewhere, like to a low interest card, or use a transfer of balance promotion (below).
5. Use a Transfer of Balance Promotion
Many credit cards periodically run promotions on balance transfers to get new customers to bank with them.
These offers generally offer a low interest rate, typically 0% to 1.99%, for a limited time (typically six to 10 months).
Look for the lowest rate and the longest promotional period to give yourself a bit of time to get out from under your credit card debt.
There are two things to keep in mind with these promotions. Even if the promotional rate is 0%, there’s still a fee for making the transfer—usually 3% of the amount transferred. (That means if you’re transferring $1,000 in debt, you’ll pay a fee of $30, which is added to your balance.)
Also, after the promotional period has ended, you will be paying the regular interest rate for that card.
That said, with a bit of careful planning, you take a chunk out of your debt by using a balance transfer.
6. Pay Off Your Debts Before Investing
Figuring out whether or not to invest while paying off debt can be tricky.
On the one hand, the interest on your credit card debt will eat up any gains in the market.
That said, remember that debt repayment is a long process. Don’t leave the market. You should still invest while paying down your credit card debts. The rates are substantially lower than in previous decades, so to have a reasonable income in retirement, you have to save longer and save more.
Some companies have RRSP-matching programs. It would be a shame not to participate in those.
7. Use Cash More Often
Credit cards are valuable tools, but only when they’re used properly.
If you’re holding onto debt, try using only one credit card (like a low interest card), or paying with cash except in emergencies.
Don’t spend any money on your credit card unless you have the funds in your bank account to pay it off. This way you can still get rewards and have the safety and convenience of spending with a card without taking on more debt.
If you have credit card debt, you want to pay it off as quickly as possible, and it’s usually a long process.
Familiarizing yourself with your own spending habits, making and sticking to a budget, and prioritizing your debt will get you ahead quicker than you anticipate.
Talking to your creditors and finding good financial strategies and products can point you to the finish line.