Learn How to Pay Off Credit Cards

Learn How to Pay Off Credit Cards
Betsalel CohenMar 18, 2012
Key Takeaways:
  • Paying off your credit cards takes discipline.
  • Make your payments on time, but avoid making minimum payments.
  • Use the snowball or avalanche method to pay off credit cards quicker.

Steps and Tips to Paying Off Your Credit Cards

Credit cards are handy. They are easy to use for everyday purchases in stores, gas stations or online. They also help you purchase larger items, such as appliances, televisions, and computers.

You have the choice of paying off your credit card in full each month, paying part of the bill and carrying a balance, or making only the minimum required payment and watching your balance accrue interest at the rate specified in your credit card contract.

Paying off your credit cards is an important financial goal. Sometimes unexpected expenses, emergencies, and loss of income can cause you to run up your credit card bills. Here are 5 tips to help you pay off your credit cards:

  1. Keep your charges down.
  2. Always make your payments on time.
  3. Avoid minimum payments.
  4. Use a pay-off strategy.
  5. Watch your interest charges.

Keep Your Charges Down

Maintain responsible buying habits. If you do not charge it, then you will not have to pay it off. Follow these tips to help your credit card debt down:

  • Make a budget and stick to it. Read the Bills.com budget guide, to help you get started on making and keeping your budget.
  • Keep a rainy day fund. This fund will help you in cases of emergency. If your auto breaks down, or you need emergency medical care, then you will have a source of funds to keep you out of debt.
  • Monitor your budget, and remember to keep your Debt-to-Income ratios down. This will help you get a lower interest rate when you are looking for a new loan.

Make Your Payments on Time

Always make your payments on time. Late payments have a detrimental effect in paying off your credit cards because:

  • Late payments show up in your credit report causing your credit score to decline. A lower credit score will make your future loans more expensive.
  • Late payments carry with them extra fees, increasing your balance.
  • Making a late payment is a breach in your contract and can cause a severe interest rate hike, sometimes even over 30%.

Avoid Minimum Payments

Pay off Credit Cards: Avoid Minimum Payments

In order to pay off your credit cards, avoid making just the minimum. The minimum payment, which varies from card to card, allows you to make a smaller payment, as your balance goes down. You are required to pay between 2%-4% of your balance. If you can only afford to make the minimum payment, make sure to do so. However, don't rely on the minimum payment as a method to effectively pay off your credit cards.

For more information use the Bills.com minimum payment calculator.

Choose One of the Pay Off Credit Card Strategies

Any effective strategy for paying off credit cards, require you to pay something more than the minimum payment. To succeed, it is important that you keep paying over the minimum payment each month. Do not decrease the amount you pay over time, until all your debts are paid off. No matter which strategy you choose, you will pay off your credit cards much quicker.

Take the following steps:

  1. Make a list of all your credit card debt, including the following information:
    • Name of the Bank/Card
    • Balance
    • Interest Rate
    • Minimum Payment
  2. Next, choose an amount that you can afford to pay each month, making sure that is above the minimum payment. Do not go below that sum on any of the future payments.
  3. Choose between one of these two strategies:
    • Snowball: Sort your list by balance, starting with the lowest balance and working down. Make the starting minimum payment on all the cards, except for the one with the lowest balance. Apply all extra funds to this card. The snowball strategy pays off the lowest balance credit card first, giving you a psychological boost. This increases as you pay off each credit card and cross it off your list of debts.
    • Avalanche: Sort your list by interest rate, from highest to lowest. Make the minimum payment on all cards, except for the one with the highest balance. Apply all extra funds to this card. Avalanche saves you the most money, because you pay off your highest interest debt first.

An example: Pay off your credit cards by sticking to your guns!

Here is an example of a family with 3 credit cards, only making minimum payments (3% of the balance). It will take over 21 years to finish paying off credit cards.

BankBalanceInterest RateMinimum Payment
Chase$8,00016%$240
BOA$5,00014%$150
Discovery$9,00024%$270
Total$22,000$660

Here is a comparison of how long it takes to pay off credit cards and how much it costs, based on your different payment methods:

MethodTotal Interest CostTime to Pay off Last Credit Card
Minimum Payment (decreases)$20,68416 years, 1 month
Stick with Same Payment ($660)$9,7043 years, 7 months
Avalanche - add $300 per month$5,0362 years, 4 months
Snowball - add $300 per month$5,9002 years, 5 months

Watch Your Interest Charges

Save money and pay off your credit cards by shopping around for the lowest interest rate possible. Look into a balance transfer. Be a careful shopper and make sure you know what your interest rate will be once the low-interest or 0% introductory period ends. Don't run up balances on the new cards.

Pay Off Credit Cards - Even if you can't afford minimum payments

Keeping your finances under control is the first and most important step to paying off your credit cards. By keeping a budget, you can control the amount of money you spend and make sure that you do not run of credit card debt.

However, even the best-laid plans can go astray.

If you finances get out of control, and you cannot make even your minimum payments, then you need to take more serious steps. I recommend that you read the Bills.com article about debt relief to learn about debt relief programs designed for people struggling to make their required minimum payments, such as credit counseling and debt management, debt settlement, or bankruptcy.