There is no bigger drag on a persons finances than credit card debt. With interest rates often over 20 percent, it is a huge burden and carrying this debt is literally like throwing money away each month.
Make it a point this year to pay down and hopefully pay down that credit card debt completely. If you are up for the challenge, here are 3 proven way to get rid of this debt and cut your monthly budget.
Get A Low Interest Consolidation Loan
If you have good credit, a consolidation loan is always a good option to pay down credit card debt. Note that this is only going to be a good option if yo have a decent credit score. With a low score, the interest on this loan will likely be as much as you are paying on your credit cards, making it a waste of time. With good credit however, you can pay a third of the interest and throw away less money each month.
There are several benefits to a consolidation loan.
- Lower Interest
You could pay less than a third of the interest that you are currently paying. That could save you hundreds of dollars in interest every year, money that you can use to pay off your debt faster.
- Lower Payment
Your required fixed payment would likely be less than your combined minimums on your credit cards.
- Improved Credit Rating
In most cases, your credit rating will increase. This is because your credit utilization ratio on your cards will go down and the new installment loan will add diversity to your credit profile.
There are two things that you should keep in mind if you go the consolidation route.
First, do not close the credit cards you pay off unless they have an annual fee. Doing so would drop your available credit and could decrease your credit age. Keep them open but do not use them. If a card has an annual fee, see if you can have the fee removed before you close it.
Next, keep in mind that you can pay more than the minimum on your new consolidation loan. It would be a good idea to add up all of the minimum payments on your aid off cards and pay at least that much each month. This will allow you to get rid of that debt quickly.
Use The Debt Snowball Method
If a consolidation loan is not a good option for you, it is time to do things the old fashioned way. You will just have to pay that money down as fast as you can. One way to do this is with a method called the “debt snowball method”.
This is really just a motivational tool, but it works. You need motivation when facing a mountain of credit cards.
With this method, you take all of your cards and organize them by their balance. You then pay the minimum payment on all of your cards, except one. You will pay as much as you can each month on the lowest balance card until it is paid off.
What you are doing here is motivating yourself to keep going. By attacking the lowest balance card first, you will get a card paid off faster. Seeing a card paid in full will motivate you to keep moving forward.
Once you have a card paid off, move on to the next lowest balance credit card and keep on going.
Use The Debt Avalanche Method
If you are a bot more disciplined and lean towards the logical side, the Debt Avalanche Method may appeal to you more. This method is all about maximizing your dollar but it might not be as motivating.
With this method, you will take all of your credit cards and organize them by interest rate. Again, pay the minimum on all cards but one. This time, it will be the credit card with the highest interest rate. Since this is not necessarily the card with the lowest balance, it may not be as motivating but it will use your dollars more effectively.
By paying down the highest interest card first, you will reduce the amount of total interest that you pay. This will save you the most money.
Just like with the other method, keep paying as much as you can on the chosen card until it is paid off. When it is, pat yourself on the back and move on to the next one.
To Sum It All Up
It really doesn’t matter which method that you use to pay down your credit card debt as long as you take action. With the average American carrying close to 10,000 dollars a month in revolving debt, it adds up to quite a lot of wasted money. With the average credit card interest rate sitting at 17 percent. that is 1700 dollars a year or over 140 dollars a month in wasted money. Money that would be doing much more for you in an investment account.