This week, the U.S. Federal Reserve decided to keep interest rates unchanged, which is particularly good for those with credit card debt. Even though your credit card interest should remain unchanged (for now), those struggling with credit card debt should consider paying it off before the Fed raises interest rates. Your credit score is affected by your ability to pay off your credit card debt, so be sure you make payments that help to quickly lower your total credit card debt. The less credit card debt, the more opportunity you will have to transfer the would be credit card payment into savings.
Before we begin with our tips for paying off credit card debt, understand that the risks and your comfort level with credit card debt is impacted by several factors. These factors include your balance, interest rate and ability to make payments. All these factors will either stress you out or make maintaining a credit card balance seem reasonable. Keep this in mind as you read through our tips.
Debt Consolidation Loan
With interest rates still relatively low, a debt consolidation loan might help you save money paying off your debt. Take a look at the interest rate for your credit card and compare it to the interest rate for this type of loan. If the interest rate for the credit card is higher than the loan, taking out a debt consolidation loan will help save you money on interest. Keep in mind, once you consolidate the debt, your credit card balance will be zero. Make sure you cut up your credit card or place it somewhere so you don’t use it until your new loan is paid off in full.
Home Equity Loan
Depending on the current market conditions, if the interest rates are still low, consider taking out a home equity loan. You can lower the interest rate on your debt with this type of loan and a portion of the interest you pay is tax deductible. As with debt consolidation, your credit card will now have plenty of available credit, so be sure to cut it up or put it somewhere you won’t access it until the entire loan is paid off. This option is available for home owners (with equity) and not for renters.
If you have not already noticed, our previous tips were focused on comparing the interest rates you pay on your credit card with some other (loan) option. Thus, you should look at the interest your money is earning in a savings account. More than likely (in today’s economy) the interest amount is minimal in your savings account, while your credit card rate is much higher. Using that money to pay down your credit card debt will save you money on interest over time. Once you pay off your credit card, the monthly amount you were paying on your credit card, can now be used to rebuild your savings.
Pay It Off
Simply making the minimum payment each month will not be effective in paying off your credit card. You will need to cut expenses (where possible) to make payments each month that are above the minimum amount required by your credit card company. Having a budget in place will help you spot expenses that can be reduced so you can find more funds each month to make a larger credit card payment. The faster you pay off your credit card debt, the more money you will have to save and the cheaper your debt will be.
These are just a few of the ways you can start paying off more of your credit card debt. Other options might include borrowing from friends/family, taking on a second job or selling your valuable assets (e.g. antiques, collectibles, etc.). You will be financially more comfortable with less credit card debt, so consider some of our tips above.
What are some of the effective ways you paid down your credit card debt? Share your thoughts in the comments section below.