The recession may be in our rearview mirror, but since credit card debt isn’t a thing of the past, plenty of people still feel like they’re in the equivalent of a financial car wreck. (If that’s your life right now, you may want to check out U.S. News Best Credit Cards for Bad Credit of 2017.)
If you have far more debt to pay off than money coming in, you can feel pretty helpless. And, unfortunately, it often takes far longer to get out of debt than it took to get into it. So if you’re going to get out, and if you’re going to do it in a way that doesn’t include bankruptcy, you basically have two strategies, or a combination of both.
[See: What to Do If You’ve Fallen (Way) Behind on Your Credit Card Payments.]
The snowball method. If you have several credit cards, you could work on paying off the smallest debts first, even if others have high interest rates.
It’s a psychological approach rather than the most mathematically efficient method, admits Joseph Carpenito, a financial advisor with Raymond James Financial Services who is based out of Boca Raton, Florida.
“Most people attack their highest credit card balance first, with the reasoning that they are paying the most in yearly interest on that card,” Carpenito says.
This makes sense from a mathematical standpoint, and it’s a good plan. But it isn’t for everyone.
“Unfortunately, life gets in the way and that card never gets paid off, and they are only able to make a dent in the balance owed,” Carpenito says.
If you like landing small victories, the snowball strategy is probably for you, Carpenito says.
For instance, let’s say that you have three credit cards: one is a store credit card with $500 on it; a second credit card has $2,000 on it; a third has an eye-popping $7,000. Obviously, you pay the minimum payment on each every month, but the most money — as much as you’re comfortable with and hopefully well over the minimum payment — goes toward the store credit card. Once that’s paid off, then you take the money you were saving that went to the store credit card and use that every month to go toward the credit card with $2,000. Once that card is finally paid off, all the money that went to the card with $2,000 on it — you now add to what you’re paying every month for the $7,000 credit card.
It’s called the snowball strategy because the amount of money going to each successive card is getting bigger, like a snowball rolling down a hill, and your debt is continually getting smaller.
[See: 10 Completely Careless Credit Card Mistakes You’re Making.]
The avalanche method. This is the strategy of paying off the cards with the highest interest balance first. You pay at least the minimums on the credit cards with the $500 and $2,000 debts, but you throw most of your money at the credit card with $7,000.
“In the long run, this is the fastest way to get out of debt because it cuts the rate of continued debt accumulation,” says Byna Elliott, based out of Detroit and a senior vice president and director of community and economic development at Fifth Third Bank.
In other words, think of all that interest that’s accumulating with the $7,000 card. If that unsettles you, and you can deal with paying off multiple credit cards, then the avalanche method is probably what you should use.
Elliott approves of the snowball method, too, however. It all depends on what works for your financial situation.
The throw-everything-but-the-kitchen-sink method. This isn’t an official strategy that you’ll hear personal finance experts champion, but as you can figure out on your own, you can just funnel money at your revolving debt with no real strategy. That isn’t necessarily bad, as long as you’re continually shoveling more than the minimum payments at your cards. If you’re deep in debt, and you only pay the minimum payment, typically you’ll stay in debt for years.
As you shovel that money toward your credit cards, here are some things you might want to consider:
Transferring your debt to a credit card with a zero percent introductory annual percentage rate. Unfortunately, this may not work for people with thousands of dollars in revolving credit card debt because, thanks to their revolving debt, their credit score is in the toilet, and no credit card is going to give the zero APR.
True enough. Switching to a low or zero interest credit card probably isn’t practical for most people with a lot of revolving credit card debt, but if you are not yet to the point where your credit score has been affected by your debt, if you can transfer your debt and stop the interest rate madness for six to 12 months, it’s something to consider.
You could take out a personal loan to pay off the credit card debt. But the math works only if, again, your credit is good enough to get a loan with a lower interest rate than what you’re paying on your credit cards.
If things are out of control, you could ask the credit card companies to close your account and stop the interest. Just know that this can blow up in your face. For instance, your credit card company, now aware that you’re in financial trouble, may simply shut down your account, so you can’t use it, but the interest continues to climb.
[See: 25 Ways to Fix Your Finances Fast.]
But Larry Smith, an attorney who owns a consumer rights litigation firm in Chicago, says that he has seen negotiating a payment plan work out for some cardholders. That said, more often than not, Smith says, the credit card company starts trying to convince you to pay several large payments, to get rid of your debt over a few months, rather than allowing you to pay off what you can afford each month, which can take far longer.
Still, “as long as they have someone paying the card monthly, even in minimum amounts, [the credit card companies] are happy with the status quo. It’s when the consumer stops paying that the credit card company changes its tune,” Smith says.
But whatever you do to pay off your credit card debt, the sad truth is that you are going to suffer some financial pain, Smith points out.
“There is no real wonderful, tricky, innovative, creative way of paying off credit card debt that does not, in some way, hurt you,” he says.
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How to Pay Off Your Credit Card Debt: 3 Strategies for Success originally appeared on usnews.com
