How to Pay Off Credit Card Debt Once and for All

Credit cards are, without a doubt, one of the most convenient forms of payment today. Add in the lure of reward points and cardholder perks, and it’s not hard to understand why they’re so popular.

But credit card debt has a way of sneaking up on you. And once it’s there, it can be extremely difficult to get under control. High-interest rates can create a debt spiral that often feels impossible to escape, no matter how hard you try. 

If you’re ready to eliminate your credit card debt once and for all, it’s time to consider a strategy called debt consolidation.

What is Debt Consolidation?

When people hear the term “debt consolidation,” they often assume the process is complex, time-consuming, and costly. But that is far from the truth.

Debt consolidation is simply moving multiple credit card balances or low-dollar loans into a new loan. To illustrate, review the following example:

Imagine you have three credit cards with varying balances and interest rates.

Your total outstanding credit card debt is $4,500, and the interest rates range from 15.99% to 21.99% APR. Debt consolidation allows you to move all these debts into one new loan, as follows:

You can see that you now have only one outstanding balance with an interest rate of 8% APR. Debt consolidation provides several financial benefits, including:

• Easier to Manage: With only one monthly payment versus several, it’s much easier to stay on top of your current debt.

• Pay Less Interest: Depending on the type of credit card, the issuer, and your credit score, interest rates can be extremely high. Consolidating debt usually results in a lower interest rate, saving you a significant amount of money each month.

• Less Stress: While you still have to repay the same amount, a debt consolidation loan simplifies the process and creates a game plan to get back on financial track.

You typically have two different options when consolidating debt:

1. Credit Card Balance Transfer

• Debt Consolidation Loan

Each choice has its advantages and drawbacks. So, it’s essential to review both thoroughly to determine which option will work best for you.

Credit Card Balance Transfer

With a credit card balance transfer, you are moving your outstanding credit card balances (like the earlier example) into a new, lower-rate credit card. This strategy is popular because the process is quick and easy to accomplish.

• Advantages:

• Low-to-No Interest: It’s possible to find and use a credit card with a 0% APR promotional offer (or other low-rate incentives). Using one of these cards allows you to repay your balances without incurring interest charges (or paying very little).

NOTE: If you choose to use a promotional offer, read the fine print first. You’ll want to know exactly when the offer expires, possible terms that could void the incentive, and any fees charged.

• Disadvantages:

• Costly Fees: Some credit card providers will charge balance transfer fees that typically range between 3% to 5% of the transferred amount. You’ll also want to avoid credit cards with annual fees – these are charges simply for using the credit card.

NOTE: It’s quite easy to find a credit card that does not charge balance transfer fees or annual fees. So, spend time researching your options before you pick the first card you see.

• Minimum Payments: One reason people struggle with credit card debt is that you’re only required to make a minimum monthly payment. This payment generally only covers interest charges, and the principal balance barely declines.

Using the balance transfer option, you must commit to paying more than the minimum amount if you want to eliminate your outstanding debt.

• Tip:

• Create a Strategy: If you’re using a 0% APR credit card, make sure you know when the promotional offer expires.

For example, imagine you have $3,000 in credit card debt. The 0% promotional offer is valid for 12 months. That means you need to make at least a $250 payment each month to eliminate your debt before time expires.  

Debt Consolidation Loan

A debt consolidation loan operates the same as a personal loan. It’s an unsecured loan that will have set payments you’re required to make monthly.

• Advantages:

• Lower Interest Rates: Debt consolidation loans typically have much lower interest rates than traditional credit cards – allowing you to save more of your hard-earned money.

• Fixed Interest Rates: Your rate will not increase as a result of the economy or decisions by the Federal Reserve.

• Set Payments: With fixed monthly payments, you won’t be tempted to only make a minimum monthly payment as with a credit card. This feature forces you to get out of debt quicker.

• Known Payoff Date: With a debt consolidation loan, you’ll know exactly when you’ll be debt-free. It’s a great feeling and can motivate you to keep going when you see the light at the end of the tunnel.

• Disadvantages:

• Higher Interest Rate: It’s very unlikely you’ll find a debt consolidation loan with a 0% interest rate (like some credit cards). But the interest rates charged are typically quite low and much lower than traditional credit cards.

We’re Here to Help!

Eliminating credit card debt will relieve stress, boost your credit score, and improve your finances overall. If you’re serious about eliminating your outstanding credit card balances once and for all, debt consolidation provides an effective framework.

If you’re interested in learning more about debt consolidation and want to speak with a team member to see which option is best for you, we’re ready to help. Please stop by any of our convenient branch locations or call 801-451-5064 to schedule an appointment.

Categorized in: Budget, Credit Cards, Debt Consolidation