If you’re dealing with high credit card debt, you’re not alone. Like, really not alone — according to the Federal Reserve, consumer credit debt in the U.S. has topped $3.34 trillion dollars as of February 2015, which means there is slightly more than $10,470 dollars of debt for every person in the country.
With numbers like that, it’s no wonder many people are struggling with their credit card debt, especially when you consider that the average card holder has about $15,000 in credit card debt, with an average annual rate of 17 percent.
With that in mind, it makes a lot of sense to focus on strategies to get that debt paid off quickly.
Paying the Minimum Can Double Your Debt
Answer this question honestly — do you pay extra on your credit card bills, or do you stick to minimum payments every month? If you’re like most people, it’s probably the minimum. While making minimum payments may help you keep your credit score from tanking, doing so costs you more in the long run. If you only make minimum payments, the amount of time it takes for you to pay off your bill increases at an exponential rate.
For instance, if your credit card debt is $15,000, your interest rate is approximately 17 percent, and you make a minimum payment of $250/month: It will take you 135 months to pay off that card, or a little over 11 years.
During that time, you’ll end up paying more than $18,000 in interest, over and above the $15,000 principal.
Now you can see why getting those cards paid off sooner rather than later make a lot of sense.
Strategy 1: Paying Off a Little Extra Every Month
The most straightforward method to getting out of debt is to simply pay more than the minimum due, every month. This method is best when you have a single, consolidated debt.
Paying extra is a great way to go because it helps your credit rating, as credit reporting agencies look at things like early payment and over-payment to be a good indicator of credit worthiness. It also dramatically shortens your timeline to pay off your debt because the extra payment goes straight to the principal.
For example, sticking with the scenario of being $15,000 in credit card debt, with an annual interest rate of 17 percent: As seen above — if you pay the $250 minimum, you’ll be paying for 135 months, and end up paying more than $18,000 in interest alone.
However, if you pay $400/month on the same card, it will only take 54 months, and you end up paying just $6,545 in interest.
Now granted, an extra $150/month isn’t a trivial amount. But if you can find a way to do it, it not only cuts your time to repay the credit by more than half (less than 5 years, instead of more than 11 years), it also reduces your interest portion by about two-thirds, resulting in a total repayment of around $21,545, instead of $33,715. That’s more than $12,000 in your pocket.
Why is this? Because, by law, minimum credit card payments are defined as that month’s portion of the annual interest due, plus 1 percent of the principal. You read that right — out of your monthly minimum payment, only 1 percent goes to principal. If you pay extra, all of the extra money paid goes straight to the principal.
Strategy 2: Divide and Conquer
If you’re like most people, however, you have more than one card — in fact, the average American has 3.7 credit cards. And all these cards typically have different interest rates and balances.
Let’s say, for this example, that you have several credit cards, each with a different balance and interest rate. To pay them off, you could pay the minimum amount on each, but we’ve seen how that prolongs your repayment plan and increases your total bill over time.
Another strategy is to pay more than the minimums on each card, which is a good strategy and it can dramatically decrease your time to pay off your debt and the payoff amount.
But an even better strategy is to focus your extra payments on the cards with the highest interest rates. With this strategy, you either pay the minimums (or slight more) on three of the four cards, and pay substantially more on the card with the highest interest rate. This has the double benefit of reducing your payment timeline and interest payments, and once the card is paid off you can take the money you were applying to that card and apply it to the next card on the list, which will result in paying that card off even faster, and so on.
If you qualify for a balance transfer credit card, you can also transfer a high-interest credit card debt to a card that offers 0% intro APRs, so you have a year or more to pay down the debt without interest. If you can’t qualify for a balance transfer card, look at repairing your credit to help you qualify.
Strategy 3: Consolidating Your Debt/Refinancing
A final strategy to mention is the option of using a debt consolidation loan, or refinancing your debt. To be honest, while this is an option, it needs to be treated very carefully and with an abundance of caution. Debt consolidation does not pay off your debt — it simply shifts it. Many debt consolidation loans extend your loan period out for a longer time, so that the payments seem lower. However, the loan comes with an even higher interest rate, and you end up paying more over time.
So while this is a strategy, make absolutely sure that you understand all of the fine print before even considering it. And even after you’ve considered it, you still probably shouldn’t do it.
Choosing the Best Strategy for You
Credit is a tool that, when used responsibly, can help you expand your financial potential and achieve financial stability. But take the time to choose a strategy that best works for you. Likewise, it’s important to avoid overextending yourself financially and stick to a realistic budget for expenses and credit repayment plans. After all, the best way to manage your debt is to keep it to a minimum in the first place.