If you have high credit card balances in 2018, you need to prioritize paying them off and do it as soon as possible. This is because credit card debt is now more expensive than it has ever been in the past, and if that’s not enough, here are some more statistics to fuel your desire to get out of debt.
- Total revolving debt in the U.S. as of February 2018, which is mostly credit card debt, has reached $1.03 trillion, according to the latest Federal Reserve statistics. This is an all-time high for our country.
- Interest rates have already risen twice in 2018, and CME’s FedWatch tool suggests another rate hike is coming by the end of the month.
You’re about to learn the six best ways to pay off high credit card debt, but before we dive in, let’s first look at the most expensive option you want to avoid.
The Most Expensive Credit Card Relief Option
The most expensive credit card relief option is to only pay minimum monthly payments. Never make only minimum monthly payments on credit cards, because you will end up paying the maximum amount of interest. For example, if you have a $15,000 balance on a Chase credit card and your interest rate is 29%, by only paying minimum payments, you will end up paying a total of $45,408 in interest alone and it will take you more than 10 years to pay off the balance.
- The Snowball Method:
The debt snowball method of paying off your credit card balances was found to be the most effective credit card debt relief option in 2018, according to new research published by the Harvard Business Review.
With the debt snowball method, you pay off the credit card with the lowest balance first. Instantly, once that first credit card balance is paid in full, your monthly free cash flow increases. You’ll then use those extra funds to pay off the next smallest account. Once the second smallest account is paid in full, your free cash flow will increase even more and continue to grow, like a snowball. Then use all that extra money to pay off the third smallest account.
This method works because of psychological principles. When a person achieves a goal, such as paying off their first credit card debt, the brain releases dopamine, which makes you feel good. And because you want more of that good feeling, you’re motivated to keep paying off each debt one by one. Before you know it, you’ll start to see the light at the end of the tunnel and your momentum will be at its peak, and at that point, nothing can stop you!
- The Debt Avalanche Method
The Debt Avalanche Method is all about going after the account that costs you the most money – the account with the highest interest rate. If you like math and numbers, you will most likely choose this method because it makes the most sense from a technical standpoint.
Technically speaking, this method will save you more money than the snowball method, if you can stick to the plan.
There is a lot of controversy surrounding which way is more effective, the snowball method or the avalanche method. Understand both options and then, based on your personality type, you can determine which path is best for you.
Some people may decide to use a combination of these two options. You could start with the snowball method, quickly eliminating your small debts that have a balance of $1,000 or less, and then move to the debt avalanche method to pay off the rest of your balances, but in the most cost-effective way.
- Balance transfer cards:
You can reduce your credit card interest rates by using a balance transfer card with no interest for 12 to 18 months. If you can pay off your entire balance on the balance transfer card during the introductory period when the interest rate is zero, you’ll end up eliminating 100% of your interest and only have to pay the initial balance transfer card fee.
Be sure to keep your credit cards open after you pay them off, as closing a credit card lowers your credit score.
These cards have an upfront fee that ranges from 3% to 5% of the balance.
Look for a balance transfer card that offers
- Low upfront fees
- an 18-month introductory rate
- a zero percent interest rate
- Home equity line of credit:
A home equity line of credit can be used to pay off high-interest credit card debt, saving you thousands of dollars in interest. Home equity lines of credit have lower interest rates than any other type of bank loan. BankRate.com estimates that the average interest rate on a home equity line of credit is only 5%.
The downside is that you’re turning your unsecured debt into secured debt, which can be dangerous because if for some reason you don’t make your payments, you could lose your property to credit card debt.
- Ask your creditor to reduce the interest rate
Don’t overlook the following method, because it is very simple. Sometimes the simplest things in life are the most overlooked.
Call your creditor and ask for a supervisor. Remind them how many years you have been their customer and how perfect your payment history has been over those years. Explain that you are unhappy that they are charging you such a high interest rate and present them with an offer that another bank is making you. If your credit score has increased from what it was when you first applied for this credit card, mention that too.
Do some research and find a credit card company that offers a lower rate, and then you can use that as leverage.
Example: “Capital One is offering me a credit card with an 8% interest rate and 1% more than you are offering in cashback. Could you please lower my interest rate so I can stay with your bank? Also, you will notice that my credit score has increased from what it was when I first applied for a card with your bank two years ago.”
- Debt Relief Programs:
A consumer credit counseling program can lower your interest rates and get you out of debt in less than five years, without hurting your credit score. All of your credit card debt will be combined into one consolidated monthly payment and the consumer credit counseling company then distributes the funds each month to your creditors, but at the reduced interest rate. This program has the least effect on credit scores compared to any other debt relief program.
A debt settlement program should only be used if you are behind on your credit card payments and cannot afford to pay more than the minimum monthly payments. This is because this type of program can significantly reduce your credit score and result in negative mentions on your credit report. However, if you already have a bad credit score, all you need to do is focus on eliminating your debts as quickly as possible and avoid bankruptcy. Once you are debt-free, you can then rebuild your credit score.
If you are on the verge of bankruptcy, debt settlement can be a viable alternative that gets you out of debt in about three years and gives you an affordable monthly payment for all your unsecured debts.