This summer is a great time to start your journey to financial freedom by paying off credit card debt and getting a grip on longer-term loans once and for all. Let us show you debt settlement strategy after strategy so that you have plenty of tips at your fingertips.
Ask about lower interest rates on your existing credit cards
Before you start speeding up your credit card payments, check with your credit card companies, especially those that have large balances and higher interest rates. Assuming your account is otherwise in good standing, you can lower a credit card’s interest rate by simply calling and asking. The reason? Credit card companies want to hold on to their good customers. So if you pay your credit card bill on time, it’s worth asking for a cheaper rate. “Ask for lower interest rates – you have nothing to lose and you might be pleasantly surprised,” says Tara Alderete, director of enterprise learning at Money Management International.
Transfer funds to cards with lower interest rates
If you have high balances on your existing cards, consolidating your debt onto a new credit card with a lower interest rate can save you money on interest charges. The best prepaid transfer cards offer lower prepaid transfer rates, but know that you must have good credit to qualify. “In some cases, you may even be eligible for an interest-free introductory period,” says Bruce McClary, senior vice president of Membership and Communications at the National Foundation for Credit Counseling. “The more your interest rate can be lowered, the easier it is to pay off your debt faster.”
Before applying for a new card, be aware of transfer fees, which can cost you 3% to 5% of the amount transferred. Also, consider the new card’s credit card limit: if it’s significantly lower than the amount you already owe, you won’t be able to transfer much of your debt. Another downside: a card with a good balance transfer offer may not offer reward points, which you may miss out on assuming a card with spending bonuses in certain categories.
Pay more than your credit card minimums
The first step in combating credit card debt is to get used to paying more than a card’s minimum payment. While making a minimum payment will keep your account in good shape, it’s not the quickest or most financially sound way to get out of debt.
To understand how this works, consider this example from Becky House, director of strategic initiatives at American Financial Solutions. If you have a credit card with a $2,000 balance and an 18% interest rate, it will take 10 years and 11 months to amortize it if you only make the minimum monthly payments of $35. You’ll also pay $2,574.43 in interest – yes, more than double what you originally owed! By increasing the payments to $50 per month, you reduce the period to 5 years and 2 months and the interest to $1,077.15.
“No matter how much you can add to your minimum payment, it will help you pay off your debt faster and save on interest and fees over time,” says McClary.
Focus on cards that charge the highest interest rates
Let’s say you owe more than one card and you are unable to increase your monthly payments very much above the monthly minimum. “Focus on the credit cards that charge the most interest first,” says McClary.
The exceptions are if you also have an account that is overdue or already in collection. In these cases, you should first pay off your overdue account to bring it up to date, and then move on to paying off the credit card account that costs the most interest. You should pay as much as you can for that card each month once you’ve paid at least the minimum payment for any other card with balance (if you don’t leave one of those this get into an overdue situation).
Transfer payments when paying out a card
Credit card paid out? Congratulations! Now you can apply the money you paid with this credit card to another account. It’s a great way to keep your payment momentum going — or roll over the payments you’ve made to the card with the next higher interest rate.
“For example, if you’re paying off a credit card, instead of putting the money back into your budget, you start sending it off to another creditor that you owe,” says House. “These larger payments will help pay off that debt faster.”
Manage your other debts
Once you have your credit card accounts in good shape, you can focus on the other debts in your life. Do you have student loans, car loans, and/or home loans? Now is the time to turn your attention to these types of debt. “Refinancing and consolidation are options for borrowers with good credit,” says McClary. “For those who qualify, the right approach can result in savings on interest and minimum monthly payments.”
By rescheduling your loan, you can save on interest over the remaining term of the loan. And less interest means more money in your pocket. Start with your lending bank or credit union and ask about refinancing options. You should also look at online lenders. Choose the lender that offers the best rates based on your credit history. When you refinance, you can also consolidate loans into a new loan with a new lower interest rate.
Whether you refinance the original loan or keep chugging on, pay more than the monthly installment and you’ll make real progress toward paying off your debt.
Enjoy the debt free life
Once you’ve paid off your last credit card and taken care of all the other loans you owe, your financial life will be a whole lot better. Life without credit card debt in particular has many advantages.
“Aside from not having to make a big monthly credit card payment to your budget, you don’t have to worry about all that money you’re paying in interest,” says McClary. You have extra money to top up your savings or put back into your budget. With inflation driving up the cost of living, having a little extra money for groceries or gas can be a big help.”
Plus, the stress of living with credit card debt is gone, leaving you more relaxed to focus on your next financial moves. Enjoy your newfound freedom.
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