They said don’t run a balance on your credit cards. They said if you can’t pay it off every month, cut it up and throw it away.
Too late. You run a balance. You owe thousands of dollars, possibly tens of thousands, on cards with interest rates close to your chronological age.
A consumer can go gray as they walk away from credit card debt. A borrower who owes $10,000 on a card at 20 percent interest and pays $200 a month will retire the debt in eight years and change at a total cost of $21,000, according to one tabloid. Credit card interest calculator. This is assuming that the consumer does not use the card again.
Here are six strategies for getting out of debt a little faster. All of them can save you time and money. Choose the one that suits you best.
Get an interest free credit card
It sounds too good to be true: the bank will send you an interest-free credit card for 12, 18, or 21 months with no real strings attached.
A no-zero APR credit card may be the best way to reduce card debt in terms of pure savings. The standard card allows the customer to transfer thousands of dollars in debt from other accounts for a one-time fee equal to a small percentage of the balance being transferred.
Then, in most cases, your full monthly payments reduce your debt. Not a penny is wasted on interest.
“A zero percent balance transfer credit card is an incredibly powerful tool,” said Matt Schulz, senior credit analyst at LendingTree, an online lending marketplace. “Being able to go a year, sometimes up to 21 months, without accruing any interest on a balance is really big.”
The downside: Once the promotion ends, the lender will start charging interest on the remaining balance. To avoid this, set a budget. If you can pay $300 a month with a no-interest card and have 18 months without interest, don’t transfer more than $5,000 on the card. Within 18 months, the debt will expire.
Remember, too, that “this will be a credit card that you’ll have in your wallet and likely use once this promotional period ends,” said Bruce McClary, senior vice president at the National Corporation for Credit Counseling.
In other words, resist the temptation to pile more debt on the card once the zero interest hour runs out.
Pay the smallest balance first
A consumer with many debts of different rates and amounts can achieve a quick and painless victory simply by clearing one of them off the list. And why not start with the smallest debt?
Financial planners call this technique the snowball. Make a list of all your debts, choose the smallest one and pay it off as quickly as possible. Soon enough, a list of seven or eight debts can shrink down to five or six debts, creating a surge of growing momentum.
“It’s that momentum that keeps people motivated,” McClary said.
Pay off debts with the highest interest
A popular alternative to a snowball is an avalanche: arrange your debt from the highest interest rate to the lowest. Next, make solid payments on the person with the highest rate.
For a consumer with numerous debts, focusing on the one with the highest rate makes financial sense.
“Over time, you’ll pay less interest because you’re targeting the highest interest rate first,” said Sarah Ratner, a credit card expert at NerdWallet, the personal finance company.
The downside: If this high-interest debt is a large amount, it can take years to pay off. An avalanche may look like a glacier.
Snowball or Avalanche? “It’s really about knowing what motivates you,” Schulz said. “Some people are motivated by small winnings, so it’s best for them to pay off that small balance first and rip that card and feel motivated. For others, it’s just a matter of the math.”
Contact a credit counselor
The above methods are not suitable for everyone. Borrowers with substandard credit scores may not qualify for a no-interest credit card. Dividing and conquering one’s debts only works for those with cash to pay it off.
Some borrowers are in over their heads. They may lack the funds to even make minimal payments, which leads to expensive fees. Fees and interest can push the credit card balance beyond the customer’s credit limit, resulting in more fees.
For them, one of the options is the non-profit organization The National Corporation for Credit Counseling. A credit counselor, McClary said, “can sit down and review your financial situation and provide an action plan.”
Nonprofit credit counselors can rescue borrowers from delinquency notices and debt collectors. They work with lenders to stop or waive late fees, “over the limit” fees and other fees and lower interest rates, reducing the amount of debt a consumer owes. The client makes one monthly payment to the advisor, who splits the money and sends it to the creditors.
A counseling service can deliver a desperate debt borrower “within four years or less, in many cases,” McClary says.
Call the bank
A consumer who has one or two credit cards and wants to start a head start on paying off retirement debt should consider making a simple phone call to the card-issuing banks.
First, research your credit score. The higher the score, the stronger your negotiating position. Next, call the credit card company and start a polite negotiation. The card issuer may agree to lower the interest rate. The company can also waive onerous fees that eliminate your debt or offer a temporary deferment from your monthly payments.
“Achieving success becomes a little more difficult if you have multiple credit cards,” McClary cautioned. A cardholder may only succeed in achieving temporary indulgence, while a professional counselor can negotiate on a permanent basis.
Hide the card
Consumers who do not pay off their credit card balances each month should not use credit cards. But going to Turkey on a credit account is not so easy, especially if the card is right there in your wallet or purse.
Credit experts say one way to curb the temptation of credit cards is to take the card out of the game. Cover with ice. Lock it in the drawer. Cut it in two and throw it away. It’s very difficult to swipe a card that you don’t have.