How to Pay Off Credit Card Debt

Using a credit card can help you build a strong financial foundation. But credit card debt can also add up quickly, especially in difficult times. If you have credit card debt and want to pay it off, your best bet is to employ the debt avalanche repayment strategy, in addition to holding off on further credit card purchases for the time being. A reputable debt relief company may also be able to help.

Why Is Paying Off Credit Card Debt Important?

The balance you carry from month to month on your credit card can have a major impact on your credit score. In fact, your credit utilization ratio, which is how much you currently owe compared to your total credit limit, accounts for about a third of your score. A common suggestion is to try and keep your credit utilization ratio below 30%. For example, if your card’s line of credit is $5,000, you don’t want to owe more than $1,500 at any given time.

A higher credit utilization ratio will damage your credit score and make it difficult to obtain loans or other credit, especially when combined with a rocky payment history. A poor credit score can also mean higher insurance rates and even impair your ability to rent an apartment or get a new job.

Your credit score isn’t the only reason to maintain a low balance on your credit card. The more debt you carry, the more you’ll also pay in interest charges—and credit cards charge some of the highest interest rates around. What’s more, credit card interest, unlike the interest on a home mortgage, for example, isn’t tax-deductible.

How Credit Card Interest Adds Up

When you get a new credit card, the company that issued it, such as a bank, will assign you a certain credit limit. As you use your card throughout the month, your balance will grow and the amount of credit you have available as part of your credit line will shrink. At the end of the monthly billing cycle, you’ll be required to make a minimum payment specified by the card issuer, which is calculated as a percentage of your total balance.

Paying that minimum—and paying it on time—will be sufficient to keep you in good standing with the credit card company. However, it’ll also mean rolling the remaining, unpaid balance on your card over into the next billing cycle. At that point, interest and possibly other fees will be added to the amount you owe. 

If you continue to roll a balance over from month to month, you’ll not only accrue more interest on your debt, but also interest on the interest on your debt. As a result, your balance can begin to snowball. For this reason, it’s typically best to pay more than the minimum amount due. If you’re able to, the ideal approach would be to pay off your balance in full each month to avoid owing any interest at all.

If you are struggling to make payments, it’s best to communicate directly with your lender and try to find a compromise to make repayment more affordable. When all else fails, a reputable debt relief company can handle these negotiations on your behalf. Investopedia publishes a regularly updated list of the best debt relief companies.

3 Simple Ways to Manage Your Credit Card Debt

If you’re having trouble managing your credit card debt, here are some things you can do to get back on track:

• Pay down credit cards from highest to lowest interest rate: If you have balances on more than one credit card, pay at least the minimum due on each of them and then put any extra funds you can scrape together toward the debt with the highest interest rate. When that one’s paid off, move on to the second-highest rate, and so on. This is known as the debt avalanche method.
• Avoid new debt: While you’re working to pay off your outstanding credit card debt, it’s smart to not take on any new debt and dig yourself into a deeper hole. Some bills are unavoidable, but this would be a good time to hold off on major purchases that you’d ordinarily pay for with a credit card.
• Use cash: Studies show that consumers spend less money when they use cash instead of credit cards. So if you want to work on paying down your credit card balances, put your cards away and, wherever possible, use cash instead. Paying with cash can also be a good reality check. While credit cards encourage a buy-now-worry-later approach, once you’ve used up the cash in your wallet, you have a better sense of how much you’ve spent.

The Bottom Line

It’s easy to fall into credit card debt, and it can be hard to find your way out of it. As such, it’s important to pay more than the minimum monthly payment on your card. You won’t be able to use another credit card to do this unless you do a balance transfer. If you’re running a substantial balance, focus on paying it off as quickly as possible. The longer it takes to pay off a balance, the more money it’ll end up costing you.