If you’ve got credit card debt, you’re not alone. Many American households carry credit card debt year over year. Even if you pay down your debt each month, you can still accrue thousands of dollars in interest each year alone. That’s money that could certainly be put to better use elsewhere.
If you’re ready to shake loose from your credit card debt for good this year, here are some tips you can follow:
- Pick one credit card for emergencies. From your card collection, pick the one that offers the lowest annual rate—that’s your emergency backup.
- Stop using your credit cards. Find a dark place for all your other cards—as far away from you and your wallet as possible. Better yet, get out your scissors and cut them up.
- Prioritize paying off your credit cards.P ick the highest rate card you have with a balance. Make a pledge to yourself to pay the minimum payment PLUS as much as you can afford every month. Make it enough to create a sizeable dent in the outstanding balance.
- Stay focused. When your highest rate card is paid off, pick the next card to attack. In the meantime, check to see if you can get a lower rate on any of your cards. For example, if you currently have a $3,000 balance on a card, make a minimum monthly payment of 3%, and are charged a 16% APR, you’ll pay interest of nearly $440 in the first year. If you can reduce your APR to 9%, that drops to about $240—a savings of roughly $16 a month.1 Finding a lower rate may help keep the balances in check as you work to whittle them down.
- Protect your credit rating. While focusing on paying off your high-interest rate cards in order, be sure to pay at least the minimum required payment on all your other accounts each month. Doing otherwise could negatively affect your credit rating.
The true cost of credit2
Say you find a 42" plasma TV on sale for $1,000. That’s a great deal, right? You can pay only $25 per month toward the TV, and you've got a credit card you recently paid off, so you decide to use that.
Your card carries an average annual percentage rate (APR) of 14.00%. With minimum payments of $25 a month, it will take about four and a half years to pay off the TV. And, at the end of that time, you will have paid a total of $1,354. Is the TV still a great deal?
As they say, the true cost of something is what you could have done with that money instead. Let's look at what happens if you invest the money. Say you invest your $23 a month for five years in a tax-deferred account at a hypothetical 7% rate of return. In five years, you could have $7,718—enough to buy seven plasma TVs.
No one says you have to deny yourself the things that make life fun. But be smart with your money: Weigh the cost of credit and aim to pay cash more often than not.
1Minimum Payment Calculator, CreditCards.com
2This hypothetical example assumes no loans or withdrawals are taken. Your own account may earn more or less than this example, and you will owe taxes upon withdrawal. The estimates do not reflect any reductions for taxes. In general, performance returns for actual investments will be reduced by taxes, fees, or expenses not reflected in these hypothetical illustrations. Investing in this manner does not ensure a profit or guarantee against loss in declining markets.
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Break free from credit card debt
A focused plan can help you reduce credit card debt and free up money for savings, investing, and other financial priorities.
