Tips for Paying Off Credit Card Debt

Credit card debt is the worst. With interest charges that seem continually on the rise, and balances that never seem to go down, it’s like a pesky iPhone morning wake-up alarm that never stops blaring.

If you’ve hit snooze on paying off your cards more than a few times, you’re not alone. The Federal Reserve estimates that about half of all U.S. households are unable to pay off their credit cards in full each month, and most households carry an average balance of $15,000 spread across four cards.

The bad news is that the Federal government is expected to make a few interest rate increases over the next few years, making it more important than ever to repay it sooner than later.

Though it can feel overwhelming, it’s never been easier to quit the habit of hitting that snooze button, thanks to a slew of new low-interest cards, apps and some interesting updates to old-school tips.

Pull the Band-Aid Off

It might hurt a little bit, but it’s worth it.

“The hardest part of making any change is facing the truth,” says James Duren, a personal finance expert and editor at Highya.com, a consumer products review site that rates and ranks financial products. Duren once paid off a combined $22,000 of credit card debt with his wife over the course of three years.

It might feel painful, but you should write down all the credit cards you have, their balances, your monthly payments and their interest rates. Go from high to low. You can use an excel spreadsheet, Google Doc or even go low-tech with a piece of paper.

Then, calculate one more number: debt-to-limit ratio for each card, which you’ll need for below.

You can also use an app, like Credit Sesame, which can give you your credit score without affecting your credit and recommends loan options and other targeted ways to bring it up.

“Once you can accept that responsibility, you can move toward gaining control of your money,” says Duren.

While you're at it, do the math to see how much money you have in your emergency fund. After all, getting caught with a large unexpected expense and no cash cushion might only cause you to take out yet more debt.

Figure Out If a Balance Transfer Is for You

If you have consistent income and average-to-good credit, consider a balance transfer to a zero or low-percent interest card and make automatic payments before the term is up.

Duren, who rates such cards on his site, recommends using one if you find yourself with a big balance that is going to take six months or more to pay off, and the interest you’d pay in that time is more than the balance transfer fee you’d pay to move the money over to the card.

Duren suggests looking into Chase’s Freedom Unlimited card, which charges a 5 percent fee, Citi Diamond Preferred, which offers a zero-percent rate for 21 months and Citi Double Cash, because it gives you 18 months of 0 percent interest.

“If you had, let’s say, a $5,000 balance on a card with 15 percent interest and you paid it off in 18 months, you’d spend $614.56 on interest. If you transferred that balance to the Citi Double Cash, you’d pay a $150 transfer fee and that’s it.

By making this move you save about $460 in interest payments. The Double Cash will also earn you 2 percent back on purchases, so, at the end of that 18 months, you’d probably earn more cash back than you paid for your transfer, so you win by zeroing out your balance and getting cash,” explains Duren.

Sites like Highya and NextAdvisor can help you compare cards.

Plus, it doesn't hurt to call your credit card company and try to negotiate a lower APR.

Weigh the Pros and Cons of a Personal Online Loan

You’ve likely seen online apps, or had a few notices coming to your home about personal loans promising up to $50K depending on your credit. Really think them through, says Duren.

“These lending sites present themselves as an alternative to the big, bad banks, but it would do consumers well to push all that aside and look at the numbers.”

Duren believes the balance transfer card may turn out to be the better option for a few reasons. First, peer-to-peer lenders may end up charging you an interest rate that's the same as or higher than you current credit card.

Their best rates are reserved (in most cases) for consumers with incomes above $100,000 and credit scores above 730. “If you don't meet those metrics, there's a good chance you won't get the best rates the site advertises,” he says.

And ask yourself this: Are the options a peer-to-peer lender is giving me better than what I could get from a zero-interest card like the Citi Diamond Preferred or Citi Double Cash? If they are, then it would make sense to use them.

Remember, these loan companies aren't going to offer you a zero-interest period.

So, calculate how much total interest you’ll be paying over the course of the loans, including the balance transfer rate, then make the call.

Pick a Pay-Down Strategy and a Deadline

Debt snowball or debt avalanche: the eternal question. The former has you paying off the cards with the smallest balances first. The latter argues that you hack away at the cards with the highest interest first.

Though on paper, the avalanche approach will likely have you saving more from interest charges, a recent Harvard Business Review study found the debt snowball approach was actually more effective in getting people to pay off debt since the thrill of little wins as you pay off cards in entirety builds momentum.

While many financial advisors will advocate for the debt snowball, Duren recommends a hybrid approach that incorporates the best of both worlds—and will have the biggest impact where it really matters—your credit score.

He suggests paying each of your credit cards down to below 30 percent of their credit limits, since doing so will raise your credit score by double digits. Once you have each one under 30 percent, then pay off your balances with the snowball approach, i.e. starting with the smallest balance first.

Then, set a deadline. Duren and his wife were able to pay off the first $11,000 in debt after 18 months, but they realized that they could probably get the rest done faster, so they set a nine-month deadline to pay off the remaining $11,000.

They did a balance transfer to ease the interest payments on their biggest balance. With the deadline looming, they also capped miscellaneous monthly spending to $100, cut date money budget in half and allotted on $25 for fun money instead of $75. And finally, they used their tax refund. “We met our goal and it felt amazing.”

Download an App

Duren has reviewed them all, and says they definitely make it easier to monitor your spending and come back quickly should you falter on your plan.

If you're someone who wants a solid budgeting app that provides metrics about your spending, Duren says Mint is the way to go: “It's free and a really well designed budget app.” If all you care about are numbers and budgeting, then YouNeedABudget is the best choice. “It's a straightforward app with a numbers-heavy user experience.”

If you aren't concerned as much about numbers and are hoping for a general overview of your finances with a small emphasis on budgeting, check out Clarity Money. The app's home page gives you a quick overview of all the important data about your spending. Empower is another app that provides a good overview of your finances with budgeting features.

If you're competitive and you want to compare yourself to other consumers in your state and across the nation, check out Status Money, suggests Duren. “The app connects with your bank accounts and shows you a data-heavy comparison of your spending habits, credit scores and equity compared to local, state and national averages for people of your same age and income level.”

As far as simple apps go for tracking spending, Fudget and Dollarbird are, in Duren’s opinion, the best.

Don't Stop Living Life

While many experts make becoming 100-percent debt-free the biggest and only priority, Duren believes debt-to-income calculations and credit score are the more important metric to watch, especially if you’re considering buying a home in the near future.

“My wife and I had a second kid on the way and needed a bigger house. Rent was going up about $100, pushing us to about $170 more than we’d pay for a mortgage on a bigger home. We had some credit card debt and more than $100K in student loans,” says Duren.

“However, our credit card payments were manageable as were our student loan payments. When our loan officer did our debt-to-income calculations, we were right on the cusp of the 45 percent threshold, which meant that our bills with our mortgage totaled no more than 45 percent of our income and we were able to take on the loan.” Durden’s income had gone up significantly over the previous year, making him feel like they could handle it.

Duren says focusing on your credit score and debt-to-income ratio are what really counts. That’s because Fannie Mae and Freddie Mac, the two government agencies that fund mortgages, have strict rules in place for how much you pay in debt each month (debt-to-income). If you can pass that test, then, by their standards, you've got the financial health to make a mortgage possible.

But, that’s right now. He stresses that the DTI litmus test doesn't work during times when mortgage standards are lax. “Before the recession, loan officers were passing out loans to people without income or jobs, or people who offered ‘stated income,’ which means the applicant wrote down how much they made per year and the loan officer believed it, no questions asked.”

“If our economy gets to the point that those loans start happening, then you can't trust federal standards to tell you that it's safe for you to buy a home with debt.,” he says.

Still, Durden says he definitely wouldn’t advise this for everyone. “Credit card debt is considered bad debt, and owning a home comes with a lot of hidden and unexpected expenses, such as higher energy bills, property taxes, even exterminator visits can rack up hundreds a year. Make sure you have a plan in place for emergencies should they arise.”

But, the most important thing no matter your situation, says Duren, is to let go of the shame and start moving forward.

“When you finally pay off that last balance, you’re going to feel a tremendous sense of freedom. Just find a system that will work for you, continue to educate yourself and build better habits and prepare for your financial success once your debt is paid off.”

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