10 strategies to help you pay off your credit card
Credit cards have become ubiquitous, used to pay for everything from gas to travel to home delivery. Managed properly, they’re also essential financial tools, allowing cardholders to build credit, earn cash back or travel points, and gain valuable perks, like insurance or purchase protection. Carrying a balance, however, changes everything. “Credit card debt is very high-interest debt, typically in the neighbourhood of 20% or more,” says Scott Hannah, president and CEO of Credit Counselling Society. At that rate, even a modest balance can spiral quickly out of control.
If you’re holding a balance on your credit card, paying it off is task number one, so you can once again enjoy its benefits. Here are 10 solid tips to help you get to a $0 balance, faster.
1. Examine your spending habits
It might seem obvious, but you can’t improve on something if you don’t understand it. “Typically, when someone comes to us looking for help, our first goal is to look at their expenditures and balance their budget,” says Hannah. “Most people can account for 75% to 80% of their expenditures, and then it gets foggy.” The purchases making up that remaining 20% to 25% typically contain a lot of information. Once you identify these expenses—whether a round of drinks for the team at work, an extra shot of whip on a latte, or even an occasional treat in your groceries—you become empowered. Knowing how you accumulated debt helps you build a strategy against future financial shortcomings.
2. Build a budget
Now that you have a clear picture of your debt load and how you’re spending your money, it’s time to make a budget. This step doesn’t have to be fancy or complicated. In fact, there are loads of apps and calculators, including a downloadable template on the Credit Counselling Society site. The task here is to log your income and your expenses to see where you can find money to put against your debt. Add a line item for every expense, like rent or mortgage, car payments, utilities, groceries and your outstanding credit card debt. Hannah notes that even if you’re in debt, it’s crucial to put away money for an emergency fund. “This way, you have the cash to deal with emergencies, so they don’t upset your debt repayment.”
Understandably, most people hate following a budget, but you can make it easier on yourself. According to Hannah, one of the biggest budget missteps is not making room for small occasional splurges. “You don’t pay down debt in a month or two. You need to plan for the long haul and you can only put yourself on a really tight budget for so long.”
3. Pay more than the minimum
The minimum payment on your credit card bill is around 2% of the previous month’s balance. The problem is, if you pay only the minimum, the majority of that money goes toward the interest (usually accumulating at around 20%), not the principal (the amount you actually owe). “Though it would take a long time, you could pay down your debt by paying the minimum,” Hannah says, “as long as you’re not using the credit card as well.” A better and far faster strategy is to find some extra every month and apply it to the debt. Be realistic and consistent. “Aim for paying an extra $50 dollars per month, $100 per month,” Hannah suggests.
4. Negotiate for a lower rate
Did you know you can negotiate with your bank? It is possible, according to Hannah. “A lot of times people just don’t ask.” If you’re struggling with your credit card debt you can call the lender (the bank that has issued your card) and ask for a lower interest rate. The reason why is simple: The bank will lose more than a few percentage points if you default on your debt entirely (meaning, they earn less money off of your interest owed), so it’s in their interest to give you a break.
It helps if you’ve been a long-time customer and can demonstrate a history of timely payments. “It’s important as a consumer to know where you stand,” Hannah says. “I would encourage someone to have a copy of their credit report and use that to ask for a rate they want. The worst thing that can happen is they will say no. And then you can go elsewhere like to a low interest card or using a balance transfer promotion.” (Wondering: ‘What’s my credit score?” Here’s how to find out.)