Gain financial freedom by paying off your credit cards

Why is credit card debt considered the worst kind of debt?

Typically, you can borrow money in two ways: installment loans and revolving debt. Mortgages, student loans, and personal loans are examples of installment loans, whereas credit cards are considered revolving debt. Installment loans allow you to borrow a considerable amount and may not affect your credit score very much. However, revolving debt doesn’t work this way.

Missed payments, along with high balances and debt utilization rates can negatively impact your credit score. The combination of these activities makes it harder to get favorable interest rates on other types of loans. Before you do anything else, start keeping a credit card log to track your balances and avoid missing a payment.

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The high interest rates on credit cards can affect your personal finances significantly. Compared to other lines of credit, credit cards have an average interest rate of 19 percent for new offers and 14 percent for existing accounts, and it’s not uncommon to see interest rates as high as 25 percent. A credit card payoff calculator can help you understand how long it will take to reduce your credit card debt based on different interest rates.

Following a plan to lower your credit card debt will help improve your credit score.

What are some ways to get rid of credit card debt?

Two of the fastest and most effective methods to erase credit card balances are debt snowball and debt avalanche methods.

Debt snowball method

With this method, you’ll pay off your smallest balance first, then move on to the next largest balance, and so on until your debt is completely paid off. This popular method works because it gives you a quick win at the beginning. Seeing that first balance reach “0” can be incredibly motivating.

Snowball pros:

• This tactic is ideal for paying down large amounts of debt or multiple balances
• You’ll feel motivated when your balances and debt shrink quickly

Snowball cons:

• You’ll likely end up paying more in interest than with the debt avalanche method

How the snowball method works:

1. Identify the credit card with the smallest balance and focus on paying it off first.
2. Make the minimum payment on the remaining credit card accounts.
3. Put as much money as you can toward that credit card with the smallest balance. Make multiple payments a month if you must. Credit card trackers can help you monitor your transactions and will automatically recalculate your balances as you make payments.
4. Once you pay it off, immediately start paying down the next largest balance.
5. Repeat until you reach a zero balance.

Debt avalanche method

The debt avalanche method focuses on interest rates. You’ll pay the card with the highest interest rate first, rather than the card with the smallest balance. If interest rates an immense financial roadblock for you, a debt avalanche might be the right choice for you.

Avalanche pros:

• You’ll pay less in interest with this method
• It will help you get out of debt quickly

Avalanche cons:

• It may take longer to see tangible progress
• It’s not as motivating as the debt snowball method

How the avalanche method works:

1. Identify the credit card with the highest interest rate, regardless of its balance
2. Make the minimum payments on all your other accounts.
3. Direct any extra money toward the card with the highest interest rate
4. Once you pay it off, start paying down the balance on the card with the next highest interest rate
5. Repeat for each account until you reach a zero balance

Which method is right for you?

If seeing a high credit card balance is stressful, and you need encouragement to stay the course, the debt snowball might be right for you. But if you have high-interest credit cards and motivated to get out of debt fast, we recommend the debt avalanche method, which is the cheaper way to eliminate credit card debt in the long run.

How can you avoid credit card debt in the future?

People run into trouble with credit cards for all sorts of reasons. Unexpected medical bills, car repairs, and not understanding how credit cards work make it difficult to pay off a balance.

One way to avoid credit card debt in the future is to have an emergency fund rather than turning to credit cards for emergencies and unexpected expenses. Understandably, an emergency fund may not be a feasible option for some people. And even for some who do have one, it may not be enough to adequately cover some emergencies — such as a loss of income.

There may be times when avoiding credit cards altogether may not be possible.

No matter what your current financial position is, you can start making changes to avoid financial pitfalls in the future by using a budget template to help you keep track of spending.

Credit card debt and money-related stress can feel overwhelming. You may struggle to see a way out, but you can get started with either of the methods described above. Every extra dollar you can put toward your debt will help you get out of it faster.