How To Pay Off Credit Card Debt on Your Own
Dealing with credit card debt can often be overwhelming. With multiple cards carrying balances, in addition to interest charges accruing monthly, paying off credit card debt can seem like a never-ending task. Nevertheless, there are many ways to pay off credit card debt without pursuing bankruptcy or debt settlement. With a bit of knowledge and perseverance, you can work to become debt-free and improve your credit score at the same time.
To pay off credit card debt on your own, you’ll need to come up with a payment strategy. There are different methods of paying off credit card debt, each of which might work best for different people. Whichever method you choose, you’ll want to make sure you pay more than the monthly minimum because the faster you pay down debt, the less interest you’ll pay in the long run.
The first method of paying off credit card debt is the avalanche method. With the avalanche method, you will first pay off the card with the highest interest rate. Starting with the card accruing the most interest can help prevent those high-interest rates from increasing your debt as you try to pay it off. Once you’ve paid off the first card, you move onto the card with the second-highest interest rate, and so on. This method is usually the fastest and most cost effective, as it lowers the overall interest you pay in the long run.
The second method is the snowball method. With the snowball method, you’ll first pay off your credit card with the smallest balance. As soon as you pay off the first card, you’ll start paying off the card with the second-lowest balance, like a snowball rolling down a hill. While this method may not be as fast as the avalanche method, it uses your sense of accomplishment to motivate you to pay off debt. Seeing the amount of debt diminish can inspire you to save even more and pay off your debts faster.
Why Would Paying Off a Credit Card Lower My Score?
While paying off credit card debt is always good, it may cause you to suffer a dip in your credit score if you’re not careful. Your credit report considers the number of accounts you have and the length of your history. So if you close an account after paying off your credit card debt, you’ll sacrifice valuable credit history that is helping you achieve a higher credit score.
You’ll also lower your total credit, which will cause your credit utilization to go up. In other words, the amount of credit you use should be under a certain percentage if you want to maintain a high credit score. When you close an account, it lowers the amount of credit. Doing this increases the percentage of the credit you use, even if you don’t accrue any more debt. The key is to keep your credit cards open and in good standing after you pay them off unless you have a good reason to close them. For example, suppose your credit card company charges you an annual fee that doesn’t fit your budget. In that case, you may want to consider closing the account.
No matter what you do, keep an eye on your credit report for any errors that could hurt your score. You can view your credit report through one of the three main credit bureaus: Equifax, TransUnion, and Experian. By building a good credit score, you’ll be eligible to receive better interest rates when you apply for future credit. This can help you avoid high-interest loans or credit cards that will put you back into debt.
Whether you’re trying to recover from financial mistakes or avoid creating new ones, check out our posts on What to Do When You Have a Spotty Credit History and How to Kill Your Credit Score to learn more about building good credit.