Credit cards are a quick and convenient way to build your credit history. However, if used irresponsibly, the debt generated can quickly become a significant burden. Indeed, for those living with a large amount of credit card debt, knowing the most effective way to pay it off is not always clear.
Fortunately, with the right mindset and support, becoming debt-free is a realistic goal. In this guide, we explore the steps you need to take if you’re looking to pay off your credit cards and regain control of your finances.
Paying off credit card debt: steps to take
Although it’s a cliche, it’s true when people say that paying off debt is a marathon and not a sprint. However, knowing this doesn’t always make taking the first step any easier. If you’re living with a large amount of credit card debt and are serious about paying it off, take a look at our recommended first steps below:
1. Create a budget
The first step you need to take when tackling credit card debt is to create a comprehensive and realistic budget. While this may sound obvious, the lack of a budget is one of the key reasons those looking to pay off their debt fail. However, the fact is that creating and sticking to a budget provides a structured and organised way to manage your finances. This allows you to trim the metaphorical fat, live to your own means, and actually reallocate found savings towards debt repayment.
Creating a budget is easy. Start by simply listing all of your sources of income alongside a comprehensive list of your monthly outgoings. This list should take into account everything from your salary and any financial benefits you receive, to outgoings such as utilities, rent/mortgage payments, and grocery costs. It can also help to check your bank statements to identify any other recurring expenses or subscription costs you regularly face.
Creating a budget will not only help you to better understand your current financial situation but also allow you to identify spending areas you can cut back on. Once you’ve done this, you may be able to allocate a larger proportion of your budget specifically to paying off credit card debt.
2. Prioritise high-interest debts
Once you have a budget in place, the next step involves deciding on the best method of paying off your debt. As we have previously discussed, from the avalanche approach to the snowball method, there are a number of ways to approach this. However, for those dealing solely with credit card debt, we’d recommend the avalanche method. That is, prioritise paying off your high-interest credit card debts first.
This is recommended because credit cards come with varying interest rates. Depending on how high these rates are on your credit cards, a significant portion of your monthly repayments may simply go on servicing this interest rather than paying off the principal amount. If you have multiple debts and are only paying off the minimum repayment on each one every month, this can naturally lead to a vicious cycle, with little prospect of paying off the debt in full. The best way to break this cycle is to tackle the debt strategically by prioritising paying off the high-interest cards first.
Putting this approach into practice is simple. Start by listing all your credit cards along with their respective interest rates. Once you have created a priority list, focus on paying off the card with the highest interest rate first, while still making the minimum monthly payments on any other remaining debts. After you’ve paid off the highest interest rate credit card, move onto the card with the next highest, and so on. When it comes to credit card debt, this approach can accelerate the repayment process.
3. Negotiate with creditors
The final step you need to consider taking when it comes to paying off credit card debt is negotiating with your creditors. While many living with debt often disregard this advice, it’s important to remember that many credit card companies are willing to work with you to find a solution that works for both parties.
Depending on your situation, creditors may be willing to lower your interest rates, for example, or adjust your payment schedule. However, if you’re planning to do this, try to make contact before you miss a payment. It’s also essential that you’re honest about your financial difficulties, and provide any relevant documentation to support your case. This will put you in a stronger negotiating position.
Should you pay off credit card debt with a loan?
Speaking purely hypothetically, paying off credit card debt with a loan is an approach with some merit. Indeed, if you can take out a loan that offers a lower interest rate than the credit cards you are looking to pay off, in theory at least, this can save money and streamline repayments.
That being said, here at MoneyPlus we would typically recommend methods of debt management that do not involve taking out a loan. This could involve simply taking the steps outlined above or, if required, through the use of a structured debt management solution, such as a Debt Management Plan (DMP) or Individual Voluntary Arrangement (IVA).
What happens if you can’t pay off your credit card?
As with any significant debt, if you are unable to pay off a credit card, you could ultimately face a variety of consequences. These can range from a declining credit score and accumulating debt in the form of interest and late payment fees, to potential legal action and even bankruptcy. However, as discussed above, there are a number of actions you can take to avoid falling in one of these scenarios.
To find out more about different approaches to paying off credit card debt, and to learn what options are available to you, visit MoneyHelper for free debt advice, or get in touch with us today.
