While paying excessive debt can always seem like a burden, paying high-interest debt can make that burden seem insurmountable. When you have high-interest credit card debt, it’s time to take stock of where you are financially and create some strategies for how you can tackle that debt. Depending on your situation, it is possible to pay off high-interest credit card debt, no matter how much you owe.
These options will help you better understand how to pay off high-interest credit cards and develop a payment plan that meets your needs.
Develop a Plan to Prioritize High-Interest Credit Cards
The first step to paying off your debt is to understand what you owe and what your financial situation is.
Some basic first steps to take include:
- Make a list of all of your creditors and lenders.
- Write down the balance owed, the minimum payment, and the interest rate for each loan or line of credit. Include any relevant fees.
- Make a note of any cards that have been sent to collections or any accounts where you are behind on payments.
- Make a monthly budget that includes all your necessary expenses outside of your debt.
Once you have a monthly budget that covers your necessities, determine what extra cash you can apply towards paying off that high-interest debt. Pay the minimum balance for all your credit bills, and then take what’s leftover and pay more than the minimum amount for high-interest debt, starting with the highest interest rates and working down. This is called the avalanche method of repaying debt. This will shorten the time you’ll pay interest on those debts.
This process will help you understand how much you can pay off and which accounts need immediate attention. From there, you can create a plan to start paying off these expenses.
Consider the Snowball Repayment Method
An alternative to the avalanche method is the snowball method. This is when you pay off your accounts starting with the smallest debt and working your way toward your biggest debt, regardless of the interest rate. You will still make the minimum payments for every account each month, but any extra money goes toward paying off your smallest debt.
For example, if you owe $500 on one credit card and $1,200 on another card, you will completely pay off the smaller card first. This method allows you to see progress quickly. You won’t feel like you owe an overwhelming number of creditors. However, this plan doesn’t take into consideration how much interest you need to pay, and you could end up losing money because of it.
Transfer the Balance to a Lower-Interest Card
Another method of managing high-interest credit card debt is transferring it from a high-interest card to one with lower interest rates. Some cards offer low APR promotions where you won’t pay interest for the first 12 months. You will likely have to pay a transfer fee (typically a percentage of the amount that you are transferring) but can benefit from paying off the debt with a 0% interest rate for the first year.
This is an optimal method if you can pay off your debt before any low-interest promotions expire. The credit card may increase its APR significantly after the promotional period, making your debt just as expensive (if not more) if you’re not careful.
This method is attractive precisely because it is relatively simple to manage and can effectively reduce high-interest debt as fast as you can transfer it.
Consolidate Your Debt
If you don’t want to transfer debt from one credit card to the next, you might consider consolidating your debt into a single consolidation loan.
With this process, you can use the loan to fully pay off your credit cards and then make flat monthly payments on your loan. Personal loans tend to have lower interest rates than credit card companies, making this option ideal if you have several high-interest credit cards.
There are various pros and cons to this option depending on your lifestyle and financial needs:
- You may spend less overall because of the (potentially) lower interest rate.
- Your financial provider may also offer more flexible payment terms than your credit company, allowing you to develop a payment plan that works for you.
- A consolidated flat payment can create a sense of stability, where you only need to focus on one payment each month.
Using a personal loan to pay off high-interest credit cards may not be the best option for everyone. The viability of debt consolidation will depend on the kinds of debt you have and the terms you can secure on a loan.
Ask About Debt Settlement
Debt settlement is when you negotiate with your creditors to make a partial payment to satisfy your debt instead of paying off the full balance. This is a useful option if you are already past due on your payments but can afford to make a large, one-time payment that satisfies your creditors.
With a debt settlement plan, you may be able to pay less than 50% of the total that you owe. This is a big “if”, however, as credit companies are not required to negotiate a settlement.
You can try to negotiate a debt settlement plan yourself, or you can hire a company that specializes in settling debt and negotiating with credit card companies. While many of these companies are legal and reputable, some try to take advantage of consumers who are already in debt. You can follow the guidelines set by the Federal Trade Commission to learn whether a company will actually be able to help you.
Ask for a Lower Interest Rate
If you have a strong history with your credit card provider and regularly make payments on-time, then you may be able to ask for a reduction in your interest rate. Explain to your credit card company why you haven’t been able to pay your balance. They may offer you a financial hardship hold on your card if you recently lost your job or experienced unexpected bills. Your credit card company may also offer a temporary interest rate reduction so you can pay down your debt over a few months.
It may seem intimidating to call your provider, but they may be more open to changing your rate than you realize.
Consider Applying for Bankruptcy
If you are overwhelmed by the debt you owe, then you may want to consider filing for bankruptcy. While filing for bankruptcy can wipe out most debt, it can also impact your future buying power and credit. You may want to seek out a credit counselor before you consider this option, as they can help you highlight alternative options or create a plan to navigate the bankruptcy process.
Managing Your High-Interest Credit Card Debt
With careful planning, you can choose the best method for paying off credit card debt that works for you. You may not solve your debt problems overnight, but you can feel like you have more control over your payments.