To get your free credit score and a complete savings analysis on your credit and debt sign up with Credit Sesame.
Manage Credit Card Debt
According to the Federal Reserve, American consumers have $798 billion in revolving debt, the vast majority of which is credit card debt. Unfortunately for many Americans, that credit card debt is accruing interest at an average rate of 14%. As a result, credit card debt is one of the most significant road blocks that keeps consumers from creating wealth.
If you are trying to eliminate credit card debt, like most Americans, turning to debt settlement, credit card consolidation or counseling services, will in the end significantly impact your creditworthiness. Here are simple tactics that will help you get out of credit card debt faster and help you improve your credit score.
Debt Snowball
The theory behind the debt snowball method is to maintain your motivation by showing quick results. As with all debt management plans, the Snowball method starts off with a good budget. Your budget is where you will need to identify unnecessary expenses to be eliminated. This expense savings is then added back into the budget as an additional payment that you will make toward eliminating your credit card debt on top of your minimum payments.
At first you will apply this extra savings to your smallest balance credit card, regardless of interest rate. While that may sound counter-intuitive, the basis of this method is to keep you motivated by getting you to a success point as quickly as possible—that is, eliminating one credit card entirely.
After you eliminate that first credit card, you apply the entire payment you were making on the first card to the smallest remaining credit card balance. As you can see, the extra payment, known as the “snowball,” grows over time and super-charges the repayment of the next credit card. The process continues until your last credit card is eliminated.
Why it works: The debt snowball method works because you see success quickly and you become more motivated with each success.
Why it may not be for you: The debt snowball is financially less optimal than paying your highest interest credit cards first.
Highest Rate First, or Debt Avalanche
With this method you will start with the same budget as the snowball method, but you will organize your credit cards according to interest rate. The extra amount from your budget is applied to your highest-interest credit card first. Once the balance on that first card is eliminated, you apply your extra payment to the credit card with the next highest rate. Again, you'll continue with this process until all your credit cards are paid in full.
Why it works: By reducing your highest-rate credit card debt as quickly as possible, you are actually adding a level of cost savings that propels you to becoming credit card debt free faster.
Why this may not be for you: You may become discouraged and lose motivation to pay off that first credit card, especially if the balance is large.
Hybrid Credit Card Payoff Plan
With the hybrid method, you will create psychological success points to keep you motivated while you eliminate your highest rate debt first. To do this, organize your credit cards from highest to smallest rate, but divide the balances into smaller chunks, based on your smallest balance. So, if you had card balances of $5,000, $3,000 and $1,000, you would actually have nine imaginary $1,000 “cards,” each with its own interest rate. You would start by making your minimum payment on your accounts and paying the extra amount to the highest-rate $1,000 “card”. Once that “card” is eliminated you move on to the next. That way you realize the success as early as possible, but you also compound your efforts by attacking the highest-cost credit cards first.
Why it works: You realize success as early as possible, but you also take advantage of enhancing your efforts by attacking you highest-cost cards first.
Why this may not be for you: Some may not like that you are just playing mental games by dividing up your balances.
So which method is best? That's for you to decide. The key to eliminating credit card debt is not necessarily having the optimal plan, but simply having a plan.
Quick Tip: To help you commit to your plan, tell you friends and family about it.
Refinance Your Credit Card Debt
Having fixed payment, terms and interest rate can help greatly in taking control of your existing credit card debt. If you are in good credit standing, consider taking out a personal loan to refinance your credit card debts. Personal loans offer up to $35,000 in financing for 3 to 5 years and a considerably lower APR of 6.78% when compared to an average interest rate of 14% on credit cards! While minimum monthly payments required maybe higher for a personal loan, with fixed terms, this method will help you get out of debt faster and save on interest payments.
Find out completely free if you qualify for a personal loan by signing up for Credit Sesame's free credit and loan management tool.
Credit Sesame helps manage credit card debt
Get a complete picture - Credit Sesame allows you to see all of your debt in one place. You can view balances, payments and interest rates for all of your debt, which helps you implement your debt management plan.
Our advice super-charges your results - Every credit card debt management plan starts with finding savings in your budget. Credit Sesame's advice engine is designed to find you the savings to jump-start your debt management plan. Credit Sesame only presents advice that actually saves you money. Start applying those extra savings to get out of credit card debt faster.
Never miss an opportunity to save - Credit Sesame tracks the credit markets 24x7, looking for opportunities for you to reduce your credit costs and consolidate your debt. When we find an opportunity, we send you an email alert, so you never miss the boat.