Credit cards are convenient, flexible, and provide numerous benefits, but only if you use them responsibly.
With easy access to credit, the temptation to rack up a mountain of debt through impromptu shopping sprees is always there.
However, by overspending, you could quickly find yourself struggling to meet your payment deadlines.
Credit card debt grows exponentially due to the steep interest rate (usually around 20%) applied to any past-due balance.
As your debt load rises, so does your credit utilization ratio and the potential for missed payments, both of which work to erode your credit score.
Getting your credit card debt under control can be a formidable challenge.
You can quickly become overwhelmed, not just financially but also psychologically.
Luckily, you can use a wide range of strategies for whittling down your balance to zero.
If you avail yourself of the right tools and knowledge and use it to craft a solid payment plan, you can bravely conquer your credit card debt woes.
Consider using a debit card vs a credit card while you’re working on wiping out your credit card debt to keep balances from growing.
Here are five strategies you can implement today.
According to a report by Statistics Canada, Canadians owed $77.2 billion in credit card debt in July 2021.
1. Increase Your Payment Amount
The most practical way to abolish your credit card debt is to accelerate the pace at which you pay it down.
You can accomplish this by contributing payments more frequently or increasing your sole monthly payment.
To do so, you’ll have to revaluate your budget and discover ways to free up more cash.
Your first plan of attack should be to curb your everyday spending.
Some ideas include:
- Negotiating a rate reduction on your phone, cable, and internet services.
- Preparing more meals at home rather than dining out
- Cancelling an online streaming service that you rarely use
- Skipping the morning coffee at your favourite café
Suppose you’ve judiciously cut back on your expenses and adopted a frugal lifestyle but still require additional funds to hit your payment target.
In that case, consider starting a side hustle or working overtime at your current job to give your income a boost.
As your balances are paid off, cancel credit cards that are no longer needed to avoid racking up debt again.
2. Set Up a Credit Card Payment Plan
When it comes to proper credit card debt management, a haphazard approach isn’t the optimal way to proceed.
Making irregular payments for varying amounts may not be as helpful as you think.
You need a concrete plan that enables you to service your debt consistently and without straining your budget in the process.
And it must work to reduce your debt efficiently while minimizing your interest charges.
At the very least, ensure that you contribute at least the minimum payment required on each card you own.
By doing so, you’ll avoid a late fee and penalty APR, which can be substantially higher than you’re regular APR.
In addition, your card issuer will report your payments as being on time, so you don’t need to worry about a negative impact on your credit score.
Here are 3 strategies you can try:
i. Avalanche Method.
Contribute the minimum payment on each credit card and make an additional payment on the balance subject to the highest APR.
Once you pay off the high-interest debt, proceed to settle the balance on the card with the second-highest interest rate, and so on.
The rationale behind the avalanche method is that by paying off the most expensive debt first, fewer interest charges will accumulate on your account.
ii. Snowball Method
This strategy prioritizes paying down the smallest balance and then working up to the largest one.
It also entails paying the minimum required on each card before applying the remainder to the one with the smallest balance.
The snowball method is a suitable tactic if you have little free cash available but are adamant about getting your debt under control.
Extinguishing the smaller balance first will provide you with a boost of confidence and kickstart the momentum to tackle your remaining debt.
iii. Blizzard Method
This strategy combines attributes from the previous two.
You contribute a payment to the card with the smallest balance first and then apply the remainder to the one carrying a balance with the highest interest rate.
Unsure of which method will net you the most in interest savings and wipe out your debt the fastest? If so, you can crunch the numbers by utilizing a credit card calculator to determine your total interest costs and the length of time needed to pay off your balance in full.
3. Consolidate Your Debt
Debt consolidation involves merging your existing credit card debt into one loan.
This includes closing out multiple credit cards and only keeping one or two.
Essentially, you obtain financing for a new loan product, use the proceeds to pay off your debt, and then work to repay the single, new loan over time.
Ideally, the rate on this loan should be considerably lower than the average rate on your total existing debt.
That way, you can realize savings in interest costs and pay off your balance quicker.
Here are some loan products that can facilitate debt consolidation:
- Personal loan
- Personal line of credit
- Balance transfer credit card
- Home equity loan or home equity line of credit (HELOC)
If you’re looking to consolidate your credit card debt at the lowest rate possible, you’ll have to opt for a secured loan. This means that you’ll have to pledge an asset you own as collateral.
4. Negotiate a Lower Interest Rate or Balance Reduction
Though not an easy task, you could potentially negotiate a lower interest rate or reduction in your outstanding credit card balance.
If you succeed, you can end up with a more financially manageable debt load.
Contact your card issuer(s) and inform them about your predicament, expressing your desire and willingness to negotiate a fair plan.
Be candid, courteous, and calm when speaking with them.
You can enroll in a debt management program (DMP) if you fail in your negotiations.
These programs are administered by credit counselling agencies, which are non-profit organizations that craft and implement payment solutions for individuals struggling with debt problems.
The agency will assign you a credit counsellor who’ll conduct negotiations on your behalf to reduce your balance owing, consolidate your debt, secure a favourable rate, eliminate accrued penalties, etc.
Did You Know?
Suppose you’re in dire straits with your credit card debt. In that case, you can file for a consumer proposal, which allows you to negotiate a legally-binding debt settlement plan with your creditors.
5. Tap into Your Savings or Investments
A large, one-time cash infusion can payoff enough of your balance so that you can manage with small monthly payments going forward.
In pillaging your savings or investments to pay off debt, you’re sacrificing potentially lucrative returns and possibly a portion of your ‘rainy day’ fund, however, if your money is earning you only a meagre return, it will probably yield more value if you apply it against your credit card debt.
In the process, you can save a considerable sum in future interest charges and pay off your debt sooner, however
Frequently Asked Questions
- Do credit card companies offer debt forgiveness?
Credit card issuers rarely forgive the debt obligations of cardholders. However, you might be able to negotiate with them to reduce a portion of your outstanding balance.
If you feel apprehensive about your persuasion skills, you can enlist the help of a credit counsellor, who can propose a payment plan to your creditors on your behalf.
- Should I empty my savings to pay off my credit card?
In general, it’s best to avoid depleting your savings to cover your credit card debt. You’ll have less money available for unexpected financial expenditures by taking this action. In addition, you’ll fall behind on your savings targets for your retirement, down payment for a home, vacation, etc.
Using a balanced approach, such as the avalanche method or snowball method, is more conducive to proper financial management, including settling credit card debt. Consolidating your debt using a balance transfer credit card or working with a credit counselling agency are excellent options as well.