Table of Contents
Credit card debt occurs when you purchase an item or service using a credit card and fail to pay off the balance by the due date. This balance accumulates interest, which can spiral out of control, leaving you with a massive sum to pay off.
Roughly 40% of Canadians have some form of credit card debt, making this a widespread issue. If you find yourself in credit card debt, don’t panic! There are several proven steps to pay off your credit card debt and get your finances back on track.
In this article, we go over proven strategies to pay off your credit card debt. Some are more effective than others, but every bit helps. So, to learn how to get out of debt and stay out of debt, read on!
How Does Credit Card Debt Affect Your Finances?
You may already know how credit card debt can affect your finances. However, to get a better picture, below we provide an overview of the far-reaching consequences of credit card debt:
- Debt cycle: To pay off debts, you may find yourself taking on more debts to repay existing ones. This can lead to a situation where a significant portion of your income is always dedicated to paying off your debt, leaving little for savings and other financial goals.
- Lowered credit score: Over time, carrying a credit card balance and not fully paying off your debt can lower your credit score. This lower credit score makes it harder to get loan approval or access to lower interest rates.
- Trouble job searching and house hunting: Having a lower credit score due to accumulated debt can make it difficult to qualify for certain rental agreements, or even get a job.
- High stress: Having large amounts of debt can have detrimental effects on your mental health. Constantly worrying about your financial situation can lead to anxiety and depression, which can further exacerbate your financial problems.
- Overall, credit card debt can lower your credit score, affect your mental and physical health, and lead to a never-ending debt cycle. To avoid this, see our section on debt-repayment strategies below.
Strategies On How To Pay Down Credit Card Debt
Paying down your credit card debt may seem like a daunting task, but there are several steps you can take to start making a difference. Before we explore debt repayment strategies, first, you need to avoid accumulating more debt by following these tips:
Stop using your credit cards: Cut them up, hide them, whatever you do – don’t put any more balance on your credit cards. Use your own money wherever possible.
- Create a budget: Create a budget and keep track of your spending. This can help you understand where to cut back on spending and learn where your money is going. The saved money can go directly towards repaying your debts.
- Now that you’re no longer accruing more debt, let’s explore how you can pay it off.
Strategy 1: Consolidating Credit Card Debt
Debt consolidation is when you combine all your credit card debts into one loan or credit card with a lower interest rate. This can simplify your payments and save you money in the process.
While it may seem counter-productive to take out another loan to deal with your loans, if done right, this strategy can get you out of debt fast. There are two main strategies to consolidate credit card debt:
- 1. Take out a personal loan: Personal loans tend to have lower interest rates than credit cards. When you take out a personal loan, you can use it to pay off all your credit cards. Then, you only need to focus on paying off your personal loan.
- 2. Get a balance transfer credit card: A balance transfer credit card offers much lower interest rates than other credit cards. Some have 3 to 6-month welcome offers with zero interest. When you get a balance transfer credit card, you can pay off all your debts using it. After paying off your debts, focus on paying off the debt on your new credit card, using the lower rates as much as possible while they apply.
- A word of warning: Taking out a personal loan may result in a false sense of security. It’s vital to avoid the urge to spend the money from the loan on something else. Use it to pay off your debts, then put all your energy into paying off the singular debt so you don’t end up back where you started.
- Similarly, balance transfer credit cards don’t have lower rates forever. There’s typically an expiry date on the lower interest rates, which means you could end up back where you started if you don’t pay off your debts as fast as possible during the promotion period.
Strategy 2: Paying More Than The Minimum
Whether you consolidated your debts or opted to keep them separate, you may wonder how it’s possible to pay off your cards, especially if the debt is much higher than you could ever hope to afford in one payment. The first step is to pay more than the minimum.
Paying more than the minimum does two things:
- 1. It pays the interest.
- 2. It pays a portion of the principal.
Paying just the minimum payment typically only covers the interest, which ultimately leaves you paying the same amount every month for eternity. By paying just above the minimum, you can make slow but steady progress to fully paying off your credit card debt.
To do this well, remember to budget and prioritize your spending. Identify areas where you can cut back and use that money to pay your credit card bills. It’s vital to stay consistent/ Make a plan to pay a certain amount each month and stick with it. Over time, you’ll see the balance decrease and your financial situation improve.
Strategy 3: Debt Snowball And Debt Avalanche
The debt snowball and debt avalanche methods are two popular strategies for paying down credit card debt. These are outlined below:
- 1. Debt snowball: This method involves paying your debts in order from smallest to largest. Start with the smallest, easiest-to-resolve debt and pay it off fully. From there, go to the second largest and so on. This method can provide a sense of accomplishment and motivate you to continue paying off your debts.
- 2. Debt Avalanche: The debt avalanche method is the debt snowball method in reverse. Start with the highest interest rate and pay off as much as you can towards that debt. Continue to make minimum payments on your other debts. This method can save you money in interest over time.
Both methods have advantages, and the best one for you depends on your circumstances and preferences.
Strategy 4: Credit Counseling
Getting out of debt is much easier in theory than in practice. This is why credit counselling may be a valuable resource for those struggling with credit card debt.
Credit counsellors offer services and advice on how to manage your debt and improve your finances. They typically offer guidance and help with the following:
- Budget counselling: Credit counsellors can provide helpful resources and guidance on how to structure your budget to get out of debt faster. They typically look at your bank statements and current budget and find areas to cut down on to increase savings.
- Debt management plans: Credit counsellors can help you set up a debt management plan.
- Financial education: Credit counsellors offer basic financial education to ensure you know how to stay on track after getting out of debt.
- Negotiating with creditors: Perhaps most beneficial, credit counsellors will negotiate with your creditors to reduce your interest rates and monthly payments. You can then make one monthly payment to the counselling agency, which distributes the funds to your creditors.
- While credit counselling can be beneficial, it’s important to choose a reputable agency. Look for non-profit organizations that are accredited by Credit Canada Debt Solutions.
How To Stay Out Of Credit Card Debt
Avoiding credit card debt in the long term requires developing good financial habits. This involves budgeting, saving, and using credit responsibly. Once you’re out of debt, do your best to stay out of it by following these tips:
- Save: Saving is also crucial. By setting aside money each month, you can build an emergency fund for unexpected expenses. This can prevent you from relying on credit cards and accruing debt.
- Budget: Budgeting is key to managing your money and avoiding debt. It helps you understand where your money is going and allows you to plan for expenses and save for the future.
- Use your credit responsibly: Pay off your balance in full each month, avoid unnecessary purchases, and keep your credit utilization low.
- Remember, it may be tough avoiding credit card debt, but it’s even tougher paying it off. Stay vigilant, and ensure you consistently pay off your credit card balance to avoid accruing additional debt wherever possible.
Final Thoughts
If you’ve accrued large amounts of debt, it can seem overwhelming to pay it all off. Don’t give up hope! It may take months to pay off, but if you develop a strategy, remain consistent, budget carefully, and save wherever you can, you will get out of debt and get your finances back on track once again. Good luck!
