The problem with credit cards is the high rate of interest you pay. Rates can be 20% or higher.
Used sensibly, a credit card is a useful tool that can help you leverage cash flow and also to finance larger purchases more comfortably.
If credit cards end up becoming credit card debt, the convenience turns into a costly burden.
If you pay interest over time, it ends up costing you a lot of money on top of whatever you charged to your credit card.
By understanding how credit cards work, the intricacies of interest and minimum payments, you’ll be better placed to repay your card using the right strategy.
You’ll need to make a plan if you want to know how long it will take you to repay a credit card and how quickly you’ll be out of debt.
How Do Credit Cards Work?
Credit cards are financial products offering you a revolving line of credit. This is available for purchases, cash advances, or transferring balances.
You need to repay whatever you charge to your card.
Credit card bill monthly. If you pay your balance in full before the due date, you’ll pay no fees and no interest.
You are not compelled to pay the whole balance each month, but you’ll need to make a minimum payment.
If you fail to pay the balance on time and in full, you’ll attract late fees and you’ll also incur interest charges. This will increase the total amount owed.
Different cards offer different interest rates, but the majority of credit cards have high APRs. This makes the bulk of credit cards an expensive financing tool.
The interest rate of your credit card will play a significant part in establishing how long you need to pay off the card. The higher the interest rate, the more money goes toward paying interest rather than the principal.
With a lower interest rate, by contrast, more money goes toward paying the principal, so you’ll be able to pay off your balance quicker.
You could carry the same balance on different cards with the varying interest rate radically affecting the speed of repayment.
Work hard to pay down your balances. The longer you hold them, the more it will cost you. Rid yourself of the debt and you’ll stop throwing away money paying interest.
The Issue with Minimum Payments
Carrying a balance costs you money. The interest will continue to grow the longer you hold the balance.
Perhaps you’re making minimum payments and you feel that’s good enough.
The problem is, these payments could be as little as 1% of your balance along with any fees and interest. While you might be fulfilling your requirements, this is known as negative amortization, and your balance will continue increasing even though you’re making payments due to the fees and interest.
Formulate a Strategy and a Plan
There’s no boilerplate solution for paying credit card debt down. All that counts is finding the right solution for you.
You should choose a method you can stick to for the long haul.
Calculate how much you need to pay monthly so you can establish how long it will take to repay the balance.
Here are some viable strategies along with their benefits and drawbacks.
Debt Snowball Repayment
If you’ve heard of the debt snowball method for debt repayment, this was brought into the public eye by Dave Ramsey, a financial guru.
You arrange your debts and then organize them according to balance.
First, you work on paying off the debt with the smallest balance. You pay at least the minimum payment on all other debts. This allows you to start progressively eliminate debts. As you do so, your payments snowball, growing larger as you eliminate balances.
You’ll enjoy some quick wins and you’ll more rapidly repay debts with small balances.
The downside of this method is that you’ll be carrying high-interest debts for longer while you repay smaller balances. While this might cost you more over time, some people find this method gives them the motivation they need to succeed.
Debt Avalanche Method
If you are more motivated by hard data than small wins, consider the debt avalanche method.
With this strategy, you arrange your debts from those with the highest interest rates down to those with the lowest.
You target the debt with the highest rate of interest since that’s costing you most money. This type of debt is also more susceptible to negative amortization.
You may take longer to repay your debts with the debt avalanche, so you should pack plenty of patience and be prepared to stay motivated during an uphill journey. Once you get there, it will be worth it.
Calculating a Timeline for Repayment
Look at home much money you can devote to making payments each month and from here you can calculate how long it will take you to pay the whole balance off.
You’ll need to work out the following:
- Your current balance
- How much you pay monthly toward that balance
- Your interest rate
Examine Balance Transfer Credit Cards
Obviously, lowering your interest rate will reduce the amount of time required to pay the balance down.
If your lender will not agree to this, look for a balance transfer credit card. These are designed with paying off debt in mind.
If approved, you can pay the entire debt off with your new card then simply repay that card.
These cards typically offer a promotional rate of 0% APR for 6 to 24 months. This should give you ample opportunity to pay off your debt without paying any interest.
Again, you’ll need to pay more than minimum payments for this to become an effective strategy.
Debt payoff isn’t quick or easy, and it isn’t fun either. It is achievable, though.
Once you have a plan in place, stick with it. With time, patience, and persistence, you can become debt-free.