Is credit card debt bogging you down? There are a couple of methods you can use to tackle your credit card debt and improve your credit score.
Let’s say that you have $7,000 in credit card debt spread across three accounts. (The average American household has an estimated $6,849 in revolving balances. Source: NerdWallet.com) After reviewing your budget, you decide that you can pay a total of $250 each month toward reducing your debt. How do you decide where to put that money? What do you do when you pay off a card? How will all of this impact your credit store?
Method #1: The Avalanche Method
The Avalanche Method is so named because it starts slow and then goes fast. Over the cycle of paying off all of your cards, this method will help you pay the least amount of interest and pay off all of your debt fastest.
Each month pay the minimum required payment on all of your cards. Then take the rest of your $250 allowance (and as much extra money as you can) and pay that amount to the card with the highest interest rate.
Once the card with the highest interest rate is paid off, continue to pay your allotted amount each month, paying the minimum on the card(s) with the lowest interest rate and as much as you can on the card with the highest rate. Each time you pay off one card, you will have more money to devote to the other card(s).
Method #2: The Snowball Method
The only draw-back to the Avalanche method is that it takes a while to see results. If you need quicker gratification, the Snowball Method may be a better option for you.
Like with the previous method, each month you will pay the minimum required payment on all of your cards. Then, take the rest of your budgeted money (and any extra you can), and pay toward the card with the lowest balance. In this way, you should be able to pay off at least one of your cards relatively quickly.
Once the first card is paid off, continue to pay your budgeted amount each month, paying the minimum on your cards with the larger remaining balance(s) and then as much as you can on the card with the smallest balance. Enjoy the momentum and snowball effect as you pay off one card after the other.
Balance Transfers
Transferring your card balance(s) to another card with a lower interest rate may also help you pay off your total debt faster. If you are paying less in interest each month, you can increase the amount you pay toward the outstanding balance.
You can transfer one or more of your balances to a lower-rate card and continue with the Avalanche or Snowball method. Every little bit you save in interest puts you that much closer to being debt-free.
Or you may choose to consolidate all of your credit card debt into one account with a lower interest rate. This way, you only have one payment to manage each month and you can watch the amount you owe decrease quickly.
Then What?
Assuming you take a year or two to pay off this debt, the money you are spending on it each month will become a regular part of your budget. So once your cards are paid off, take that same amount each month and deposit into a savings account! A savings account is a much better way to pay for unexpected or planned large purchases. And that way, your credit union will be paying you dividends rather than you paying interest!
Paying down your credit card debt will help your credit score. Closing some accounts might also help improve your credit card, but it’s probably not wise to close all of your accounts right away. Your credit score reflects not only the amount you owe on your cards but also the ratio of how much you owe compared with the card limits. So, suddenly and radically decreasing the amount of credit available to you might not help your credit score.
Have more questions? Need more advice?
The member service advisors at GE Credit Union would be happy to look at your credit card debt and help you figure out the best way to pay it off and boost your credit score. Contact your local branch with questions or to schedule an appointment. We’re committed to helping you find the best solution for you!