Credit Cards 101 Part 2: Debt Pay Down Strategies

Credit cards have the ability to make or break your credit scores. In Part 1 of our Credit Cards 101 series we have already covered just how important it is that you keep your credit card balances paid off monthly. Credit card debt has the ability to harm your credit scores even if you make all of your monthly payments on time.

Yet credit cards are not nefarious either. It is ultimately up to you whether your credit card accounts will help or hurt your credit and finances. In fact, by never revolving a balance from month to month you can turn your credit cards into powerful, credit building tools.

If the Ship Has Already Sailed

Unfortunately for many consumers, paying off all of their credit card debt in one fell swoop is simply not a realistic option. After all, if you had extra money lying around you probably would not have gotten into so much credit card debt in the first place.

If you find yourself in this camp and are already buried under a pile of credit card debt so deep that it feels like you will never again be free, take heart. You may not be able to undo the mistakes of your past but you can certainly make a plan to overcome these mistakes in the future. You do not have to be destined to spend the rest of your life with credit and financial problems due to out of control credit card debt. Here are 3 great credit card pay down strategies to help you get started on your debt free journey.

1. The Balance Transfer

When you find yourself facing more credit card debt than you can afford to pay off quickly, a balance transfer is worth considering. One of the biggest problems with credit card debt, aside from the painful fact that it can trash your credit scores, is that the debt is so expensive. Interest rates on credit cards are probably among the most expensive rates you will ever be subject to in your entire life. As a result of these high rates, paying off credit card debt can be a lengthy process.

With good to great credit, however, you may be able to lower the amount you are paying in credit card interest with a balance transfer. An attractive balance transfer option can sometimes boast interest rates as low as 0% when your transfer your outstanding credit card debt over to your new account.

While a balance transfer can certainly save you a lot of money, there are a few drawbacks you need to be familiar with as well. First, your lower interest rate will likely come with an expiration date. Most balance transfer options expire after 12 – 18 months. Additionally, balance transfers are not free and generally require a fee to participate (typically 2% – 5% of the debt transferred to the new accounts).

Finally, balance transfer offers might help your credit scores some, but probably not a lot. Remember how credit scoring models pay attention to your revolving utilization ratios on each of your individual credit card accounts and on all of your accounts combined? A balance transfer will not eliminate your revolving debt, but it can at least lower your individual revolving utilization ratios on the accounts you are paying off.

2. The Consolidation Loan

A second great option to consider when you are working to eliminate your credit card debt is the consolidation loan. Consolidation loans are personal loans often offered by your bank or local credit union as well as online lending sources. Just like with a balance transfer card, you will generally need good credit to qualify for a consolidation loan as well.

If you do qualify for a personal loan to consolidate your outstanding credit card debt you will likely be offered an interest rate which is much lower than your current credit card interest rates (though probably higher than a balance transfer offer). This low rate will generally be fixed for the life of the loan with no expiration date. Finally, the best benefit of a consolidation loan is that you can use it to pay off your credit-score-damaging revolving debt with installment debt for a very likely credit score boost.

3. The Totem Pole

If your credit is in bad shape currently then qualifying for a balance transfer or consolidation loan may be impossible at the moment. However, you can still make headway toward lowering your debt and improving your credit by tackling your credit card accounts one at a time.

Simply make a list of all of your outstanding credit card balances from highest to lowest. Pay the minimum payment on every card except the one with the lowest balance. Use every extra dollar you have to attack the lowest balance until it is entirely paid off. Then, climb the totem pole to the next credit card and repeat. As you pay down each card on your list you should begin to see small, incremental credit score increases (provided there is no new negative information or new credit card charges to set back your progress).