How to Pay Off Your Credit Card Debt

Using a credit card can help you build a strong financial foundation. But credit card debt can add up quickly. That's especially true in difficult times. If you have credit card debt and want to pay it off, this article can help.

Why Is Paying Off Credit Card Debt Important?

The balance you carry from month to month on your credit card can have a major impact on your credit score. In fact, your credit utilization ratio, which is how much you currently owe compared to your total credit limit, accounts for about a third of your score. Experts suggest that you should generally try to keep your credit utilization ratio below 30%. This means that if your card's line of credit is $5,000, you don't want to owe more than $1,500 at any given time.

A higher credit utilization ratio will damage your credit score and make it difficult or impossible to obtain loans or other credit, especially when combined with a rocky payment history. A poor credit score can also mean higher insurance rates and even impair your ability to rent an apartment or get a new job. That’s why it’s important to pay your credit card bill on time and try to pay down any big balances as quickly as possible. 

Your credit score isn't the only reason to maintain a low balance on your credit card, of course. The more debt you carry, the more you'll also pay in interest charges—and credit cards charge some of the highest interest rates around, often well over 15%, sometimes more than 20%. Carrying a lot of debt means paying a hefty price for that borrowed money. What's more, credit card interest, unlike the interest on a home mortgage, for example, isn't tax-deductible. So you'll also lose out at tax time.

How Credit Card Interest Adds Up

When you get a new credit card, the company that issues it, such as a bank, will assign you a certain credit limit. As you use your card throughout the month, your balance will grow and the amount of credit you have available as part of your credit line will shrink. At the end of the monthly billing cycle, you’ll be required to make a minimum payment specified by the card issuer, which is calculated as a percentage of your total balance.

Paying that minimum—and paying it on time—will keep you in good standing with the credit card company. But it will also mean rolling the remaining, unpaid balance on your card over into the next billing cycle. At that point, interest and possibly other fees will be added to the amount you owe. 

If you continue to roll a balance over from month to month, you'll not only accrue more interest on your debt, but interest on the interest on your debt. In that way, your balance can begin to snowball.

For that reason, it's always best to pay more than the minimum amount due each month and to chip away at your balance as aggressively as possible. If you're able to, the ideal approach is to pay your balance in full each month and never owe any interest at all.

If you are struggling to make payments, it's best to communicate directly with your lender. When all else fails, a reputable debt relief company can handle these negotiations for you to make repayment more affordable. Investopedia recently published this list of the best debt relief companies of 2021.

3 Simple Ways to Manage Your Credit Card Debt

If you’re having trouble managing your credit card debt, here are some things you can do to get back on track.

• Pay down credit cards in interest rate order: If you have balances on more than one credit card, pay at least the minimum due on each of them and then apply any additional money you can scrape up to the card with the highest interest rate. When that one's paid off, move on to the second most expensive card, and so on.
• Avoid new debt: While you’re working to pay off your outstanding credit card debt, it’s smart not to take on any new debt and dig yourself into a deeper hole. Some bills may be unavoidable, but this would be a good time to put major purchases that you'd ordinarily pay for with a credit card on hold.
• Use cash: Studies show that consumers spend less money when they use cash instead of credit cards. One MIT study, for example, found that students using credit cards to buy sporting event tickets were likely to spend up to 64% more than if they used cash. So if you want to work on paying down your credit card balances, put your cards away and, wherever possible, use cash instead. Paying with cash can also be a good reality check. Though credit cards encourage a buy-now-worry-later approach, when you’ve used up the cash in your wallet, it’s gone.

The Bottom Line

It’s easy to fall into credit card debt, and it can be hard to dig your way back out of it. Plan to pay more than the minimum monthly payment on your card. You won't be able to use another credit card to do this unless you do a balance transfer. If you're running a substantial balance, focus on paying it off as quickly as possible. The longer it takes to pay off a balance, the more money it will end up costing you.