Pay-Off Your Credit Card Debt With This Four Strategies

September 3, 2021

The pandemic recovery has been uneven on the credit card balances of many people. While overall credit card debt is on the decline, others are seeing their balances mushroom into huge figures.

Money Management International, a nonprofit credit counseling agency, recently analyzed the credit card balances of renters who sought financial assistance from the organization. Renters have been particularly hard-hit by the pandemic, and federal aid allocated by Congress to address their crisis has been painfully slow to reach households. More than a third of Americans are renters.

The typical renter seeking the agency’s help carried around $3,000 in credit card debt in 2019, Money Management International found. The average balance so far in 2021 is closer to $25,000.

Others agencies that help those financially struggling report the same.

“We do see people who have $20,000, $30,000, and $40,000 in credit card debt,” said Bruce McClary, a spokesman for the National Foundation for Credit Counseling.

Balances that high can take decades to pay off, experts say.

If someone made only the minimum monthly payments on a credit card with a $25,000 balance, charging the average annual rate of 16.22%, it would take them nearly 30 years to be free of that debt, and they’ll have paid more than $32,500 in interest by the end, according to an example provided by Ted Rossman, the industry analyst at CreditCards.com.

The minimum payment on that balance would begin at around $588 a month and would decrease over time as the balance dwindled.

How to avoid paying annual credit card fees

1) One way to speed up repayment, Rossman said, would be to continue paying the original, higher minimum payment.

“That would trim their payoff period way back to a little over five years,” he said. “And their interest expense would be $12,443.”

2) For people who owe such large balances, Rossman recommends reaching out to a nonprofit credit counselor. Money Management International, GreenPath, and other members of the National Foundation for Credit Counseling are options.

“They can provide helpful advice and negotiate with creditors on your behalf,” Rossman said.

For example, he said it’s common for people to get a more manageable payoff plan, thanks to a credit counselor, “something like a 7% interest rate over five years.”

Under those fixed terms, someone making payments on a $25,000 balance would be debt-free in five years and will pay just $4,700 in interest.

Be prepared that some credit counselors charge fees for their help, although these costs are usually well worth it when you consider the interest they can save you from paying, experts say.

3) Another option for people with good credit is to take out a personal loan to pay off their credit card debt, Rossman said.

You’ll still be stuck making monthly payments, but hopefully for less time because the interest rates on personal loans can be as low as 5% or 6%, compared with the 16% or more annual fee on credit cards.

4) Those with good credit may also be able to transfer their debt to a 0% balance transfer card.

These cards offer you a certain amount of months during which no interest is charged. If you found one with a 20-month period, and paid $1,250 a month, for example, your $25,000 balance would be gone in less than two years.

I believe you should start paying down on your Credit Card debt as quick as possible to prevent it from becoming an overwhelming barrier.

“Just beware that the interest rate ranges from 14.49% to 24.49% after the 0% promo ends,” Rossman said.

Analyst View

A growing Credit Card balance or debt is frustrating particularly when the debtor has not figured out a way of gradually paying down on it. It is, however, advisable to seek a non-profit credit counselor to guide you through it, or better still, you take a personal loan that is fixed rate to pay down on the ballooning Credit Card debt.

Source: CNBC