Dealing with most debt can provide its financial challenges, and credit card debt is no different. While many people carry some kind of debt like a mortgage, car or student loans, there are other kinds of debt that also need attention.
One of those is credit card debt, and it can be an expensive way to borrow, especially if you can only afford to make minimum payments. But there is an option which can help you to pay it off sooner, and less interest too.
In a recent study (Consumer Debt Index – MNP) it was found that 45% of Canadians said they have regrets about the amount they have taken on. Many Canadians might have bad financial habits, and the study found of those surveyed that making minimum credit card payments (21%) and borrowing money they can’t afford to pay back quickly (11%) topped the list.
Credit Card Debt Crisis
Each year Canadians pay billions in credit card interest and fees, and families are more in debt than ever before. During the majority of the pandemic, Canadians did something unexpected, they started paying off much of their credit debt. But as the economy continues to recover, many are back to taking on even more credit card debt. The average Canadian carries over $3,330 in credit card debt.
If someone’s plan to deal with their credit card debt were to only make minimum payments on the average amount of credit card debt ($5,525) then it would take about 16 years to pay off, and cost them more than $6,000 in interest. That means that over time the actual interest would be more than the amount originally owed.
Having a plan to deal with credit card debt is crucial to getting your finances under control. Fortunately, we have a few suggestions that can help you do just that.
Paying Off Credit Card Debt with a Personal Loan
A smart way to help with paying off credit card debt can be to use a personal loan to consolidate what you owe. This can put you in a better financial position, often in less time.
Suppose you have 3 credit cards and owe a total of $10,000 on them combined. If you were to take a personal loan and pay off the credit card balances, not only do you now have just one payment due date to worry about, but if you qualify for a good rate you will probably pay less interest on the personal loan then the credit card debt.
But what if you have a poor credit history and have concerns about approval? It’s still possible to get approved for a personal loan with bad credit. But it’s important to consider if it’s the right time. If the lender’s interest rates are greater than what personal loans you might be eligible for, then you might want to focus on fixing your credit score so that you can later qualify for a personal loan that would help with your credit card debt.
Mistakes to Avoid When Paying Off Credit Card Debt
One thing you don’t want to do when trying to pay off credit card debt is to continue using your credit card. This won’t allow you to truly pay your balance down. What is recommended is that you only use what is available to you. Using your debit card instead of a credit card means you would have to live within your means and the cash available to you. Also avoid relying on any sort of overdraft, which is sort of a buffer that can act like credit. Only use the actual money you have and avoid any sort of credit usage when paying off credit card debt.
But another mistake would be to stop using your credit card altogether. This can result in an account being closed for the reason of “due to inactivity” and that can affect your credit score. The way it works is it can impact your debt to credit utilization ratio and your mix of credit accounts. To keep cards active while not putting yourself in debt, using them once a month for a small purchase to help keep accounts active.
You should also look at decreasing your spending, as every dollar you can spare to paying off your debt sooner is one more without interest. Using a budget, cutting back on expenses, and putting more towards your credit card debt will help you save in the long run.
Also avoid taking on any new debt. This would also include avoiding that you apply for new credit cards in most cases, whether it’s for rewards or points. Maintain a focus on paying down your credit card debt, but also keep your credit score in mind, along with your debt to income ratio so that you are in a good position later.
Also, as mentioned above, if you’re only making the minimum payments on your credit card debt you will pay a lot in interest over time.
Paying Off Credit Card Debt – Plan B
One of the few situations where it could make sense to get another credit card is if you were to apply for the type that offers a 0% balance transfer. This is a type of credit card offer where the introductory offer means you can move your credit card debt to the new card and for a limited time (often about 12 to 18 months) you would have a zero percent interest rate for this term. But the only way this can work in your favor is when you are absolutely certain that you would be able to pay off that balance before the introductory term expires.
RELATED: 7 Debt Mistakes to Avoid
Planning The Pay Off
As you can see there are a few ways to get your personal finances under control, even when you owe with credit cards, and good money management skills are never too late to learn.