Carrying a balance on your credit card that never seems to go down can be demoralizing. Faithfully making minimum credit card payments hardly makes a dent in your balance because the interest rates are often ridiculously high. The whole thing worsens when credit card companies add extra fees and charges. So how can you reduce the interest rates and fees and pay off that debt?
Paying off your credit card
Several options are available to get rid of your credit card payments as quickly as possible. These options include:
- Making more than the minimum payment.
- Paying off your credit card with a lower rate card.
- Using a line of credit to pay off your credit card.
- Consolidating your debt into a loan.
Each of these has merits and, of course, drawbacks. The best choice for you will depend on what you want to accomplish and your financial situation.
Find out the pros and cons of using low-interest credit cards in this podcast.
Paying more than the minimum credit card payment
Having a large balance owing on your credit card will result in a fairly high payment. Even if you make your minimum credit card payment faithfully every month, you’ll notice your balance stays stubbornly high. The balance doesn’t go down because all the credit card company is required to charge you for principal is $10 (except in Quebec).
If you owe $5,000 on your credit card with a 19.99% interest rate, your minimum monthly payment will be $150.00. Your monthly payments will decrease as you pay down the balance. Paying off your balance by making the minimum payment will take 20 years and 11 months.
Paying more than your minimum payment will pay off your debt much faster and reduce your interest costs. Increasing your payment from the above example to $200.00 per month will pay off the amount owing in 2 years and 9 months. Your interest costs will be $1521.02. Keeping your payments at $200 per month until you pay off the balance will save you 18 years and 2 years of payments and cost $4,462.89 less than making minimum payments.
There are three potential pitfalls to this method. First, you must have room in your budget to make extra payments. Second, your money is still going towards high-interest charges. Reducing your interest rate will reduce your overall costs. Third, it assumes you won’t be using your credit card.
Paying off your credit card with a lower-rate card
Paying off your credit card with another credit card can be beneficial for two reasons. The first is that you may be able to lower your interest rate by switching your balance to another card. Secondly, you could reduce your minimum payment by switching to a lower-rate card.
Transferring your balance to a lower-rate card can reduce your interest rate significantly. Credit card companies frequently send promotions for balance transfers with a low introductory rate for six months or more. Rates can be as low as 0%. It’s important to read the terms and conditions of the agreement, so you know what your rate will be once the promotion expires.
Lowering your interest rate will lower your minimum monthly payments because most of your payment is interest. If you choose to keep your payments the same as you were paying on your higher-rate card, more of your money will go toward paying off your balance.
Paying off your credit card with another credit card can benefit you if:
- You stop using your credit card.
- You pay off your balance or most of it within the promotional period.
- The rate on the card is lower than on your existing card once the promotional period expires.
These offers can save you money for a few months, but there are some drawbacks. These include:
- You usually must pay a transfer fee, such as 3%, on the balance you transfer to the low-rate card. If your balance is $5000, your transfer fee will be $150.00 if the fee is 3%.
- You might need a high credit score to qualify for the credit card.
- Once the promotional rate expires, the rate might be as high as, or higher than, your existing card.
- If you continue using your original card, you might have more debt than before transferring your balance.
Paying off your credit card with a line of credit
A line of credit is a revolving credit product that works much like a credit card. You have a maximum limit you can access; as you pay down the amount owing, you can re-access the limit.
The differences between a line of credit and a credit card are:
- Credit card interest rates are usually set.
- The interest rate on a line of credit will change as the Bank of Canada changes the prime rate.
- The minimum limit on a line of credit is typically higher than on a credit card, often starting at $5,000.00.
- The minimum payment is usually $50 or 2% of the outstanding balance, meaning your line of credit payments could be higher than your credit card payments.
- The interest rate on a line of credit can be significantly lower than on a credit card.
- It’s easier to qualify for a credit card than a line of credit.
Using a line of credit to pay off your credit card has several advantages. First, you’ll save money if the interest rate is lower than your credit card. Second, even if you only make the minimum payments, you’ll pay it off more quickly than you’ll pay off a credit card making minimum payments. Finally, you can use a line of credit to consolidate all your debt if the limit is large enough and you only have one payment to manage.
There are some downsides to a line of credit, such as:
- It can be challenging to get approval for a line of credit.
- Financial institutions often base the interest rate on your credit rating.
- If your credit rating isn’t very high, the rate on your line of credit could be similar to your credit card rate.
- You could owe more than you initially did if you continue using your credit cards.
Consolidation loans
A consolidation loan can be an option if you have debts with high-interest rates, such as credit cards, high-interest rate loans, and payday loans. The proceeds from a consolidation loan will pay off all those debts and give you one payment to manage at an interest rate that is usually lower than your other debts. Additionally, consolidation loans are term loans. A term loan has a fixed payment, so you’ll be debt free within a specific time frame, like three or four years.
Consolidation loans may be a way to manage your debt, however, there are a few drawbacks to be aware of:
- They can be hard to qualify for if your credit rating is poor or your income won’t support the loan payments.
- The monthly payment can be high.
- The lender may require you to close all your credit cards as a condition of the loan.
- You could owe more than you initially did if you continue using any available credit cards.
Paying off Your Debt
The best way to eliminate your debt will depend on your financial situation and what you want to accomplish. A consolidation loan or line of credit might work for you if you have several loan and credit card payments. On the other hand, if your goal is to pay off your debts as quickly as possible, you can switch your debt to a low-interest credit card and increase your payments.
If you’re struggling to make your payments, these options may not work for you. Any number of circ*mstances, like a job loss or illness, can result in your debt load becoming unmanageable. Restructuring your debt might not be possible or helpful in a situation like this.
Fortunately, you don’t have to deal with your debt alone. The Licensed Insolvency Trustees at Allan Marshall and Associates will work with you to develop a solution to get your finances. Our Trustees will listen to you and provide the best options for your needs.
If you’re ready to deal with your debt and move toward a better financial future, please contact Allan Marshall and Associates at 1-888-371-8900 or online for a free consultation. Our offices are conveniently located for you in New Brunswick, Nova Scotia, Prince Edward Island, Alberta and British Columbia. Reach out today for help to put your debts behind you.
