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How to Pay Down Your Credit Card Debt While Saving Money on Interest

Feb 11, 2013

It's no secret that paying down your credit card debt is a crucial first step toward getting your personal finances in order.

For starters, you'll save hundreds or even thousands of dollars in interest alone once you pay your credit debt down to zero. More money in your bank accounts means more flexibility in paying down other debts, too; students loans, home loans and any other monthly payments you might have.

Paying down your credit card debt should be a priority for a number of reasons. First, they carry some of the highest interest rates of any form of credit available. They also carry a ton of weight when it comes to calculating your credit score; one late or default payment on your credit card bill could mean a significant drop in your credit score depending on how established your credit profile is.

Not only that, consumers using more than 30% of their total available credit line will also see a negative correlation in their score due to a high credit utilization ratio. This number represents the ratio of amounts owed versus your total credit line available. Ideally you want to report to credit agencies that you're using less than 10% of your total available credit line, but to maintain a good credit score it's important for that percentage to be at least less than 30%.

So the quicker you pay down your credit debt, the less you pay in interest on your existing balance and the better your score becomes. An improved score means lower interest rates down the road, plus more flexibility and leverage if you're hoping to refinance existing loans.

If you're interested in paying down your credit card debt quickly but you're not quite sure where to begin, here are some helpful tips towards paying down credit debt and ultimately saving money on interest fees...

1.)    Consolidate your debt with a credit card balance transfer

If you're paying interest on existing credit cards, consider consolidating your debt on to a credit card that offers a 0% intro period for balance transfers.

Many credit cards include a 0% intro period attached to purchases and balance transfers as an incentive to sign up. Depending on the card (and your credit score), that intro period could last anywhere from three to 18 months, giving consumers the opportunity to pay down their old balance interest-free for up to a year-and-a-half.

Consolidating your debt via balance transfer is simple. First, determine how many months it will take you to pay down your debt with monthly payments. Once you've got a realistic plan in place, then it's time to research credit cards that not only match up with your newly-formed payment plan, but also include other features you would prefer in the long run, too; airline miles, cash back rewards, etc.

Once you apply for and receive your new credit card, contact your new credit card company online or by phone to initiate your balance transfer. Generally, the fee to transfer your balance is 3% of the total balance being transferred, and it takes anywhere from 7 to 14 days for the balance to finalize.

But once your balance is transferred, you'll be paying down your debt interest-free, making that 3% fee a small price to pay to eliminate your credit card interest.

2.)    Negotiate lower interest rates on your existing cards

If you're uneasy about opening up yet another credit card (and you should be if you have 5 or more existing cards already), then it's worth writing your credit card companies or giving them a call to negotiate lower interest rates.

This may sound unrealistic, but you would be surprised by how open some credit card companies are to lowering rates – especially if you have a solid track record with the issuer. Simply identify yourself and your good payment profile with the company, tell them you would like (or deserve) a lower interest rate and, if they play hardball, maybe even mention that you would consider canceling your card and switching companies if the rates don't improve. (By the way, we don't recommend closing an existing account in most circumstances; this is more of a threat for leverage than anything else.)

No matter the outcome, a simple inquiry couldn't hurt. If you're tired of paying 20% interest even though your payment history is sterling, then it's worth letting your credit card company know that you deserve a lower interest rate. Odds are they won't do this on their own, so it's up to you to get the ball rolling on lowering interest rates.

3.)    Eliminate the balance with the highest interest rate first

Whether you decide to transfer this balance is up to you, but the most crucial debt to eliminate first is the one charging the most interest.

If you have one card with a particularly high APR – maybe this was the first card you received to build credit, or a retail credit card that seemed like a steal at the time but actually carried heavy interest fees – then make this the first credit card balance you pay down.

While some analysts recommend paying off the debt with the smallest balance first, this is more for psychological reasons than anything else since you're “crossing off” a debt. But in the long run, you'll serve yourself (and your wallet) better to eliminate the debt with the highest interest as soon as possible.

And finally...

4.)    Take an extended break from charging

You'll find that it's awfully difficult to pay down credit debt if you continue to add to it. If you're serious about getting out of debt, then it's time to start saving money rather than spending.

Do whatever it takes to eliminate the urge to charge; “hide” your credit cards, keep them at home (though maybe keep one on you for emergencies), cut 'em up if necessary! But the only way to become debt-free is to stop charging items to your card.

Combined with the above tips for paying down debt, you'll see a noticeable dent in your credit card balance from the get-go. And while coming back from credit debt can be a long and arduous process, you'll save hundreds and probably thousands of dollars over the course of your lifetime when you pay those debts down to zero.

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