In this week's millennial money episode, Damien Fahy and I speak about the top ways to pay off credit card debt.
Tip 1 - Always pay more than the minimum
The average UK credit card debt sits at £6,400 and with the average interest rate being 17.43%, hopefully this makes you feel a bit better because I know everybody thinks they've got the highest credit card bill in the world.
When it comes to paying off that credit card debt, most people choose to pay the minimum payment which is usually a percentage of the overall debt. In the example we have used above, it would be about £150 a month. If you pay £150 off the first month, the following month it will be slightly lower, approximately £149 and so on and so forth. This does mean however that it will take you a really long time to repay the debt, in fact in this example it would take 33 years and four months using the minimum payment method.
There's a very simple trick you can do to not only cut the amount of interest you pay but actually pay off the debt a lot quicker. Get in touch with credit card company and say you want to pay a fixed amount that's equivalent to the initial minimum rate, in this case £150. Say that you want to pay that amount forever. By fixing the monthly amount and not letting it reduce you will clear the same amount of debt in just 5 years and 4 months. Not only that, it will save you £5,259 in interest over the lifetime of the debt and you'll pay it off 28 years quicker.
Tip 2 - Prioritise debt
Most people have debts that are spread across multiple credit cards and that's just life, there's nothing wrong with that and we shouldn't make people feel bad about it. What you need to do to repay your debt quicker is organise your debt in order of priority, with the highest interest rate at the top of the list and the lowest interest rate at the bottom.
The easiest way for you to do this is:
- Make a list of the debts in order of priority.
- Work out your monthly budget for paying off the debt.
- Set up minimum payment direct debits for the lowest priority cards
- Set up a direct debit to pay the most off on the highest interest rate cards (within budget)
Once you have cleared the highest debt you can then apply that amount to the next credit card in the list. As you work your way down the list it creates this snowballing effect. You're tackling all of your debts at once and paying less interest at the same time. Make sure that you set up a direct debit for each to ensure you do not miss any payments as it could impact your credit score.
Tip 3 - Budget
Looking at how you spend your money each month is a great insight into seeing where your money goes. Categorising your spending opens your eyes to purchases that you may need to cut back on and helps you to budget effectively to tackle any debt you may have.
Apps such as Emma and Yolt help you to manage your bank accounts without opening new ones. Whereas, apps such as Monzo and Starling Bank are app-only banks that help you budget your salary and track your spending. Check out our article How to manage your finances and what you should focus on first.
Remember: If you can't quantify it you can't control it.
Tip 4 - Do a balance transfer
A final tip is to do a credit card balance transfer. A lot of people don't realise that you can transfer your current credit card balance (or balances) to another credit card with 0% interest. This allows you to avoid paying all of the high-interest fees for a period of time whilst you try to clear the debt.
For more information see our article: "How to do a credit card balance transfer in 5 minutes" or check out our video "How to clear debt with a 0% balance transfer".
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