Consumer credit runs off credit cards. Using credit starts early. Some people start on their parents’ credit cards before getting one of their own. Credit card companies pepper college students with offers. Ten years later, your credit card debt is second only to student loan debt.

No matter how many payments you make, your balance keeps growing. Why?

It’s important to understand minimum payments, interest rates and cash withdrawals. Let’s talk about how credit cards work.

Credit Cards 101

A credit card offers users an unsecured loan – no collateral required. Your credit limit is the amount you’re allowed to borrow. Most cards offer a 25-day billing cycle. During that period, there is no interest charged on a new purchase.

That only applies if you pay your balance in full each month. When you do not pay in full each month, you pay interest on any debt you carry forward.

Minimum Payments

Every month your credit card bill shows what you spent and sets a minimum payment. As long as you make the minimum payment, your credit score is not affected. But your wallet is.

Minimum payments are always low – sometimes as little as 1% of what’s owed.

Why would a credit card company let the majority of your debt ride? They make money from the interest on your unpaid balance.

Consider this scenario from the Balance. If you make minimum payments of 2% on a balance of $5000, it will take over 20 years to pay off the card.

Daily Interest Rates

All credit card companies publish their Annual Percentage Rate or APR. Use that number to understand the actual interest rate. Divide the APR on your card by 365 to get the daily interest rate. That amount is added daily.

Let’s use the same example above (minimum payments on $5,000 balance), with an APR of 21.21%, you end up paying over $21,000 in interest on your $5000 balance.

Cash Advance

The current average interest rate on cash advances is just under 24%. That doesn’t include convenience fees, which can be as high as 5% of the amount received.

Don’t set up your pin, don’t use your card at an ATM, don’t cash the “convenience check.” It’s a rabbit hole no responsible card owner should go down. These extra fees rapidly increase debt levels over time.

Debt to Credit Ratio

Your debt to credit ratio measures how much of your credit is being used on an individual card. That means your spending versus your available credit.

A maxed-out credit card isn’t offset by a card with no balance. When you have multiple maxed out cards, there is less chance to qualify for a loan or mortgage.

The best way to maintain your credit score is never max out your cards. Keep your balance (debt) at 30% of your credit limit.

If you pay off your balance in full every month, you don’t have to worry. Some people think it improves your credit to leave a small balance each month. It does not. It’s an outdated idea. There’s no benefit to anyone but the credit card company.

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6 Steps to Pay off Credit Cards in Full

Unless you hit the lottery, getting your cards paid off will take time. But there are ways to speed the process along. Follow these steps to get your debt under control.

1.    Put your cards on the table

An inventory of your cards is the first step for getting your debt under control. It’s surprising but many people have no idea how many cards they have, much less their total debt.

Make a list of all your cards, their current balance and their APR. Check your credit limit on each one. The card you’ve had the longest is important to your credit score. It reflects the duration of your credit history.

Look for cards charging annual fees. Next, store cards have the highest interest rates. Set them aside and don’t put them back in your wallet or purse. If you have other authorized users on your accounts, make sure they hand their cards over too.

When it comes to authorized users, it’s smart to review who is spending what. When everyone in the family has access to multiple cards, it’s easy to see how the debt can pile up.

2.    Make a budget

We can hear the groans from across the room. But credit card debt comes from spending more than you have.

Budgets are a tool to manage your money. They keep your attention focused on your financial goals, not what you want to buy next.

Don’t confuse budgets and income. The more money you have, the more money you need to manage.

For higher-earners, more money often means more spending. Credit card debt is a sign of poor financial management.

3.    Which credit card debt to tackle first?

There are different schools of thought on this. We agree with Dave Ramsey’s suggestion. He recommends choosing the card with the smallest balance.

It sounds counter-intuitive, but the idea is to motivate a change in spending behavior. In business, it’s known as picking off low-hanging fruit. If getting out of debt feels overwhelming, an early win is a strong motivator to persevere.

Make minimum payments on all your cards but this one. Increase your payments as high as you can. Don’t use the card unless it’s an emergency.

Ramsey is a big advocate for cutting up your cards right from the start. But there are some considerations to make about your credit before you do.

The other option is paying off credit cards with the highest interest rate. The total amount of money paid back will be less with this strategy. It does take dedication.

4.    Tools to manage your debt

There are numerous options to get your credit card debt under control. Some are more helpful than others. All have pros and cons.

Balance Transfers

Depending on your debt to credit ratio, you may be able to move a balance from a card. These transfers usually offer a very low-interest rate if moving your debt. Some offer no interest terms of 12 or 18 months.

Balance transfers are a good option if you commit to making more than a minimum payment. Otherwise all you’re doing is ignoring your problem for a year or so. There is often a balance transfer fee. It varies by card but it’s worth paying if you pay off your balance during the term.

One word of caution. If you transfer under a promotional rate, remember it will go up when the term ends. Sometimes more substantially than your original APR. Most credit card companies assume the balance will not be cleared by the end of the term. Prove them wrong.

Personal Loans

Credit consolidation loans have proliferated in recent years. They are an opportunity to pay off one or multiple credit cards with one payment. Depending on your circumstances, some of them are worth considering. Just be careful about extra fees that are charged.

The first thing to look at is the final payoff amount based on the duration of the loan. It shows both the principle and interest. If you have $25,000 in credit card debt across four cards, chose that amount to borrow. Then pick the shortest term for repayment.

Make sure you’re confident you can make your payments. Check how much you’re paying out every month on the cards in question. Use that number as your guide.

This loan is to pay off your credit card debt. Don’t get sidetracked. As soon as it hits your account, go pay off the cards.

Credit Restoration and Debt Resolution Agencies

A credit restoration service handles discrepancies and disputes on your credit. They do not provide help in managing debt. They assist with improving your credit score.

Debt resolution services are for debts that have gone unpaid. They negotiate settlements between clients and creditors. They usually provide budgeting and credit counseling.

The only reason for using a debt resolution service is if you’ve defaulted on payments. Our goal is to help you avoid ever being in that position. But if you are, be aware there are many unethical companies out there. Always check the Better Business Bureau to avoid financial scams.

Some companies would purposefully destroy your credit. They would go to the credit card company and say someone with credit this bad could never pay off debt. They negotiate a lower amount and take a large fee. Avoid companies that use these questionable practices.

5.    Which cards to cut up?

When you close a credit card, it can have an impact on your credit. That doesn’t mean you can’t make changes – they need to be thoughtful.

Closing your cards may feel empowering but isn’t always for the best. Closing several cards at once can seem alarming to your remaining creditor. They wonder if you’re unable to make payments.

The first cards to close are cards charging an annual fee. When possible, pay the card off before closing the account. Check with customer service to see if you can close it with a balance. If yes, automate your payments to avoid forgetting that balance.

Store cards are the next cards to consider but take your time. For example, if you’ve had a Target card for years, it might make sense to keep it active. The age of your credit history is a factor in your credit score. As long as your spending at Target is manageable, it may be to your benefit to keep the card open.

The other option is to leave the credit card account open but cut up the card. Some credit cards may close after long periods of no activity. This is less likely to impact your credit then closing multiple cards at once.

Authorized Users

Sometimes it’s not the cards that need to be cut, but the users. Most families have one or more members spend too much. The question is what are you willing to do about it?

If most of the family can manage that Target card, but your teenage daughter can’t, take her off the card. This might make you feel like a villain, but you’re protecting the family’s financial well-being. Be a role model and instill financial values in your children.

Remember that not everyone needs to have every card. Limit authorized users to two or three cards. Include an emergency card for you and your spouse. And only use it for emergencies!

6.    Monitor your credit cards

No matter how many precautions you take, monitoring your spending is critical. Don’t expect credit card habits to change instantly.

Some financial advisers propose an all-cash lifestyle. We admire the idea in principle, but not in practicality. The better option is learning to manage your money.

Remember your credit history is built on how you consume and manage credit. It’s difficult to think you won’t need a loan or mortgage in your lifetime. Use your credit responsibly and pay less to get it.

Building a strong credit history opens more doors in the future when debt is needed.

Tricks to pay off your credit card debt

The best trick is to pay your monthly balance in full every month. With every card you have, that should be your goal.

Chose the credit card with the best rewards with no annual fees. As long as you pay your balance you are getting free things.

If that’s not an option, here’s our list of recommendations.

  • If you are carrying a balance, don’t use that card. If all your cards have a revolving balance, stop using them for anything but emergencies.
  • An emergency is not a pair of shoes on sale. An emergency is the car dying on the side of the highway at night.
  • Pick the card with the lowest balance and pay it down to zero. At that point, call the credit card company and reduce the credit limit on the card. (If you reduce your credit limit when you still have a balance, it’s bad for your debt to credit ratio.)
  • If an authorized user is maxing out a card, remove them from the account.
  • Authorized users who can’t control their spending shouldn’t have credit cards.
  • Balance transfers offer low-interest or no-interest terms to move your debt. Commit to paying off the debt during that time frame. Otherwise you’re procrastinating.
  • Personal loans provide immediate relief by paying off multiple balances. Be sure you can make the payments and the interest rate is reasonable.
  • Don’t get suckered by scammers. When it sounds too good to be true – it is.

In Closing

Struggling with credit card debt isn’t unusual. But it doesn’t have to be the norm.

How you spend your money is up to you. You can take control of your credit card debt today. Start by looking at how many cards you have and much you owe. Next make a budget to reduce your dependence on credit cards.

Then start paying off your debt. Keep chipping away and monitor credit card spending.

The outcomes will take a while but they’re all positive:

  • Save yourself interest and fees
  • Curb impulse spending
  • Bring less stuff in the house/garage/storage
  • Improve your credit score
  • Spend less per month

When you clean up your debt, it reduces financial anxiety. That type of stress and tension is difficult for families to handle.

But most important of all?

Make this the last time you ever have to Google “how to get out of credit card debt!”​

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