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The Fed’s move to increase the Fed Funds Rate aims to get inflation under control, but there’s also a downside. Hikes to target rates affect consumer rates, so you might notice interest on credit card balances start to cost you more and more. The good news is paying off credit card debt can minimize the effect rate hikes have on your wallet. Here, we share ways how to pay off credit card debt and save on interest.
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Many major credit card issuers offer credit card specials where new customers get 0% APR on balances transferred to a newly opened card for 12 months or more. Applying for a balance transfer card and paying off debt during the interest vacation can help you attack principal faster.
Here’s how to put this strategy into action:
Before transferring your balances, there are a few important details to know. Credit card companies may charge a fee for each balance you transfer. Also, you might have to execute the transfer within the first few months for it to qualify for the 0% deal.
After the interest-free period, interest will likely jump up to the standard rate. So, it’s best to pay off as much as possible during the 0% intro special so you can reap the rewards of the deal.
If you have a large amount of debt that would be difficult to pay off during a credit card’s 0% APR special, another strategy could be consolidating debt with a personal loan.
Personal loans are installment products that typically offer a fixed payment each month and a set payoff schedule. If you have good to excellent credit, you could land a low rate on a personal loan, which could help you save a boatload while paying off consolidated debt.
Let’s take a look at some numbers. Say you owe $10,000 on your credit card with 18% APR. With payments of $500, it would take 24 months to pay off your debt with $1,978.27 in total interest paid. On the other hand, if you qualify for a personal loan with 8% APR and a 24-month term, you would pay just $854.55 in interest.
Here’s how to put this strategy into action:
Like balance transfers, personal loans may come with fine print to consider. Typically, lenders charge an origination fee that’s taken from the loan amount before funds get deposited.
Your credit score also affects your rates and eligibility odds. If your score is less-than-perfect, you may not qualify alone, and some lenders will let you apply with a cosigner.
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Perhaps you’re not interested in applying for a balance transfer card or personal loan — you still have options. The snowball and avalanche methods of debt repayment can help you figure out which debt to pay first. Here’s how both work:
Debt snowball
The debt snowball is when you make the minimum payments on all of your debt and focus any extra money you have on the smallest balance. The idea beyond this strategy is that early success in eliminating a balance can keep you motivated to continue paying off debt.
You can get started by listing out all of your debt balances from smallest to largest. Then start prioritizing debt on the top of your list, progressively moving downward to other debt once the first ones are paid off.
Debt avalanche
The debt avalanche is a debt repayment approach where you list your debt from the highest interest rate to the lowest interest rate. Then you make minimum payments on all of your debt and focus extra money on the most expensive debt first. This strategy could save you money compared to the debt snowball strategy, but if your most expensive debt is also the debt with the highest balance, it could take you a while to see progress.
Lastly, if you need help coming up with a debt payment plan, there are experts you can call. A debt management plan (DMP) is a program offered by some credit counseling organizations. In the program, a credit counselor reviews your debt balances and budget to see how much you can pay. They also reach out to your creditors to try to negotiate lower interest and fees.
After the DMP is set up, you make one payment to the credit counselor, and they divvy up payments to your creditors, so you don’t have to worry about fielding calls or managing payments going out to multiple companies. However, this service isn’t always free — organizations may charge upfront and ongoing fees for participating in the plan.
The July Consumer Price Index shows inflation is stabilizing, but prices are still higher than they were a year ago. While prices are high, interest savings you see from paying off debt could be better off going to other areas of your budget. When paying off debt, remember it’s a marathon. You might not be able to pay off your entire card balance in one shot, but making consistent payments higher than the minimum payment due can help you chip away at the debt until it’s gone.
Next: Planning on buying an iPhone? Should you finance your iPhone? Here’s how much you’ll pay each month.
Taylor Medine is a personal finance writer with over eight years of experience writing books, courses, guides, and articles that demystify personal finance topics, such as how to repay debt, build credit, shop for credit cards, and more. In 2013, Taylor started documenting her efforts to stretch a dollar as a recent college grad on a personal blog. Eventually, her passion for finance writing grew into a full-time career in explaining intimidating money topics to the everyday consumer. Taylor’s work has been featured on Bankrate, Experian, Forbes Advisor, The Balance, Business Insider, Credit Karma, and more. Follow her on Twitter @taytalksmoney.
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