What's the best way to pay off credit card debt?

Owing a lot of money on your credit card can be overwhelming. Whether you accumulated a large balance due to an unexpected emergency or because of overspending, it may take years to pay it off if you’re making minimum payments. The best way to pay off credit card debt depends on factors like your budget and the number of accounts you owe balances on.

In Canada, 37% of surveyed people grapple with paying off debt. Fortunately, getting out of debt is possible if you take action today. Here are six tips and tricks to help you pay off credit card debt and achieve financial freedom.

1. Assess your debt and interest rates

Wondering how to pay off credit card debt? Here’s a step-by-step guide to get you started:

• Start by making a list of all the credit cards you own. 
• Write down your current outstanding balance, interest rate and minimum payment for each card. 
• Compare the fees and interest rates on each card to decide which debt to pay off first.

Taking the time to assess your debt is also a good way to choose the right repayment strategy. For example, paying off balances on the credit card with the highest interest rate can help you save a considerable amount of money on interest charges. 

2. Pay more than your minimum payment

The minimum payment is the least you need to pay towards your balance. You’ll still accumulate interest on the outstanding balance. When you only pay the minimum, your payments will not reduce your principal balance. Instead, they’ll only cover the interest charges.

A good way to get out of this cycle is by allocating all your extra cash towards your credit card debt. Here’s a quick look at how you can do it:

• Use your bonuses, tax refunds or any other windfalls toward your credit card debt. 
• Pay whatever extra you can put aside each month to make a larger dent in the principal you owe and save money on interest charges. 
• Set up automatic payments so you don’t miss due dates, which can attract late payment fees that increase your outstanding balance. Late payments can also stay on your credit report for up to six years.

3. Target one debt at a time

Paying off credit card debt can often feel overwhelming, especially when you’re juggling payments on multiple cards. Instead, focus on repaying one debt at a time. You can start by repaying the credit card with the highest interest rate while making minimum payments on the other cards.

Once you pay off the balance on the card, move on to the next credit card. This is a good way of reducing credit card debt because it helps you stay focused. You’ll also stay motivated as your overall debt reduces over time.  

4. Choose a debt repayment strategy that works for you

There are several different debt repayment strategies to choose from when paying off credit card debt. Ultimately, the best way to pay off credit card debt will depend on your financial goals and what keeps you motivated. For example, if saving money on interest charges is a priority, a 0% balance transfer credit card may be your best option.

Let’s take a look at some of the most effective strategies to choose from to get out of debt.

Snowball method

The snowball method is a debt repayment strategy in which you focus on paying off the card with the smallest balance first. Here’s how this repayment method works:

• List your credit cards with their outstanding balances and interest rates and list them from smallest to highest.
• Make a budget to determine how much you can pay towards your debt.
• After making the minimum payments on all your debts, start paying extra on the card with the smallest balance each month.
• Once you’ve paid off the smallest balance in full, you can roll over that payment and any extra amount you budgeted toward the card with the next-smallest debt. 

The accomplishment you’ll feel after you pay off the first card will help you stay motivated throughout the process. 

Avalanche method

The avalanche method is an efficient way of paying off debt because it helps you save money on interest charges and pay off debt faster. 

Here’s how this repayment method works:

• Make a list of all your credit cards, arranging them from the highest interest rate to the lowest. 
• After making the minimum monthly payments for each debt, focus on paying extra each month to pay off the card with the highest interest rate first. 
• Once you pay it off in full, you can move on to the card with the next highest interest rate.

Debt consolidation

If you have multiple credit cards at high interest rates, you can combine them into a single debt consolidation loan. This will make your debt more manageable since you’ll have a single payment each month instead of multiple. 

Personal loans to reduce credit card debt can also help you save a considerable amount of money in interest charges. If you have good credit, you may qualify for a loan with a lower annual percentage rate (APR) than what you typically pay on credit cards. Compare the APRs and terms different lenders offer to find the lowest rates and maximize savings.  

Balance transfer

With a balance transfer credit card, you can transfer the balance from your high-interest card to one with a lower APR, sometimes as low as 0%. You’ll typically pay a balance transfer fee of up to 5% of your transfer amount, so it’s important to read the terms and conditions carefully.

Keep in mind that the favourable rates are temporary, usually lasting for 12 to 24 months. If you pay off your balance within this period, all your payments will go towards your principal balance, which can help you pay off your debt faster. Once the introductory offer ends, you’ll be stuck with a higher APR on the remaining balance. 

5. Reduce spending and increase your income

Another way to get out of credit card debt faster is to reduce unnecessary expenses and use the savings to make extra debt payments. 

Track your expenses for at least two weeks to determine where you’re spending money. This can help you spot opportunities to reduce monthly bills by cancelling subscriptions you don’t use or making coffee at home instead of buying specialty coffee for $5 every day.

Even with reduced spending, sometimes the only way to pay off credit cards faster is by increasing your income. Look for ways to boost your income through overtime hours, a part-time job or monetizing a skill you have. Even a little extra income can get you closer to freedom from credit card debt.

6. Seek professional help

If you’re struggling to keep up with repayments or if you have little left over each month after paying your bills, it may be a good idea to work with a certified credit counsellor to create a structured repayment plan.

A credit counsellor can look at your income, current expenses and debts to help you identify the best way to pay off credit card debt. Other than credit counselling, they can also help you enroll in a debt management plan so you pay back what you owe with reduced interest rates.

Take charge of your credit card debt with Money.ca

Getting out of debt can often feel overwhelming, but there’s light at the end of the tunnel. Money.ca has all the resources you need to learn as much as you can about credit card debt and the strategies you can use to pay it off. The best way to pay off credit card debt is usually the one you can stay consistent with.

For most people, it can be as simple as reducing expenses, making extra payments, and following a repayment strategy like snowball or avalanche. If you’re consistently struggling with making minimum payments, it may be better to seek professional help instead.

Credit card debt FAQs

Have questions about paying off debt? Find answers below.

Scott Birke Content editor, Money.ca

Scott Birke Content editor, Money.ca

Scott Birke is a financial content editor at Money.ca.

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