Paying off credit card debt can not only help you save money on interest but also helps in improving your overall financial well-being. Whether you have just one credit card or many, it is important to pay off your outstanding balance on time. Here we have explained the process of credit card debt consolidation with the help of an illustration, which will help you to figure out how long it will take to pay off your debt, how much amount you will be required to pay, and what would be the ideal way to do so.
How To Pay Off Credit Card Debt?
Depending on your situation, you may have different options to pay off your credit card debt. If you are not planning to consolidate your credit card balances, there are two methods you can use:
1. Debt Snowball
This involves making just the minimum payments on all your credit cards except for the one with the lowest balance. Start with the card having the lowest outstanding balance and once that card is paid off, take the monthly payment you were putting towards it and apply that to the card with the next lowest balance. Continue the same strategy until all your balances are paid off.
2. Debt Avalanche
This method works similarly but instead of targeting cards based on the balance, you will have to work on paying off the cards with the highest interest rates first.
Neither method is inherently better than the other, so choose the right one for you according to your goals and preferences.
How Does Credit Card Debt Consolidation Work?
If your credit score is good, debt consolidation may be a good option to pay off your debt faster and save money along the way. Consolidating credit card debt involves paying off your existing debt with a new credit card or a personal loan, preferably at better terms. Here is how each debt consolidation option works:
Balance Transfer Credit Cards
With a balance transfer credit card, you can transfer debt from one or more existing cards to a new one. Many balance transfer cards offer an introductory 0% APR, which means you can pay off your debt interest-free during the promotional period.
Personal Loans
On average, lenders charge lower interest rates on personal loans than credit cards. Personal loans also offer the benefit of set repayment terms instead of just giving a minimum payment.
Regardless of which option you choose, it is important to avoid racking up debt on your credit cards, otherwise, you could end up in a more difficult financial situation.
How Does Credit Card Debt Impact Your Credit Score?
Your credit utilization ratio, the ratio of credit utilized by you to the total available credit, is an important indicator of how you manage your debt. If you are exhausting your total credit limit on a regular basis, you could be damaging your credit score.
However, paying off your credit card debt can improve your credit and overall financial well-being. As you work on paying off your debt, make sure to keep a track of your credit score.
Credit Card Payoff Calculation
The best way to manage your credit card depends on how much you have, and how your debt stacks up to your income. The following debt-to-income (DTI) ratio categories can help you determine how you can effectively handle your debt.
| If your DTI is less than 15% | Paying your debt should be affordable with your income. Methods like debt snowball and debt avalanche can help you stay on track |
| If your DTI is between 15% to 39% | Consider financial tools to help you manage your debt. For borrowers with good to excellent credit, a 0% balance transfer credit card or a personal loan could be good options |
| If your DTI is more than 40% | Your debt load may be too huge to handle on your own without sacrificing other financial goals, like saving for retirement or paying a mortgage. Consider debt relief. |
Here is an illustration that will help you to find out how much time you will need to pay off your credit card debt. For calculations, we have assumed that you make monthly payments on the same date as you received your credit card statement, also you are not making any additional purchases on the card.
| Suppose that the outstanding amount on your credit card is Rs. 50,000 and the monthly interest rate charged is 2.8%. The total number of months required to pay off the debt and the total payment inclusive of interest charges will depend on how much you are planning to pay every month. |
Let’s see how much amount you will have to pay in each scenario month-wise.
| How much do you plan to pay every month? | No. of months required to pay off the outstanding amount | Total Payment |
| Rs. 3,000 | 23 | Rs. 68,296 |
| Rs. 5,000 | 12 | Rs. 59,485 |
| Rs. 7,000 | 9 | Rs. 56,570 |
| Rs. 10,000 | 6 | Rs. 54,650 |
| Rs. 12,000 | 5 | Rs. 53,947 |
Please note that credit card interest calculations will differ on the basis of your card variant. These are indicative numbers only. Actual numbers may differ because many credit card companies start charging interest from the date of purchase and not from the date of billing.
Tip: If you are running late on your credit card payment, you should try to make payment to credit card companies as soon as you have money in hand, as with every passing day the interest charges keep on accumulating.
Should You Go For Low-Interest Rate Credit Cards?
Credit Cards allow you to carry an unpaid balance to the next billing cycle. Carrying a balance forward is sometimes considered favorable than converting it to EMI or taking out a loan. Having a credit card with a low-interest rate can be beneficial for those looking to do some expensive purchases. Usually, interest rates in the range of 1.5% to 2.99% per month are considered low when it comes to credit cards. There are some advantages as well as disadvantages of having a low-interest rate credit card:
| ADVANTAGES | DISADVANTAGES |
| With such cards, the issuer may waive the annual fee if a certain amount is spent on the card every year | Unlike other credit cards, low-interest credit cards may not offer great rewards, cashback, or air miles |
| Since the credit card carries a low-interest rate, if you choose to use the rollover credit facility, then the interest incurred on the bill will be much lesser | Lower interest rates are offered to HNIs to attract them. Such offer is usually promotional and expires after a certain period |
| With the help of low-interest credit cards, you can pay off the accumulated credit card debt | Low-interest credit cards come with high interest rates when it comes to cash advances |
Bottom Line
The time it takes to pay off a credit card depends on things like balance, interest rates, and how much amount you are willing to pay every month. It is true that the interest remains the same, but while your card balance increases so does your monthly interest charge. Hence, it is important to pay more than the total minimum required each month. Make regular principal and interest payments to eliminate debt. Start with the credit cards you have had the longest—particularly the cards you have never missed a minimum payment on. Whatever debt elimination route you decide to go with, just remember to be careful, do your research, make a plan, and stick to it.
