Paying off your credit cards isn’t as hard as you think

Credit card debt a miserable kind of debt to have, thanks to high interest rates and long pay-off horizons. But it’s honestly easier to pay off your credit cards than you think. Credit card companies just don’t highlight this because it means they wouldn’t make as much money off of you. If you’re committed to paying off your credit card debt read on, and put those cards away in a drawer and ignore them. Delete them from your phone if they are part of something like Apple Pay. You can’t be adding to your balance on your credit cards each month if you are trying to pay them off.

The Example Set Up

I’m using an example of having 2 credit cards with a total balance of $11,000 for this example. The cards’ details are below:

CardCredit LimitInterest RateBalance OwedMin. Payment
Minimum Payments are calculated as 3% of the balance owed

If you went right on making the minimum payments, the credit card companies would love it. Why? It would take you 18 years and 2 months to pay off these cards, and the lenders would rake in a total of $9,999.51 between the two of them. That’s about $1,000 shy of paying your combined total balance owed ($11,000), twice over! I don’t think the companies are entitled to that much money just for extending us credit.

Why do credit cards take so long to pay off?

There are a two main factors in these long time horizons. The first is that your payments are assessed a portion of what you owe, usually 3% or 4%. That means that each time you make a payment and lower your balance owed, your payment for the next month will decrease as well. This draws out payments. Second, that percentage is very small. Only 3-4% of the total amount you owe. You can definitely do better than that.

How to speed up your payments even if you don’t have extra money on hand

You can actually speed up your credit card payments even if you don’t have a spare dollar to throw at your debt. Instead of letting the credit card company lower your minimum every month, take your minimum payment on month 1 of your payoff and treat that as your minimum payment every month. That is, you will always pay $90 on Card A and $240 on Card B. Automating your credit card payments is a good way to do this. Set up the automatic payments using the fixed dollar amounts, not the minimum balance option. This is how much better your repayment will be with this one change:

Total Pay-off TimelineTotal Interest PaidInterest Saved
Minimum Payments Only18 years, 2 months$9,999.51N/A
Fixed Payments (No Extra Money)7 years, 10 months$4,202.39$5,797.12
Remember, this is just treating your Month 1 minimum payment as the fixed payment until the cards are paid off

Just by treating that $90 and $240 as a fixed monthly payment rather than letting the credit card company reduce the payment as the balance falls, we have cut our time until the cards are paid off in half. We’ve also saved over half the interest that the credit card company would have gotten otherwise! But if you can manage to allocate an extra $50/month towards your credit cards, you can do even better!

Snowballing the debt with an extra $50 a month

The debt snowball/avalanche method is a way of speeding up debt payments even more. It requires a bit of extra money per month overall, but not much. For this demonstration, we’re only giving our credit cards an extra $50. Here’s how it works:

  1. We’re going to do the snowball method here, which is paying off the lowest balance debt first, and tackling the next smallest each time. The avalanche method ranks the debts by highest interest to lowest rather than from lowest balance for highest.
  2. Card A is our lower balance card. It has a minimum payment of $90/month. We’re going to add our extra $50 to that and pay a total of $140 on that card until it is paid off.
    1. While we are paying the $140 on Card A, we are only paying our minimum payments on card B.
  3. Once that card is paid off, we take that entire $140 and pay it on Card B in addition to it’s $240 minimum (a total of $380) until it is paid off.

That’s the magic of the snowball! Every time you pay off a debt, you roll that payment into the next, increasing the extra for every debt you pay off! Here’s how it would play out:

CardsThe First RoundPayments on Each CardThe Second RoundPayments on Each Card
Card A27 months$140.00N/AN/A
Card B27 monthsMinimum Payments21 months$295.98
Total Interest Paid$3,145.29$822.06
Our minimum payment on Card B for Month 28 was $155.98, we added the $140 to that

By finding an extra $50 per month for our cards, we paid them both off in 4 years (48 months!) Even better, we only paid a total of $3,967.35 in interest charges. That’s a savings of $6,032.16!

What to do when your cards are paid off

If you’re going to need other loans in the future – things like car loans or mortgages – don’t close out your credit cards UNLESS you don’t trust yourself to keep them at a low monthly balance that is paid in full every month. If you think having the account will tempt you to spend, close the account rather than get back into debt.

If you think you can be responsible with your cards, you need to commit to paying off the balance in full every month, before the bill date. That way you don’t get charged interest and run up a balance. Limit your balances to what you can afford, and never more than 15% of your total credit limit on each card. For Card A that means a max of $750 a month and a max of $1,500. If you can’t afford to pay that much every month, scale down until you can. Limiting your cards to 15% or less of your available credit is that no matter what day you decide to apply for a car loan or mortgage, you credit card utilization rate will be right at the sweet spot – if you carry too high of a balance on your cards, even if you pay it off every month, it can make a lender nervous.

A great way to use your cards and make it easy is to put a couple normal expenses on each and automatically pay them off about a week before the billing date. For example, maybe you put your cell phone bill on Card A and your cable/internet bill on Card B and otherwise leave them alone. Those expenses get automatically charged to the cards each month, and you can automate a payment for the same amount to hit about a week before the card’s billing date. That way when the billing date comes around, your balance is $0 and the credit card company makes no interest off of you!

Closing Thoughts

I hope that these examples have shown you that paying off your credit cards is easier than you think. Even if you don’t have a dollar to spare each month, you can speed up your payoff just by treating your minimum payments as an absolute number rather than a percentage. And if you do have some extra money on hand you can speed things up even more!

The snowball is also useful for mixed types of debts! I used this method to pay off 2 credit cards, a car loan, and a mountain of student loans over the course of 10 years. My snowball wasn’t perfectly lowest to highest balances. My car loan was a higher balance than most of my individual student loans, but it was due within 4 years. So I put it right after my credit cards and before my student loans in my list!