Paying off Credit Card Debt

Total credit card debt in the USA was up to $712 billion as of 2015, so it’s fairly easy to say someone reading this blog either has credit card debt or knows someone with credit card debt. If you think you don’t, then you might fall into the “technically you do” category since you “technically” have debt if there’s a balance on your card(s), even if you’re like me and will pay the entire balance when the statement closes. Needless to say, there are options to reducing your credit card debt and reducing the amount you owe.

First and foremost is getting a hold of your cash flow: figure out how much money you bring in each month (if it changes month to month figure out a safe average amount), figure out how much you need to survive (food, housing, etc.). Once you have that amount see if you have any money left over. Hopefully you have some left over so you are not going further into debt (if you are, I’m very sorry but this next portion probably isn’t for you at this point in time).

Now, having extra money is necessary for paying down debt, but if you’re paying interest because your credit cards have interest rates (likely no less than 15%) then you’re probably making very little progress in eliminating that debt. One simple solution to paying off your credit card debt faster is to open a new card with 0% interest (and hopefully balance transfer fees) for a certain number of months. Most cards have at least a 12 month 0% time frame. Others have 15 months or 18 months, and a couple have even 21 months. These 21 month 0% APR cards are the Citi Simplicity and Citi Diamond Preferred cards.

Citi has an unofficial rule not to accept a second application less than a week after the first application and no more than 2 applications in a little more than 2 months. If you plan to get those Citi cards for the maximum time with 0% interest then make sure to wait at least a week between applying for each.

Let me show some math to exemplify the power of a 0% interest rate credit card:

  • Starting balance and interest rate: $10,000 and 15%
  • Balance transfer fee: 3% (from your current card, 0% to the new card)
  • Monthly payment to payoff in 21 months
    • 15% card: $544.37/month
    • 0% card: $490.48/month
  • Savings from 0% card over 21 months
    • Each month: $53.89
    • Total: $1,131.69

While saving $53.89 a month might not be much, it can really add up. And you can also transfer the balance to a new card near the end of the 21st month to a new card that offers 15 or 18 months so you can make smaller payments each month. I did the math for this situation, original balance of $10,000 with a balance transfer at month 0 and 21 with a 3% transfer fee and paid in full in 39 months.

  • Minimum payment for 21 + 18 month: $267.70/month
  • Over 39 months:
    • $57.84/month less
    • $3212.40 total
    • 12 months sooner

Paying 0% interest over 39 months means you will end up paying $57.84 a month less than if you were paying 15% interest, but you will still be paying over $3,000 less over those 39 months with minimum payments more manageable than the 21 month goal.

Individual cases will be different so if your balance and interest rates are lower then your savings will be less, if your interest rate and balances are higher your savings will be more, if one is higher and the other is lower then your situation is not so straight forward.

Nonetheless, if you find yourself paying off credit card debt you should first look at your money flow and set up a budget. Next, don’t be afraid to open a new credit card to take advantage of a long 0% interest rate period. But don’t spend more with either of the card, at least not more than what you can pay back at the end of the month.