When used properly, credit cards can be a good money management tool. However, if you’re not careful with your spending, you can rack up consumer debt and stress yourself out.
It’s not hard to see why people try to avoid debt. The average credit card interest rate sits at 19.99%. That’s quite the premium to be paying if you’re not paying off the balance in full every month.
That being said, sometimes we’re in a situation where we’ve racked up our debt. If that happens, we should try our best to pay it off ASAP. Of course, that’s easier said than done, so here are three tips to help you lower your credit card interest payments.
Make a debt payment plan
Usually, the biggest concern for people with credit card debt is how they should tackle it. Admittedly, it can be tough. However, regardless how much you owe, as long as you have a debt repayment plan; you’ll be just fine.
A debt repayment plan is exactly like it sounds: You set up a payment plan, stick to it, and eventually your debts will be paid. The key is to choose either the debt avalanche or debt snowball methods to help you pay off your debts.
With the debt avalanche method, you focus on the debt with the highest interest rate first regardless of how much you owe. For example, let’s say you have $2,500 in credit card debt at 20% interest, $30,000 in student debt at 4% and you’ve used $1,000 of your line of credit at 6% interest.
With the debt avalanche method, you would pay the minimum amount required for each debt, but any additional payments would go to the highest interest debt first. In our example, it would be credit card debt, then the line of credit, and finally your student debt. By focusing on the highest interest debt, you pay the least amount of interest in the long run.
Granted, owing money to multiple people can have a psychological effect on people. If you’re like this, then you’ll want to use the debt snowball method, which prioritizes your smallest debt first. Using our example from above, you would focus on the line of credit first while making the minimum payment to your other debts. The idea is that by eliminating your smallest debt first, you’ll be encouraged to pay off the rest of your debts.
Use a low interest or balance transfer credit card
As mentioned, the typical credit card interest rate is 19.99%. However, the best low interest credit cards offer interest rates that are substantially lower.
You likely won’t get many benefits compared to the best travel rewards credit cards, but one major benefit you’ll get is the ability to balance transfer. That means you can transfer your existing debt to your new low interest credit card which would instantly reduce the amount of interest you pay every month. Here are three cards you’ll want to consider:
Although the Scotiabank Value Visa has an annual fee, there’s a lot to like about the card. The 0.99% promotional interest rate is comparable to the other cards, but what makes this card interesting is the fact that the you pay a flat interest rate of 11.99% on purchases, cash advances, and balance transfers. Since the rates are straightforward, there’s no confusion about how much interest you’ll pay. The additional benefits are limited, but you can save up to 20% on car rentals through participating AVIS car rental locations worldwide.
With a balance transfer rate of 1.99% for the first 6 months (8.99% after), the American Express Essential Credit Card is one of the most popular low interest credit cards on the market for obvious reasons. There’s no annual fee for this card and you’ll still get access to American Express Invites. This is arguably, the best low interest credit card on the market.
Although the BMO Preferred Rate MasterCard doesn’t offer a lower rate when making a balance transfer, it does have an interest rate of 12.9% which is appealing. There is a $20 yearly fee, however, cardholders do get Zero Dollar Liability which protects you from unauthorized transactions.
Switch to cash
Reducing your credit card interest payments is important, but so is recognizing how you got into debt in the first place. In many situations (not all), it has to do with overspending. When we use credit to pay for our expenses, we tend to spend more. The reason for this is because we never see the money leaving our accounts. With credit cards, spending money is as simple as a quick tap.
Now, if you switched to cash while paying off your debt, you would have a psychological advantage over using credit. With cash, you’re physically seeing the cash leave your wallet or bank account, so you’ll be less likely to spend your hard earned money. Using cash is a proven way to reduce your spending.
Having debt sucks, but there’s no point in beating yourself up over past decisions. Your best bet is to come up with a debt repayment strategy and to use the tools available to you to reduce your debt. Soon enough, you’ll be debt free.
- Best Low Interest Credit Cards in Canada
- Credit Card Battle: BMO Preferred Rate MasterCard vs. American Express Essential
- How Does Credit Card Interest Work