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How to pay off your credit card: 8 ways to reduce interest charges

Credit cards are essential financial tools and can build your credit while simultaneously helping stretch your dollar through rewards and money-saving perks like travel insurance and purchase protection. But when you carry a balance, interest kicks in and your credit card can go from helping your bottom line to hurting it. 

If you’re grappling with credit card debt, you’re not alone. According to a study conducted by Equifax Canada, the average non-mortgage debt for Canadians is now $21,128 - an increase from previous quarters.

There are steps you can take to lower your credit card payments and reduce your interest rates (which sit at a steep 19.99% on the typical credit card). Below we cover eight ways to reduce your credit card interest charges.

Key takeaways on tips to reduce credit card interest fees

  1. Track your finances and list out all outstanding debts, including amounts owed and interest rate for each
  2. Make multiple payments throughout the month, where possible, to help reduce the amount of interest owed
  3. Focus on paying off the debt with the highest interest rate first (also known as the debt avalanche method)
  4. Access lower interest rates by consolidating your debt onto a balance transfer credit card
  5. Negotiate with your credit card issuer for a lower interest rate
  6. Set up recurring automatic payments to your credit card to avoid accidentally missing a payment
  7. Use a low interest credit card if you anticipate carrying a balance month over month
  8. Pay with cash more often to help you curb your spending you are less likely to over-spend

1. Reflect on your finances 

If you’re looking to tackle your credit card debt, it can be worthwhile doing some self-reflection and examining your finances first. 

Ask yourself: what led you to rack up consumer debt? Was it overspending on nice-to-haves, a cash crunch due to a reduction in income, or an emergency? These are important questions and can help you spot possible solutions to avoid getting stuck in a cycle of debt (like, say, building an emergency fund or picking up a side hustle).

You’ll also want to bust out a pen and paper (or spreadsheet) and start tracking some hard numbers. List all your debts, including the amounts owed and interest rate for each. Calculate your average monthly budget and how much you have leftover after fixed costs that you could put towards debt repayment. Even consider keeping tabs on your daily purchases to identify where you could cut back and curb your spending. 


2. Make multiple payments throughout the month

You don’t have to wait till the end of your credit card’s monthly billing cycle or for your statement to arrive in the mail to make a payment. In fact, making payments more frequently throughout the month (on a bi-weekly or even weekly basis) can actually help you reduce the amount of interest you owe.

That’s because interest on most credit cards is calculated based on the average balance you carry every day – not your balance at the end of the month. 

Let me explain: 

If you carry a credit card balance of $1,000 for the entire length of your 30-day billing cycle, you would owe interest on the whole $1,000 by the time your statement period ends.

But if you paid down $500 early halfway through the billing cycle, your average daily balance for the month would fall to $750: $1,000 for your first 15 days and $500 for the remaining 15 days. 

By making multiple payments on a more frequent basis, you’ll decrease your average daily balance and effectively reduce your interest rate. Spreading out payments into more regular chunks can also make chipping away at your debt feel more manageable and lower the likelihood you’ll spend your money on something else by the time your statement arrives.


3. Use the debt avalanche method

If you’re juggling debt on multiple credit cards and loans, it can be tough to decide which to tackle first. Enter the debt avalanche method.

The debt avalanche method advocates that you should focus on the debt with the highest interest rate first regardless of the size of the balance. For example, let’s say you have: $1,500 in debt on Credit Card A with 19.99% interest, $3,000 on Credit Card B with 15.99% interest, and $20,000 in student debt at 4%.

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 this example, it would be Credit Card A, then Credit Card B, and finally your student debt. By honing in on the highest interest debt, you will pay the least amount of interest in the long run.

If you carry debt on two credit cards with the same interest rate, a helpful strategy to get things started would be to use the debt snowball method, which prioritizes your smallest debt first while making at least the minimum payment on everything else. The idea is that the sense of accomplishment from eliminating your smallest balance will keep you motivated to pay off the rest of your debt. 

4. Consolidate your debt onto a balance transfer credit card

One of the best ways to access lower interest rates is by signing up for a balance transfer credit card and consolidating your debt. The idea of getting a new credit card may sound like a weird solution but hear me out.

The best balance transfer credit cards come with rock-bottom promotional interest rates for a limited time (i.e. anywhere from 0% – 3.99% for six to ten months). By moving your debt on your current credit card to a balance transfer card, you’ll have access to these ultra-low rates and can pay down your debt considerably faster. 

Think of it like you’re using one credit card to pay off another.

Here’s a simplified example of what would happen if you kept a $3,000 debt on a typical credit card versus if you moved it over to a balance transfer card with a 0% offer for ten months, while making payments of $300 each month:

Once the promotional period ends, the interest rate on the balance transfer credit card will go back to its normal levels. So, you’ll want to look into both the balance transfer card’s promotional rate as well as its regular interest rate.

Some additional things to know about balance transfers: you’ll usually need to pay a flat transfer fee upfront (typically 1%-3% of the balance you’re moving over) and you can only transfer balances between credit cards from different banks.

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5. Ask for a lower interest rate from your credit card issuer

In the wake of COVID-19, many banks are offering temporary credit card payment deferral programs along with reductions in interest rates. Check with your bank – either on your online app or with a customer service representative – if you’re eligible.  

If you’re not eligible or your card issuer doesn’t offer such programs, consider picking up the phone and trying to negotiate for a lower rate. As the saying goes, it never hurts to ask.

Here are some quick tips to help you in the negotiation process:

  • Your odds of successfully negotiating for a lower rate will increase if you’ve been a loyal, long-term cardholder. So make sure to emphasize how many years you’ve been a client of the bank and if you carry multiple accounts with them
  • Explain your situation and be honest, courteous, and patient
  • Before you pick up the phone, do a bit of self due-diligence. Do you have a good credit score? Do you have a solid track record of making at least the minimum payment on time? These can all help your case for a lower rate
  • Don’t just ask for a lower rate but be specific and provide an actual percentage (note: reductions likely won’t be permanent but only for a temporary period of time). It can help if you do your homework by reading up on what competing banks are currently offering
  • The first customer service representative who picks up your call may not have the authority to reduce your interest rate, so consider politely asking to speak to a manager or someone who would be able to authorize a rate reduction
  • If your initial request is rejected, don’t settle. Ask for a counter offer and how much of a reduction would be possible
  • If negotiating doesn’t work, don’t abandon the idea of completely and consider calling again in the future within a few weeks or months to ask again.

6. Automate payments to your credit card

Setting up recurring automatic payments from your chequing account to your credit card is a low effort way to guarantee you’re consistently paying down your debt and lowering your interest charges without having to think about manually making payments. It can also help you avoid the pitfalls of accidentally missing a payment.

A good strategy is to schedule automated payments to happen on your payday, so you can ensure your money is put to work tackling your debt before you have a chance to spend it on something else.

You’ll want to tread carefully here though and avoid setting payments too ambitiously high. Decide on a set payment amount that you can realistically afford over a sustained period of time, like a fixed percent of your income.


7. Get a low interest credit card

While it’s always recommended you avoid carrying a balance, if you anticipate you’ll need to continue using a credit card for daily purchases to tie you over during a cash crunch, it’s best to use a low interest credit card.

Some of the best low interest credit cards in Canada come with rates as low as 8.99% to 12.99%, which is well below the average of 19.99% found on most rewards credit cards. Just be sure to only use credit for absolute essential purchases, track your spending, and avoid splurging on nice-to-haves.


8. Use cash more often 

Reducing your credit card interest payments is important, but so is recognizing how you got into debt in the first place. In some 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 or swipe.

Now, if you switched to cash while paying off your debt, you would have a psychological advantage overusing credit. With cash, you’re physically seeing the cash leave your wallet or bank account, so you may be less likely to spend your hard-earned money. 


The bottom line

Having debt sucks, but there’s no point in beating yourself up over it. Your best bet is to come up with a debt repayment strategy, employ some of these tips, and in more extreme cases, seek help from a debt counsellor. With the right steps and support systems, you can become debt free sooner.