How to Pay Off Credit Card Debt Fast and Raise a Low Credit Score?

How to Pay Off Credit Card Debt Fast and Raise a Low Credit Score? 

Don’t let credit card debt overwhelm you – you can get rid of it with a concrete plan! In fact, you’re not alone in the quest for going debt free – in the last quarter of 2022, credit card debt reached $986 billion, a $61 billion increase over pre-pandemic levels. Those balances will likely continue to rise due to inflation and rising interest rates. Though there is no quick fix for debt, despite what solicitors or infomercials claim, it’s wise to view the journey as a challenge, and a learning opportunity to build a healthy credit score! 

Firstly, let’s get to the basics of what we’re talking about. 

What is Credit Card Debt? 

Credit card debt refers to debt owed to credit card companies after making purchases with a credit card. The credit card company lends you money when you use a credit card. Credit cards charge interest if you fail to pay off the full balance by the due date, which can quickly add up and lead to huge debt. Unmanaged credit card debt can negatively impact your credit score and overall financial health. 

What is a Credit Score? 

A credit score is a 3-digit number ranging from 300 to 850 that reflects an individual’s creditworthiness based on their credit history. Lenders use credit scores to evaluate the risk of lending money and determine interest rates and credit limits. Factors considered include payment history, amounts owed, length of credit history, types of credit used, and new credit accounts. A good credit score is crucial for loan and credit approval, as well as favorable interest rates and terms. 

How Credit Card Debts Impact Your Credit Score? 

Credit card debt has a significant impact on your credit score since it affects both credit utilization and payment history. Late payments, missed payments, or defaulting on debt have a negative effect on your payment history, which makes up 35% of your credit score. Using a large portion of your credit limit has an impact on credit utilization, which makes up 30% of credit usage. It’s advised to keep credit utilization below 30%. 

How paying your credit card debt boost your credit score? 

Paying off your credit card debt can improve your credit score by reducing your credit utilization rate (CUR), which measures how much credit you are using compared to how much credit you have available. By paying down debt, you decrease your utilization rate, which can have a positive impact on your credit score. The amount your utilization rate decreases depends on how much of your credit card debt you pay off.  

How to Pay Off Credit Card Debt Fast and Raise a Low Credit Score?
Let's consider a hypothetical scenario in which two individuals, both with the same credit utilization, decide to use different portions of a $1,200 stimulus check to pay off their credit card debt.  

In this case, Paul and Peter have identical credit card balances of $2,000 and credit limits of $5,000, resulting in a shared credit utilization rate of 40% ($2,000 / $5,000 = 0.4 x 100 = 40%). While Paul opts to use the entire stimulus check to pay off her credit card debt, Peter decides to only use $600 and save the remaining amount. Consequently, Paul's utilization rate drops to 16%, while Peter's utilization rate only reduces to 28%. 
 Paul Peter 
Current balance $2000 $2000 
Current credit limit $5000 $5000 
Current CUR 40% 40% 
Balance after stimulus payment $800 $1400 
Credit limit after stimulus payment $5000 $5000 
CUR after stimulus payment 16% 20% 
Total CUR drop 24 percentage points 12 percentage points 

Experts recommend maintaining a utilization rate below 30%, with some suggesting aiming for a single-digit rate to achieve the best credit score. Credit utilization makes up 30% of a credit score on the FICO model. By paying off their credit card debt, both individuals in the hypothetical scenario would see an increase in their credit score, although the extent of the increase would depend on their overall credit profiles. Here’s how to learn Finance and become smart with money management!

How to Pay Off Credit Card Debt Quickly? 

The best way to repay your credit card debt quickly is to create a budget, prioritize debts by interest rate, take out a balance transfer or debt consolidation loan, increase payments, and avoid using credit cards. While debt-freedom is not easy, with determination and strategic planning, it is achievable. 

10 most effective ways to repay your credit card debt faster 

Congrats on your decision to free yourself from the burden of credit card debt and shed the weight off your shoulders. Yet, what is the best way to get started? There is no universal solution to paying off credit card debt. Nevertheless, there are several established approaches to addressing your credit card debt and regaining control over your finances. 

  1. List all debts that need to be paid 
  1. Pay more than the minimum due 
  1. The debt snowball method 
  1. The debt-avalanche method 
  1. Negotiate better rates with bank 
  1. Take advantage of a personal loan 
  1. Apply for a balance transfer card 
  1. Spend less and save money 
  1. Pause investing while in debt 
  1. Convert outstanding bills to EMIs 

Let’s take a closer look at all the points above. 

Step 1: List all debts that need to be paid 

It is critical to have knowledge and clarity regarding your debt in order to effectively reverse your credit card debt. This includes a list of all your credit cards and the amounts owed on each, as well as the interest rates charged, minimum monthly payments, yearly fees, and payment dates. You may efficiently manage and pay off your debt by creating an Excel file to log all of your payments. With this knowledge, you will have a better understanding of your debt and will be able to make more informed decisions to reduce and eliminate it. When it comes to managing your finances, remember that knowledge is power. 

Step 2: Pay more than the minimum due 

To reduce credit card debt efficiently, pay more than the minimum monthly amount to lower the principal balance and reduce the interest charges. For example, a $2,000 credit card balance with an APR of 18% and a minimum monthly payment of $40 can take six years and $1,240 in interest to pay off. However, paying $100 monthly can cut that time in half and cost only $416 in interest. Consider making payments more frequently if possible and ensuring you pay at least the minimum amount due by the due date to avoid late fees and penalty rates. 

Step 3: The debt snowball method 

The debt snowball method was developed for people who find it challenging to stick to their debt reduction plan, especially when progress seems to be stagnant. It involves paying off small debts first, then gradually increasing balances. The debt snowball method was popularized by Dave Ramsey, a personal finance expert. Behavioral economists suggest this approach may not be the most financially efficient, but it can serve as a mental reward to motivate people toward debt reduction. Despite its higher cost, this method may motivate debtors to pay off their obligations. 

Step 4: The debt-avalanche method 

Debt stacking or the debt avalanche method involves paying off credit cards with the highest interest rates first, then moving on to those with lower interest rates. By doing this, you reduce the amount of time you spend paying off the credit cards that are costing you the most money. For example, if you have two credit cards with debts of $1,000 (8% interest rate) and $2,000 (10% interest rate), you would pay off the $2,000 debt first using the debt avalanche method. 

Step 5: Negotiate better rates with your bank 

Negotiating better interest rates with your credit card issuers is a great way to pay off credit card debt quickly. To begin, it’s important to check the interest rates on all your cards, as they can vary significantly. When negotiating your debt, highlight your loyalty, payment history, and outstanding balance to demonstrate your credit-worthiness. If you’ve been a responsible customer for a long time, banks are often willing to lower their rates to keep you. However, if you have a history of credit card debt, improving your creditworthiness should be a priority. 

Step 6: Take advantage of a personal loan 

Consider consolidating your credit card debt with a personal loan if you have less than excellent credit. Look online or ask a local bank or credit union about personal loans, also known as debt consolidation loans. Personal loan APRs are usually lower than credit card APRs, so you’ll likely pay less interest. Plus, you’ll only have to make one monthly payment instead of several. Just make sure the loan’s interest rate is lower than your credit card, you can pay off the loan in a reasonable time, and you understand the loan’s cost and terms. 

Step 7: Apply for a balance transfer card 

With a high credit score, you could be eligible for a card that helps you pay off your balance faster. Balance transfer cards offer 0% APR for a promotional period (usually 12-18 months), allowing you to pay down the principal without interest. Prioritize paying off your balance before the promotional period ends, as the non-introductory APR may be high. Note that some balance transfer cards charge a fee (typically 3%) for transferring a balance, so look for cards with low or no fees to maximize your debt repayment. Don’t be swayed by cards that offer 0% APR on purchases – focus on paying off your debt first. 

Step 8: Spend less and save money 

Credit card debt can come from unexpected medical or emergency expenses, or from chronic overspending. To gain insight into spending habits, making a reasonable budget is recommended. The budget should account for basic necessities, obligations, nice-to-haves, and irregular recurring expenses. The last category can often lead to credit card debt. To pay off debts in 12 to 18 months, go through each expense and find ways to free up enough money each month. 

Step 9: Pause investing while in debt 

If you’re in debt, it’s not advisable to keep investing even if it generates some returns on the stock market or mutual funds because the gains will be offset by increasing debt. Instead, it’s best to pause investing until the credit card debt is fully paid off. You may also want to sell some investments to help pay off the debt, but it’s crucial to avoid touching your emergency fund as it serves as a safety net in unexpected situations. 

Step 10: Convert outstanding bills to EMIs 

Converting your outstanding credit card bills into EMIs has multiple advantages, such as lower interest rates that can be paid off over a more extended period, fixed payments that help with budgeting and financial management, improved credit scores by consistently paying EMIs on time, avoidance of penalty fees from missed payments, and debt consolidation to simplify multiple balances. You should examine the EMI plan’s terms and conditions before committing, especially if you have a large debt or difficulty making payments.

How much credit card debt is too much? 

The answer to this question isn’t definitive. Several factors can indicate too much credit card debt, such as not being able to make minimum payments or frequently using one credit card to repay another.

How to Pay Off Credit Card Debt Fast and Raise a Low Credit Score?

If you are concerned about too much debt on your credit cards, here are three ways to determine whether it is too much: 

  • You have a credit utilization ratio over 30%: In this ratio, you compare how much credit you are using to how much credit is available to you. You should aim for a utilization ratio of no more than 30%. 
  • You have a debt-to-income ratio greater than 36%: A debt-to-income ratio compares your average monthly credit card debt with your gross monthly income. It is ideal to keep your DTI rate below 36%. 
  • You have more than 15% credit card debt to monthly income: This ratio measures how much you pay on your credit cards each month compared to your total net income each month. It is recommended that you pay no more than 10% to 15% of your total income on credit card debt. 

Creating a specific plan using a strategic approach can lead to a quicker payoff of your debts and the possibility of restoring your credit score. Achieving a healthy credit profile can greatly reduce stress levels and is invaluable. 

How Fast does a Credit Score Go Up after Paying off Debt? 

The time it takes for a credit score to rise after clearing debt is determined by various factors, including the amount and type of debt paid, the person’s credit history, and the mode of payment. Usually, it may take a while for the actual increase in credit score to reflect on the credit report as credit bureaus may require up to 30-45 days (about 1 and a half months) to update the report. 

As favorable payment history is recorded to the credit agencies, the credit score may also rise gradually rather than immediately. It’s important to remember that improving a credit score may require more than just paying off debt; additional characteristics including payment history, credit mix, and length of credit history also affect credit ratings. 

Credit Card Debt: Boon or Bane for Your Credit Score? 

Credit card debt can be a source of great distress for most cardholders, not only affecting their peace of mind but also their credit score. While it may be tempting to exhaust the full credit limit on your card, it is advisable to resist this urge. Maxing out your credit limit can lead to a decrease in your credit score, resulting in higher interest rates on other credit cards or loans you may apply for. Additionally, having a low credit score may limit your ability to secure approval for future loan applications from lenders. 

Looking for a smart way to Pay off your Credit Card Debt? 

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