Smart Way to Pay Off a Credit Card

If I had a dollar for every time a friend or family member asked me for help pay debt, I would be debt-free myself!

But I get it. Credit cards are so easy to use. And that means all of them, including Mastercard, Visa, Discover and AMEX. But it’s not so easy to get credit card relief and to get help pay debt. In a perfect world, you would just pay the balance in full each month. 

But for the rest of us, paying most but not all of your credit card debt each month ends up with an increasing balance, that at some point could max out your available credit line. And this is definitely not good for your credit score, as how much of your available credit is being used is a key calculation of your credit score. Having a lot of available credit balance available is good for your score. Maxing out your available credit is bad for your credit score.

But here is a little secret I pass along to make it a lot easier than you think to get real credit card relief. Make a monthly principal payment that is equal to at least three times the monthly finance charge. 

As an example:

Let’s say your card has an Annual Percentage Rate (APR) of 9.74%. To keep the math simple, let’s say the balance is $10,000. This means that your annual interest cost is $974. Dividing the annual interest charge by 12 months gets you to $81.17. Three times this monthly interest cost is $243.50. I round up to the nearest $5, so in this scenario, I would make a principal payment of $245 plus the interest charge each month.

Assuming I am not using the card, since I intend to pay it off, this tactic takes a little bit less than three and a half years to pay off the card to $0. The total interest charge is about $1,700. Sure, you can make a higher principal payment to pay it off faster, but some folks need to budget, since this is not our only bill.

This secret works great when the rate on the card is less than a fixed term personal loan. But what about a Visa, Discover or AMEX that might charge a higher rate? In this case, a lower rate fixed term personal loan is the answer.

Using the $10,000 credit card balance example, a 36-month term personal loan at 11.90% APR has a monthly payment of $331.67. The total finance charge is $1,939.96, to be exact. So, in three years, that high balance credit card is gone. That’s real credit card relief for all high rate credit cards.

It is very helpful for you to use an online finance calculator to help review finances. It can be invaluable to help paying debt and still keep you to your budget. There are a lot of other debt consolidation programs found on the Internet, too. But my friends tell me I’m the one with the real credit karma that gets them to the best credit score.

If you need credit card relief or are looking at debt consolidation programs, I recommend you consider a low rate credit card or personal loan. And use my "three times the interest cost" principal payment to keep your credit card balances low.