Consumer Tips

Learn How to Save Money While Paying off Your Credit Card

Gerri Detweiler

May 19, 2015

Take a look at the chart below comparing the difference between making a minimum payment versus making a fixed payment above the minimum.  The example uses a $2,500 credit card balance, a 21% interest rate with a fixed payment of $100. 

Time to pay off:

$2,500 balance 21% APR	Minimum payment: 2.5% of balance	Fixed payment:  $100
Time to pay off	26 years, 1 month	2 years, 10 months
Interest paid	$5,194.02	$816.60

Making additional payments, or paying more than the minimum, help you to avoid the trap of having credit card balances stretch out for years and years. You can use the Credit Card Calculator to determine how quickly you will pay off your credit card balance, and you can save even more money if you do the following:

• Lower your interest rate. 
  Call your issuer, request a lower interest rate and if they refuse state that you will take your business elsewhere. If they still won't budge, consider transferring your balance to another credit card with a better deal. For instance, an interest rate of 12% with a $2,500 balance and $100 monthly payment will save you an additional $470 in interest. You will also pay off your balance in just under two and a half years.
• Add more money. 
  Even if you can't get a lower interest rate and you continue to make payments at a rate of 21%, adding $20 a month to your $100 monthly payment will allow you to pay off the debt in two years and three months; you will pay just under $637 in interest. Another example, by making payments of $233 a month (at the 21% interest rate) the balance can be paid-off in one year. With a lower interest rate, the balance will be paid down even faster! 

Here are the three other effective ways to tackle credit card debt:

• Pay off the credit card with the lowest balance first.
  This advice is based on the notion that you will feel great about paying off credit cards with small balances, and will be so excited the momentum will carry over to paying off cards with larger balances. By having fewer bills you minimize the possibility of missing payment due dates that can result in late fees or higher penalty interest rates. 
• Pay off the card with the highest interest rate first, regardless of the size of the balance. 
  You will save the most money using this strategy--though your actual savings amount will depend on the interest rate for each account. Start by paying as much as you can toward the card with the highest interest rate, and when you have paid off that card, move on to the next card, and so on. 
• Strategically pay down your balances to improve your credit score. 
  With this method, you look at your available credit lines on each account and you work to reduce each of your balances to below 30% of your available credit, or even lower if you can afford it. This can boost your credit score, since a high balance relative to your credit limit is an important factor in determining your FICO credit score. If you have generous credit lines, you may not need to consider this approach.

It is important to note that you don't have to carry debt to build a strong credit score. When you pay off a card, don't close it (unless there is an annual fee and the issuer won't waive it). Keep it active by using it from time to time for purchases you would make anyway, and pay the balance in full.