Credit card payments can take up a significant chunk of your monthly budget—especially with interest rates constantly rising or falling.
Lowering that monthly payment amount requires a series of effective strategies to decrease your balances or lower their interest rate, which, in turn, lowers your monthly credit card payments.
Average Debt in the US
The average American household with a credit card balance owes around $6,300, according to the most recent data from the Federal Reserve's Survey of Consumer Finances. In 2019, about 45% of families in the U.S. still owed a balance after their last credit card payment.
While credit card balances in the U.S. overall decreased from 2019 to 2020, the total revolving debt (which consists mainly of credit card debt) in the U.S. is still $974.9 billion.
Pay More Than the Minimum Monthly Payment
Most credit card issuers only require you to pay between 2% and 4% of your credit card balance each month. However, we recommend paying in full—not only do you avoid interest thanks to a credit card’s grace period, you also avoid credit card debt. However, if you've accumulated a balance larger than you can pay in one month, paying as much as you can above the minimum is the next best option.
Paying just the minimum increases both the total interest and the time it takes to pay off your credit card balance.
Prioritize Your Debt
Take inventory of your credit card accounts by making a list of all your credit cards along with the amount you owe on each, the minimum payment, and the interest rate.
You’ll use this information to choose a debt repayment strategy, either prioritizing your repayment by APR or the balance each one carries, two strategies known as the “avalanche” and “snowball” strategies, respectively (more on this later).
Review Your Budget
If you don't already have a budget, now is a great time to create one. It will help guide your spending, ensuring your expenses don't exceed your income. Review your spending to determine whether you can reduce or cut any expenses, including:
- Recurring subscriptions services
- Bank fees
- Services fees you may pay when paying bills
- Subscriptions or fees that have increased over time
- Discretionary spending, such as dining out or new clothes
Negotiate your larger expenses, like car insurance premiums. You may be able to get a lower rate by bundling your car insurance with your homeowner's insurance, for example.
If you're not sure what you're spending each month, consider using a budgeting app you can link to your checking and credit card accounts to monitor your expenses.
Consider Options for Reducing Interest Rates
Reducing your credit card interest rate cuts down on the finance charges you pay each month, allowing more of your monthly payment to go toward your balance rather than interest. There are two ways to lower your interest rate
- Call the credit card issuer and ask for a rate reduction. If you've been a good customer, consistently pay on time, and have a strong credit score, your card issuer may be willing to honor your request.
- Transfer the balance to a card with a lower or 0% introductory APR. Because 0% APR cards don’t charge interest for a certain period of time, you have lower monthly payments because the issuer isn’t tacking on interest. And, you can pay down your balance faster because your full payment goes toward reducing your principal. Once the interest kicks in, your monthly payment is likely to be lower than it was on the card from which you transferred the balance. Be sure to take into account balance transfer fees, which can add 3% to 5% to what you owe once the transfer is complete.
Pick a Debt Repayment Strategy
Once you're ready to start paying down your credit card debt, you should decide on a debt repayment strategy. Having a system to follow will make it easier to keep track of your credit card payments, build momentum, and see progress. Using your prioritized list of debts will help you get started.
The debt avalanche strategy focuses on paying the credit card with the highest interest rate, since it's the most expensive.
Pay the minimum on all your credit cards, while putting any extra money you have toward your card with the highest interest rate. Once you've paid that one off, move on to the credit card with the next highest interest rate, again putting your extra money toward that debt.
The debt snowball method focuses on paying off debts starting with the lowest balance. The goal is to knock out small debts first, giving yourself a motivational boost to continue on your debt payoff journey.
Just like with the debt avalanche strategy, make the minimum payment on all your credit cards except the one you're currently focused on paying off.
You can pay off your debts in almost any order, as long as you strategically focus on one debt at a time. For example, you may have one creditor that you're eager to pay off quickly.
Whenever you have extra money come in, such as a bonus at work, a gift from a relative, or even an unexpected refund, set that aside for debt repayment. The goal is to find any extra dollars and cents you could apply to your credit card balances.
Put the Brakes on New Purchases
While you're paying off your debt, avoid making new credit card purchases. Adding to your balance increases your debt load, making it even harder to pay what you owe.
Rather than relying on your credit card for daily expenses, switch to a cash-based budget or use the envelope budgeting system to limit your spending while you are paying off your debt. Once you’ve paid off your credit cards, you can start using them again in moderation, being sure to pay your balance in full every month.