Done well, credit cards can be useful tools that allow you to leverage your cash flow and finance big purchases.
But if those credit cards turn into credit card debt, then that tool suddenly becomes an expensive burden.
The problem with credit cards isn’t the card itself, or the ability to charge a purchase and pay for it later.
The problem is the high interest rates on credit cards.
When you charge something to your credit card and then don’t pay it off when the bill is due, the credit card company charges interest that can reach as high as 20% interest or more.
Paying interest over time costs a lot of money. Remember, that’s money on top of the cost of whatever goods or services you charged to your card.
Only by creating a plan can you determine how long it will take to pay off a credit card - and how soon you’ll be debt-free.
Understand How Credit Cards Work
A credit card is a financial product that provides you with a revolving line of credit. You can use this line of credit to finance purchases, transfer balances, and request cash advances.
You need to repay whatever purchases or cash advances you charge to a credit card.
Credit cards are billed on a monthly basis, and if you pay your balance off in full by the time the bill is due you won’t pay any interest or fees on what you charged.
You’re not required to pay off the entire balance each statement period, but you will need to pay at least a minimum payment.
However, if you don’t repay the balance in full and on time, late fees and interest charges will apply and increase the amount of money you owe.
Interest rates vary from card to card, but most credit cards carry higher APRs and are an expensive financing option because of those high rates.
The Role of Interest Rates
The interest rate on your card plays a big role in determining how long it takes to pay off a credit card. The higher the rate, the more of your money goes to paying the interest and not the principal.
This means it will take you longer to pay off the debt. With a lower interest rate, more of your money can go straight toward repaying the charges you put on the card.
You can have the same balance on two separate cards, but different interest rates will dramatically impact how quickly you can repay what you owe.
For example, a card with a $5,000 balance and 18% interest rate will take you 20 months to pay off if you pay $500 per month.
On the other hand, another card with the same $5,000 balance and $300 monthly payment but with an interest rate of 10% will take you 18 months to pay off.
A lower rate saves two months of payments, which, in this case, is $600. (That lower interest rate card would be paid off even faster, and you’d save even more money if you increased your monthly payment.)
You should work hard to pay off your balances because the longer you hold them, the more money they cost you. Getting rid of your debt means no longer losing your money is lost to interest.
You can do more important things with that freed-up cash instead, like save for something important to you or invest your money to grow your wealth.
Percentage of Monthly Credit Card Payments Toward Interest
|Time to pay off||2 years 8 months||11 months||7 months||7 years 4 months||2 years||1 year 2 months||2 years 4 months||11 months||7 months|
|Total principal paid||$5,000||$5,000||$5,000||$10,000||$10,000||$10,000||$5,000||$5,000||$5,000|
|Total interest paid||$1,215||$430||$274||$7,508||$1,841||$1,084||$557||$217||$141|
|Portion of monthly payment paid toward prinicipal||80%||92%||95%||57%||84%||90%||90%||96%||97%|
|Portion of monthly payment paid toward interest||20%||8%||5%||43%||16%||10%||10%||4%||3%|
|Monthly payment to pay off in 1/2 the time||$351||$875||$1,295||$307||$988||$1,511||$378||$855||$1,273|
The Problem with Minimum Payments
You get it: carrying a balance and maintaining debt costs you money because you need to pay interest. And that interest only grows the longer you have a credit card that needs to be paid off.
Maybe you’re already making the minimum payments and you feel like that’s sufficient.
Your minimum payments are usually calculated as a percentage of your balance, with most major companies requiring you to pay 1% of your balance plus interest and any fees (or $15 to $35, whichever is greater).
Look on your statement or call your credit card company to get the details on how they calculate your minimum payment.
While 1% of your balance plus additional fees is the typical formula, there’s no set standard for determining how much a minimum payment will be - and not all companies follow the 1% formula.
No matter how your credit card’s minimum payments are calculated, there’s a problem here: just because you’re fulfilling your obligation to the credit card company by paying the minimum doesn’t mean you’re making progress on repaying your debt.
This is called “negative amortization” and it happens when you make payments on a credit card but your balance still increases over time. The balance increases because the interest and other fees accumulate faster than you pay down the principal.
It’s critical that you work to make more than the minimum payment on your credit card balance if possible. If you stick to the minimum, you risk your balance rising even as you try to pay it down.
Choose a Strategy and Create a Plan
There’s no one right way to pay off a credit card. What’s important is to understand your options and choose a method that works for you.
And that means choosing a method of paying off your credit card that you can stick to over time if you want to eliminate your entire balance.
This is the most important step in knowing how long it will take you to pay off your debt.
Creating a specific plan means you’ll know exactly how much you need to pay each month and exactly when your balance will be repaid.
Let’s explore some of the strategies you can use to pay off your debt, and explain the pros and cons of each.
The Debt Snowball Repayment Method
The debt snowball is a debt repayment method popularized by financial guru Dave Ramsey. This method has you line up all your debts and organize them by balance.
You start by repaying the debt with the lowest balance first. While paying at least the minimum on your other debts, you put all the money you can toward paying off that first debt with the smallest balance.
Once that debt is repaid, you move to the debt with the second lowest balance. You take the payment you were making on the first debt and combine it with the current payment on this next balance.
Your payments then “snowball” and grow larger and larger as you knock out each of your balances one by one.
This method gives you some small, quick wins up front as it’s faster to repay debt with a small balance.
You’ll pay off a credit card faster this way, but there is a downside. Because you’re working in order of lowest balance to highest balance, you risk carrying a high-interest rate debt for a long time while you work to repay other balances.
This could cost you more money in the long run. But personal finance is personal, and some people find that the debt snowball keeps them motivated as they work to repay debt - even if it’s not the most financially efficient method of paying off credit cards.
The Debt Avalanche Repayment Method
For people who are more motivated by the numbers and saving money than they are by getting some small wins and quickly erasing smaller balances, the debt avalanche might present a better debt payoff strategy.
The debt avalanche has you order your balances by interest rate, from highest to lowest.
You start with the highest interest rate first, because this is the debt that costs you the most money.
It’s likely also the one at greatest risk to experience negative amortization since a high interest rate can build faster than a minimum payment can pay down a balance.
It might take longer to pay off your first balance if you use the debt avalanche, so you need to be patient and find other sources of motivation to help you stick with it until that highest interest rate debt is gone.
Calculating Your Repayment Timeline
Once you’ve determined how you’ll pay off a credit card, you need to know how long it will take. Just like the old saying goes, a goal without a deadline is just a dream.
To solidify your plan to pay down your debt, determine how much money per month you can dedicate to repayment and how long it will take you to reach a $0 balance on your card.
You need to know the following pieces of information to figure out how long it will take to pay off a credit card:
- The card’s current balance
- The monthly payment you put toward that balance
- The interest rate on the credit card
You can calculate a payment schedule with these numbers. For example, let’s say you want to pay off a credit card with a $10,000 balance. The APR is 15%. You have $500 to put toward that card each month.
It would take your 24 months, or 2 years, to pay off the card.
You can also work backward and set your timeline first. If you have a goal date in mind, you can use this to determine how much money you should put toward your credit card balance each month.
Let’s say you had a credit card with a $8,000 balance and a 12% APR. You want to be debt-free in 12 months. Your monthly payment on the card should be $710.79 if you want to achieve this goal.
Once you gather up the numbers from your own financial situation, use tools to help you determine either how long it will take you to pay off your card or how much money per month you need to put toward repayment to reach a goal date.
Consider a Balance Transfer Credit Card
We've talked a lot about interest rates here, so it should come as no surprise that lowering your rate can decrease how long it takes to pay off your card.
While sometimes you can lower your rate simply by calling and asking, another way to do it is to get a balance transfer credit card.
Balance transfer credit cards are designed specifically with debt payoff in mind.
If you get approved, your card will be used to pay off your other card (or cards) and then you'll simply have to repay the balance transfer card. (This act does not close your other cards, however.)
A balance transfer card often comes with a promotional rate of 0% from anywhere for six months to 24 months.
That period of time gives you a head start to pay down or off your debt. And if you can't pay if off by the time your 0% rate expires, you can get another balance transfer to extend your time at 0%.
The main thing to think about here is, again, paying more than minimum. The minimum due won't help you pay the card off on a balance transfer card, just like it won't for other cards.
Instead, divide your balance by how many months you get at 0% interest. That amount should be the minimum payment as far as you're concerned.
If you pay that amount every month, you'll be paid off by the time the rate expires.
Stay the Course
Debt payoff isn't an easy or fun journey, but it is one that can be achieved.
Once you decide the plan that will work for you, stay the course.
Time and persistence will help you get this debt out of your life. And, when you do, you get to use your money the way you want to - not lose it to interest.