Credit cards can be powerful tools for college students. By using the right credit card responsibly, students can graduate with zero debt and a great credit score that will help them score a better interest rate when buying a home, qualify for credit cards with better rewards, or get a small business loan. Unfortunately, that’s not always the case.
It’s easy for students with minimal financial experience to swipe their way to a high credit card balance. In 2016, over 30% of active students had an average credit card balance of $2,573. (And 33% of those students said they had maxed out their card that same year.) That’s a chunk of change — especially for those who have recently begun paying toward student loans.
If you’ve found yourself in this situation, here’s the good news: With the right strategy, you can minimize interest payments and erase your credit card debt as quickly as possible. Here’s how to do it.
First, review your credit card debt.
Be warned: This is the worst part. Reviewing how much money you owe can be disheartening, but you should embrace it. The more you understand the reality of your situation, the more focused you’ll become on your goal: eliminating your debt.
The first thing you need to do is to jot down a few figures for each of your active credit cards: the outstanding balance, the interest rate, and your minimum monthly payment. Now plug those numbers into our debt payoff calculator below to get a bird’s eye view of your situation.
Here’s a tip: Make sure you input the minimum monthly payment for each card regardless of whether you plan to pay extra. It’s important to start off with the baseline scenario, otherwise you risk misinterpreting the severity of your debt, which could result in a less effective payoff strategy.
Once you’ve logged your information, pay attention to two key items: the payoff date and total interest. The payoff date shows you how long it will take to get out of debt if you make the minimum monthly payment for each bill. The total interest refers to the amount of extra money you’ll pay over the course of your debt. Both of these figures can be sobering if you have a lot to pay, but they’re crucial for understanding the journey ahead of you.
Now that you understand your situation, it’s time to build your payoff strategy.
Then build your debt payoff strategy.
Dealing with debt is never fun. It takes grit, determination, and always requires a change of lifestyle. If you have racked up an average amount of debt (around $2,500), it could take months or years to wipe the slate. Thankfully, there are five practical tactics that can help speed up the process and minimize the interest you have to pay. (Plus, you’ll develop a better financial mindset in the process!)
Tactic 1: Consider a balance transfer.
Visit our guide to balance transfer cards to see your options.
A balance transfer (the act of transferring your balance due from one credit card to another) is one of the first tactics you should consider — especially if you owe several thousand dollars or more. Moving your debt from one place to another might sound counterintuitive, but the benefits are two-fold.
Benefit: 0% interest
Many balance transfer cards offer 0% intro APR for a year or more, which means you don’t pay any interest. That interest-free period gives you the opportunity to apply 100% of your payment to the principal and minimize the amount of interest your pay down the road.
For example, if you have $3,000 on a card with 18% APR, you would pay an additional $588 in interest over two years while making a $150 monthly payment. After transferring that to a balance transfer card with 0% APR for 15 months, however, you would knock out $2,250 of your debt before you pay any interest at all. If that balance transfer card has the same 18% APR once month 16 kicks in, you’d only wind up paying an extra $35 in interest on the remainder of your debt. That’s about $550 less than the total you would pay without using a balance transfer card.
Benefit: debt consolidation
Second, most balance transfer cards allow you to combine debts from multiple cards as long as you don’t exceed the overall credit limit. So instead of keeping track of multiple accounts, you just have one monthly payment to remember — oftentimes at a more attractive interest rate. The simpler, the better.
Tactic 2: Pay more than the minimum payment.
Only 26% of college students say they pay more than the minimum payment. That’s too bad, because it’s one of the best ways to whip debt into shape as quickly as possible.
Let’s say you have an outstanding balance of $500 on your card. The interest rate is 15% (which is pretty common for student credit cards) and your minimum monthly payment is $25. If you stick with the minimum payment, it will take you exactly two years to pay off your balance, along with $78 of interest.
If you pay at least $15 extra each month toward the principal, you’ll pay your card off nine months earlier than you would have making the minimum payment. You’ll also save about $10 on interest.
Prioritize payoffs from smallest to largest.
If you have multiple cards with outstanding balances (and you can’t consolidate them all with a balance transfer card), try Dave Ramsey’s debt snowball method. List all of your balances in order of smallest to largest and focus all your extra cash on the smallest debt first. Let’s call that debt A. When you’ve finished paying off debt A, start applying all the money you were spending on debt A (including the extra you had been applying toward the principal) toward the next largest debt on your list. Like a snowball rolling down a hill, this approach helps you gain momentum. Plus, you’ll get the added psychological benefit of checking a debt off your list early on in the process.
Finding wiggle room in your budget can be difficult to do, especially if you’re a recent grad who hasn’t landed a job yet. But if you get creative, there are plenty of ways to rack up a few extra dollars each month.
For starters, you can sell stuff. Perhaps you have some books to sell back to your campus bookstore? Maybe you don’t need your longboard anymore? Sell it and put that money toward your balance. Another strategy is to pick up a side hustle. And if that isn’t feasible, you might be able to commit to completing one odd job every month for family or friends. Don’t write anything off, no matter how small the contribution — even $10 extra a month can make a big difference.
Tactic 3: Avoid fees by paying on time.
Late payments are a big deal: In 2016, 33% percent of active students made late payments, and 15% completely missed a payment. Thanks to the 2010 addendum to the Credit CARD Act, your first late fee is capped at $25, no matter what type of card you have. But after that, the offense can rack up a fee around $37, a higher penalty APR.
Just a couple of late fees can seriously derail your payoff strategy, so it’s incredibly important to stay on top of your payments. Think beyond the penalties. Every time you incur a fee, you miss out on the opportunity to pay apply that extra cash toward the principal. It slows down your payoff rate and increases the amount of total interest you pay in the long run. Don’t rely on your memory — add payment dates to your calendar and/or to-do list every month.
Setting up automatic payments is another great way to prevent late fees. But this only works if you keep enough money in your bank account. If you have a history of overdrafting your checking account, you might not be ready for auto pay yet.
Tactic 4: Negotiate.
If you’ve already incurred a late fee, there’s still hope. Call your credit card provider discuss it. According to a 2014 study, nine out of ten cardholders successfully got late fees waived by pleading their case on the phone. Remember: The worst your provider can tell you is no.
But don’t stop there. Two out of three of those cardholders were also approved for lower interest rates simply because they asked for it. Knocking your APR down several points can have a big impact down the road, especially if you have a hefty balance.
Tactic 5: Tighten up your budget (or create one).
There are plenty of good reasons to use a budget. But when it comes to paying off credit card debt, there’s one standout reason: A budget helps you identify and walk away from expensive habits that you might not realize you have. A $5.50 latte on your way to school every morning might not seem like a lot in the moment, but when you tally it up on a budget, the effect on your wallet becomes much more obvious.
Budgets are a tool to help you mold your normal behaviors into a set of more financially responsible behaviors, nothing more, nothing less. — Trent Hamm, founder of Money360
When you pay attention to every penny that comes in and out of your bank account, you’re more you’re apt to make smarter purchases in the future. And even more importantly, you’ll be able to cut down on unnecessary expenses and apply that extra money toward your principal. And the more you pay on your principal, the less interest you pay in the long run.