It is revealing to know that your credit card is always near you in case of emergency. Unfortunately, most credit card users generate debt, not for emergencies but daily activities- groceries, rent, and clothing. Combine this usage with higher interest rates of credit cards; soon, millions of users find themselves in a repayment struggle. This guide discusses the main points on credit card debt, including repayment and credit card debt forgiveness. As a student, you might not have a high income or find a job easier to afford your payments. Hence, we present alternative payment methods, such as “Snowball” or debt avalanche strategy.
How to Pay Off Credit Card Debt Fast?
Many students have federal or private student debt. However, besides student loan debt, students are struggling with credit card debt, too. A survey conducted among more than 30,000 students revealed that around 36% of the respondents have credit card debt worth more than $1,000. But what makes students incur this debt? Another research revealed that 23% of the debtors use credit cards for everyday expenses, such as utilities and grocery shopping. Additionally, rent makes a significant portion of credit card debt.
Luckily, there exist some methods to pay off credit card debt. For example, you can use strategies like the debt avalanche method. However, while implementing any plan, you still need to take small actions, such as reducing expenses or stopping further credit card usage. Here are 12 main things students should know about paying off their credit card debt.
1. Credit Card Debt is the Worst
The CEO of AIG Retirement Services mentioned that credit card debt is the worst type of funding method. The main reason for this statement is that credit card debt is costly. The average interest rate for this debt type is around 16% compared to 3-5% interest rates of federal student loans. Additionally, borrowers can hardly find a credit card debt forgiveness option while such opportunities exist for federal loan borrowers. Lastly, borrowers might not get tax breaks for credit card debt as they do for student loans or mortgages.
2. Prioritize Credit Card Debt
Most students have both debt types – credit card debt and student loans. Experts advise such students to pay off credit card debt first. The reason behind this recommendation is that credit card debt generates more APR. Compared to student loans, the APR is double the federal student loan interest rate. In other words, credit card debt grows more prominent in a short time in contrast to federal student loans with low-interest rates.
Hence, paying off credit card debt should be a priority for borrowers. Once you pay this debt, you can start thinking of repayment for other debt types, such as student loans.
Additionally, having credit card debt in addition to huge student loan debt can be exhausting. It is a reveal for students to get rid of at least the credit card obligations before they start worrying about long-term student loans.
3. Snowball Method
Finding a credit card debt forgiveness option is not as easy as student loan forgiveness. Besides, sometimes the debt is so huge that borrowers lose their hopes of paying it off. However, even small actions can help borrowers to decrease their credit card debt burden. For example, Dave Ramsey explains the “Snowball” method, which is a debt reduction strategy. By using this strategy, the debtors can reduce their obligations significantly.
The strategy requires borrowers to list all their debts from small to larger ones, no matter the interest rate. Then, they need to make minimum required payments for each debt obligation, except the smallest one. Thus, borrowers need to allocate as much money as possible for the smallest debt. In this way, they can eliminate the smallest debt first while maintaining obligations for the rest. Once the smallest debt is out of the way, the monthly payment amount for that debt can be used for the following smallest responsibility.
This method allows you to eliminate debt in steps and can be a great answer if you wonder how to pay off credit card debt fast. Besides, it gives some emotional freedom to borrowers as they notice that it is possible to get rid of debt. According to CNBC, a borrower in San Diego could even pay off $68,6000 debt in three years with this method.
4. Debt Avalanche Method
An alternative method to the “Snowball” strategy is the debt avalanche strategy. This strategy requires borrowers to pay the most expensive debt first. In this way, the borrowers are left with a significant amount of money to cover other debt types once the debt is eliminated.
Generally, credit card debt requires the highest interest. Hence, it can be a useful strategy to close credit card debt first. If you have multiple credit card obligations, paying off the one with the highest interest rate is advisable. However, during repayment, you should still be making minimum payments for other obligations. Otherwise, non-repayment can cause significant negative consequences.
Compared to the “Snowball” strategy, the debt avalanche method can seem more exhausting. While it looks simple to pay $1,000, $10,000 can seem prohibitive. Hence, the “Snowball” strategy brings more straightforward victories. However, the “Snowball” method would not bring much interest saving because you are closing small debts first. Meanwhile, you will save money and use it for other obligations if you get rid of the most expensive credit card debt with the debt avalanche method.
5. Credit Card Debt Forgiveness vs. Student Loan Cancellation
Federal student loans offer excellent opportunities to get a cancellation. For example, if you work in the public sector, you can get rid of 100% of federal student loans through Public Service Loan Forgiveness. With this program, you make 120 payments and obtain forgiveness for the remaining balance.
However, when it comes to credit card debt forgiveness, it is hardly possible. Credit card issuers do not favor canceling your debt for service or dedication. They mainly require repayment in the total amount.
Yet, you have two options to get rid of credit card debt without paying it off fully. First, you can declare bankruptcy. Bankruptcy on credit cards is more achievable than bankruptcy on student loans. Another option is a settlement agreement, where you pay less than the full amount to close past-due credit balances. Although you can eliminate the debt with these methods, both have immense negative consequences. Your credit score will drop significantly, and your credibility will be hurt. Therefore, you will face challenges in your daily life when you want to rent an apartment, get insurance, a car loan, etc.
6. Paying Credit Card Debt with Student Loans
Some students might wonder if they can pay credit card debt with student loans. Student loans aim to cover the costs of education. Generally, it is not advisable to use the proceeds of student loans for your credit card debt. In this case, you might need more student loans, making it more costly in the long run. Besides, doing so can be against your loan agreement.
Student loans usually allow the money to be spent for tuition, fees, supplies, equipment, accommodation, or transportation. So if you used your credit for these purposes, let’s say for paying accommodation, you might pay credit card debt with student loan funds.
However, if you have a private student loan, you need to check your loan terms. The rules change from lender to lender. In addition, you need to clarify if loan money can be used for other expenses, like accommodation.
7. Paying Student Loans with Credit Card
While it is technically possible to pay student loans with a credit card, it is not a good idea. Currently, you can use a credit card to repay some private student loans. Meanwhile, the Treasury Department prohibits borrowers from making payments with credit cards. Instead, debtors should use their checking or saving accounts for repayment.
Yet, some loopholes exist which allow borrowers to afford student loan repayment with credit card proceeds. Although the option is technically possible, it has more disadvantages than advantages. First, if you get cash advances from your credit card, you will pay an additional advance fee besides interest on the amount. Next, credit card debt is more expensive. Finally, you will end up paying more for the credit card debt than you originally needed for student loans.
Additionally, student loans have more repayment and forgiveness options. You can get forbearance, deferment, Income-driven repayment plans if you face financial struggles. Meanwhile, you will hardly be able to get credit card debt forgiveness or more affordable repayment if you cannot pay the debt.
Overall, it is not logical or feasible to use a credit card for your student loans. If you cannot pay student loans, use strategies like In-school deferment or enrolling in a more suitable repayment plan rather than considering credit card advances.
8. Stop Using Credit Card
If you wonder how to pay off credit card debt fast, you need to first stop generating more debt. Credit card debt is already highly expensive. If you are concerned about repayment, do not add more debt. Otherwise, you will be taking one step ahead and back, which will be a barrier to repayment. Instead, you can put a hold on your cards till you ease the obligations. Besides, you might need to draft a new budget plan to afford your essential needs without using a credit card. Sure, it will be a challenge, but it will be faster to eliminate the debt.
9. Build Emergency Funds
Some people use their credit cards in case of emergencies. When there is an emergency like a medical bill, and you do not have money at hand, you are obliged to use credit cards. Unfortunately, soon this debt gets larger, and you find yourself in a more significant struggle.
Hence, it is advisable to save some money for emergencies. Every month, little by little, you can save $1,000 for unexpected expenses. Sure, it is better to have savings worth 3-6 months of living expenses. However, for now, start with more achievable goals.
10. Curb Your Spendings
When you finally decide to pay off your debt obligations, you will need money. Sure, increasing your income or getting another job is highly beneficial. However, not all debtors can get more income in a short time.
Instead, it can be more beneficial to decrease your spendings. Try to list all your expenses for a month and see what you can eliminate. Eating out less frequently, listing necessary groceries, or buying second-hand clothing can be helpful. For example, let’s say you pay $15 per week for a coffee. It makes $780 per year. Sure, it is not a huge saving, but such small savings can lead to bigger savings in the future.
11. Take a Step
Any strategy is better than doing nothing. Regardless of which method you choose, whether credit card debt forgiveness with bankruptcy or the “Snowball” method to pay off obligations, you will have some progress on repayment. Reducing your debt obligation, even by little, will be motivating for you to take further steps for full repayment.
Besides, when you start making a plan, you get more familiar with loan terms, interest rate and how it works, different strategies, etc. All this additional knowledge will help you develop better methods and find the best strategy for you to get rid of credit card debt.
12. You are not Alone
Paying off credit card debt is not easy. It will take a lot of time. If you use the debt avalanche method to get rid of the highest interest debt first, it might seem endless. However, do not blame yourself for making mistakes. Keep in mind that you are not alone. 38% of students mention that they do not plan to pay their credit card bills each month, while 14% of borrowers have more than a $5,000 debt. There exist a lot of borrowers like you struggling with repayment. You might lose control over credit card payments, but you have already taken a step toward resolution if you are reading this guide.
What to Look for in a Student Credit Card?
Till now, we have discussed how to pay off credit card debt fast. However, the most effective strategy is avoiding generating massive debt in the first place. If a credit card is necessary, you need to find the one that is more suitable for students.
For example, check the APR (Annual Percentage Rate) of different cards. Usually, credit cards are expensive. However, you can find relatively cheaper options. Compare various card issuers and see if you can get the lowest APR available. Next, check additional fees. Some fees are hidden, and users ignore them. You need to contact the issuer and get familiar with all existing fees before getting a card. There can be maintenance, setup, annual or monthly fees associated with the credit cards. Additionally, some cards bring points when you make spendings. In this way, you can at least get some benefits back while using the card.
Please, be extremely attentive when you get a credit card or while using it. Keep in mind that credit card debt forgiveness is hard to achieve through bankruptcy or settlement agreement. As the debt is expensive, paying it off is also highly challenging. Therefore, you need to be familiar with all features of credit cards before getting one and plan the repayment during usage accordingly.