The Secret to Reducing Credit Card Debt Faster

APR is the reason you can’t make headway, even when you pay on time every month

Reducing credit card debt can be frustrating to no end. You diligently make payments month after month and you still can’t seem to get anywhere. So, what’s keeping you from reaching zero?

Three words: high interest charges

Why high APR makes reducing debt so tough

Credit cards have much higher APR compared to other types of debt, like your mortgage or auto loan. Most loans have APR around 5%, while average credit card APR is over 15% in 2017. That high rate is what makes credit card debt so tough to pay off.

Let’s say you have a $1,000 balance on a card with a standard 2% minimum payment schedule. You minimum payments should be $20.00. However…

  • At 15% APR over half of the minimum payment goes to interest charges:
    • $12.50 covers accrued interest charges
    • $7.50 goes to pay principal
  • At 20% APR, you only reduce your actual debt by a few dollars:
    • $16.67 covers accrued interest charges
    • Only $3.33 pays off the debt you actually owe

Even if you make larger payments, reducing credit card debt can take a long time. Whether you put a little bit of extra money toward each payment or make fixed payments, it still takes time.

The key reducing credit card debt faster

Once you understand that high APR keeps you from reducing debt quickly, it naturally follows that the solution is to reduce or eliminate the APR applied to your debt. The more you can lower the interest charges, the faster and more efficiently you can reach zero. APR is the key and you want to get as close to zero as possible.

There are four ways to do this:

  1. Call each creditor to negotiate a lower interest rate
  2. Transfer your balances to a credit card that offer 0% APR on balance transfers
  3. Consolidate with a low-interest personal consolidation loan
  4. Enroll in a debt management program so credit counsellors can negotiate for you

Each of these options provides the low rate benefit that you need, but they won’t work in just any situation. You need to find the right option for your needs. In addition, you should keep in mind that each has its downsides.

Negotiating with your creditors

Interest rate negotiation can be a good option if you have good relationships with your creditors. You will usually have more success if you’re a longstanding good customer who always makes your payments on time. It can also be beneficial if your credit has improved since you opened the account.

The main trouble with this is that the results can vary. Some creditors may be willing to negotiate, while others may not.

Transfers often offer the fastest path

On face value, balance transfer credit cards seem to be the best solution. They offer 0% APR on balances transferred from other cards. That means 100% of every payment you make goes to pay off principal. Paying off debt interest-free is the fastest way to do it.

However, be careful when considering this option. If you can’t eliminate the debt during the introductory period, the APR may be even higher than when you started. Calculate carefully to make sure you can pay your debt off in-full before that introductory periods ends.

Consolidation loans offer a stable low rate

While transfer credit cards get you the lowest possible rate at 0%, consolidation loans give you a low rate over a longer period of time. With a card 0% APR only lasts up to two years; a consolidation loan can give you a rate less than 10% for the entire term of the loan.

As long as you can afford the payments, this can be a viable option if you have good credit to qualify for a low rate. If you ever run into trouble, you can re-consolidate with another option, like a debt management program.

Bringing in the professionals to negotiate

Enrolling in a debt management program means you begin working with a credit counselling team. Credit counsellors help you work out a repayment plan that you can afford. Then they negotiate with your creditors on your behalf to lower or eliminate your interest rates.

This is the service Consolidated Credit provides. Clients that qualify for a debt management program typically see their rates reduced to 0-11%. In total, the program usually reduces the average interest rate to around 7%.

With the rate reduced, clients typically see their total monthly payments reduced by 30-50%, on average. Even with lower payments, most people complete the program within 36 to 60 payments.