Debt ConsolidationCredit Card Debt Consolidation

The Fastest Way to Pay off $5,000 or Less in Credit Card Debt

The average U.S. household carries around $5,700 in credit card balances, according to the U.S. Federal Reserve — a staggering number, especially since your revolving balances affect more than just your monthly budget.

If your credit utilization ratio is above 30% (i.e. your current balances exceed one-third of your total available credit), your credit score will take a hit; how much you owe makes up about a third of your FICO score. And since a good score is critical for locking down the best financing rates, carrying credit card balances from month to month could come back to haunt you when applying for a mortgage, auto loan or any other type of credit.

Note: If you have a credit score less than 640, struggling to make monthly debt payments and would like to explore your options to reduce your debt by up to 50%, then please click our option to customize a personal debt relief plan.

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What’s worse, the longer your debt sticks around, the more you’ll shell out in interest. Getting caught in a debt cycle also makes it harder to hit other financial milestones.

“Being in chronic debt means spending money on minimum payments that could go to other goals, like building up your emergency fund, saving for a down payment on a home, or growing your nest egg,” certified financial planner Jason Preti told LendingTree.

This is precisely why paying off your balances in full each month is the best way to go. If you’re realizing this after the fact, don’t fret. We’re unpacking the two best strategies for eliminating $5,000 or less in credit card debt as fast as possible.

Fastest ways to pay off a $5,000 credit card debt

Option 1: Using a balance transfer credit card

High-interest rates help keep people stuck in a debt cycle, but locking in a 0% rate means that your monthly payments will pack a much bigger punch against the principal balance. Zero-percent APR balance-transfer deals represent a loophole for folks currently weighed down by high-interest rates because they can seriously accelerate their debt repayment timeline. But keep in mind that these glorious deals are only available to those with very good to excellent credit score. Think 740 or higher.

Once approved, you transfer your debt balances onto the new card. (FYI, this part isn’t always free. Most offers these days come with a 0% to 4% transfer fee, but it’s definitely worth it if you’ll ultimately save more by eliminating your interest payments.) From there, you’ll enjoy a 0% introductory APR for a specified amount of time. Anywhere from 12 to 21 months is the norm for most promo offers.

Now for the most important part: The only way balance transfer cards will save you money and help you get out of debt faster is if you pay off the full balance before that promotional period ends. After that, expect to be hit with hefty interest rates. If possible, also try to avoid charging any new purchases unless you’re able to pay it off during that billing cycle. While it’s tempting to use that 0% card to charge new things, it’s a very slippery slope, plus not all balance transfer cards extend that 0% rate on new purchases. Also, remember to always make on-time payments. Some credit cards companies will wipe away the 0% APR promotional period if a payment is late or missed and replace it with a high-interest rate.

Most credit cards have an automatic payment schedule that can be modified via their personal app or website. This can be a safe option to eliminate being late or missing a monthly payment.

The best course of action is to hit pause on all credit purchases, including your old cards until you’re debt-free. If you continue accumulating new debt and don’t stop the financial bleeding, so to speak, then balance transfer offers are nothing more than a Band-Aid. The goal here is to wrap up that promotional period with your balances at zero. (This is where sticking to a realistic budget and having an emergency fund come into play; we’ll dive deeply into both in just a bit.)

Let’s pretend you owe $5,000 across three different credit cards with varying interest rates. Your monthly payment for all three totals $375. Opting for an 18-month 0% balance transfer card with a 3% transfer fee will ultimately get you out of debt faster and save you $830 when all is said and done.

$5,000 across 3 credit cards with varying interest rates
Total debt on credit card 1 Total debt on credit card 2 Total debt on credit card 3 Total debt on new balance transfer card
Starting balance $2,000 $1,500 $1,500 $5,150*
Interest rate 18% 22% 20% 0%
Monthly payment $175 $150 $50 $375
Debt-free timeline 13 months 12 months 42 months 14 months
Total amount paid $2,211 $1,672 $2,097 $5,150

 

*$150 added for 3% balance transfer fee.

Before pulling the trigger on a balance transfer card, you’ll want to shop around for the best offers. The higher your credit score, the better your options. Just take a close look at the fine print. How many transfers can you make? What’s the balance transfer fee? Is there a limited time frame for completing the transfer? Is the payoff timeline realistic for your budget? The big-picture goal is to find a balance transfer card that fits your individual needs and timeline.

Compare Balance Transfer Cards

Option 2: Personal loan

Unlike a credit card, which is a revolving line of credit you can use and pay off as you like, a personal loan is exactly what the name implies — a one-time lump sum loan. The monthly payment, payoff timeline, and interest rate are locked in from the get-go, so you know exactly what you’re getting. Instead of getting caught in a debt cycle where you’re only making minimum payments and/or continuing to charge up the balance, a personal loan is a clear-cut, lump sum of money that you can use (in most cases) however you want.

Using a personal loan to consolidate credit card debt can have some major perks, like saving you money over the long term and helping you get debt-free faster. Think of the personal loan as the balance transfer’s distant cousin; interest rates are the name of the game.

But since credit cards are a form of unsecured debt (aka it isn’t protected by collateral like your car or home) the interest rates lean higher, especially for those with poor credit.

Personal loans are great for those with a good credit score because they will have a better chance of qualifying for a loan with lower interest rates. There are options if your credit score isn’t as high as needed but make sure that the monthly payments make sense financially. If you’re eligible for a personal loan that has a lower interest rate than your current credit cards, using it to wipe out those balances is a smart financial move. Another advantage is that unlike balance transfers, where you’re beholden to a short-term introductory promo period, the repayment timeline for personal loans currently ranges anywhere from one to seven years, respectively. Just be sure that the big-picture savings still hold true if the loan comes with an origination fee, which could range anywhere from 0% to 8%.

>> Click here to see our best debt consolidation loans for 2018

Let’s say you owe $5,000 across four different credit cards. The average interest rate is 22% and you’re shelling out $400 in minimum payments. Now assume you qualify for a 12-month, 9% personal loan. Here’s how your debt breaks down.

Credit Card Debt vs. Paying off a Personal Loan
Total debt on existing cards Total debt from personal loan with no origination fee
Starting balance $5,000 $5,000
Interest rate 22% 9%
Monthly payment $400 $437
Debt-free timeline 15 months 12 months
Total amount paid $5,732 $5,247

 

That’s a $485 saving, plus you’ll be out of the red three months sooner.

Like balance transfer offers, it pays to shop around and compare the best loan rates and terms. The only sticking point is that once you pull the trigger, you’re agreeing to make those payments every month. Falling short here will put your credit score in jeopardy.

Compare Personal Loan Rates

Personal loan vs balance transfer to consolidate debt: Which is best?

Not sure which option is best for you? Let’s weigh the pros and cons of each.

Personal Loan vs. Balance Transfer: Pros & Cons
Balance transfer
Personal loan
How long does it take to get? Almost instant approval with cards being issued within one business day Almost instant approval with access to your money in as little as 24 hours, although this varies by lender
Debt payoff timeline Only makes sense if you can pay off the balance within the 0% promo period, which is usually anywhere from 12 to 21 months Personal loan repayment terms range from 12 months to seven years
Credit score needed For a balance transfer credit card, you’ll need a very good to excellent credit score. (Think 740 or higher.) It’s possible to obtain a personal loan with a score as low as 580 but to get interest rates lower than what you’re receiving, you’ll need a higher score.
Interest rates Many offer 0% for a limited time. After that, rates range from 13.24% to 26.24%, depending on your credit 3.24% to 35.99%, depending on your credit
Fees Most charge a balance transfer fee between 0% and 4% Potentially an origination fee, which usually ranges anywhere from 0% to 8%
Effect on credit Minimal if you apply and are approved for one balance transfer card, but multiple hard inquiries could ding your score. However, making on-time payments and reducing your debt over time will improve your score. Barely any impact if you apply and are approved for one loan, but multiple hard inquiries will likely impact your score. But making on-time payments and reducing your debt over time will improve your score.

 

How to stay out of credit card debt

To pull yourself out from under debt quickly, you need to do more than just make your minimum payments and call it quits. Again, the idea is to accelerate your efforts. In addition to using the methods above to shorten your payoff timeline and save money in the long term, here are some lifestyle tweaks that can help get you there sooner.

Create (and stick to) a realistic budget

This sounds simple, but it’s a biggie. Only 41% of Americans actually follow a budget, according to a 2016 U.S. Bank study, but it’s perhaps the easiest way to get a handle on your finances. Creating a budget that works for you begins with first understanding where your money’s going. (Again, tracking your income and expenses is key.) From there, your spending will fall into one of three categories:

  • Regular bills: These are recurring expenses you have to pay to get by — your rent, utilities, phone bill, any credit card minimum payments etc. Preti suggests keeping your total spending in this category below 50% of your take-home pay.
  • Discretionary spending: This is your fun money. Stuff like eating out and shopping go here.
  • Goals: Got your sights on debt-free living? Depending on how serious you are, it may mean scaling back on other goals in the short term in order to eliminate your high-interest balances once and for all. When it comes to finances, it’s all about trade-offs.

>> Click here to view our best budgeting apps for 2018

“Once you see it all in black and white, you can tweak and adjust,” California-based certified financial planner Kari Jean Glosser told LendingTree.

“For example, you may negotiate down one of your fixed expenses, then redirect the savings toward debt repayment.”

Get your spending under control

Money wasted is money that could go toward your debt. The problem is that Preti says there tends to be a big disconnect between what most people think they spend and what they actually spend.

A simple way to bring some clarity to the situation is to track your income and expenses for a couple months. You can do this easily by looking at your bank statements and credit card transactions to get a feel for where your money’s going.

“Most financial planning software makes it easy and even breaks your spending into specific categories so you can see exactly where you’re going off budget,” said Preti.

Doing this will pinpoint opportunities to course correct. This may involve negotiating your cellphone bill, tweaking your cable package or scaling back on ordering take-out. At the end of the day, you can’t live within your means if you don’t know what your means actually are.

Build your emergency fund

Debt is very much linked to your emergency fund. This is a cash reserve you could access relatively easily if blindsided by a financial emergency. In other words, it’s a safety net for when the financial you-know-what hits the fan. Job loss, a surprise medical bill or an unexpected home repair all warrant dipping into your savings to cushion the blow. The problem is that many of us turn to credit to get to the other side. In fact, the Federal Reserve Board reports that 44% of adults are unable to cover a $400 surprise bill.

Glosser typically recommends saving three to six months’ worth of expenses in your emergency fund.

Others recommend building a micro-emergency fund of $1,000 or so, which should come in handy if there’s a financial disaster, then go back to hitting the debt hard.

Automate your debt payments and don’t carry a balance

Using credit responsibly is key since your credit score is built on things like payment history and new credit. This means only charging transactions that you can pay off in full at the end of each billing cycle. If you’re disciplined enough, Glosser says it’s fine to put fixed expenses, like gas or cable TV, on credit each month, then set up autopay to get your credit card back to a zero leftover balance each month. Another thing to think about is increasing your credit limit on the cards you have so that you’re not exceeding 30% of your available limit.

As for the debt you already have, go with a set-it-and-forget-it approach when making your monthly payments by automating everything. This way you’ll never miss a due date, which can wreak havoc on your credit score.

Consider an all-cash system for discretionary spending

This may sound extreme, but hear us out. While paying in cash is anything but convenient for things like your cell phone bill or rent, it can actually help keep your budget in check when it comes to discretionary spending.

It goes hand in hand with living within your means. Let’s say after all your bills are paid, you have $400 left for the month that you can do whatever you want with.

“If you have no credit or debit card to rely on — just cold, hard cash — it forces you to get into the mindset of not overspending because once it’s gone, it’s gone,” said Glosser.

The key takeaways

If your balances don’t exceed the $5,000 mark, you could leverage some simple strategies to pay off your debt relatively quickly. The kicker is that you can also save money on interest in the process.

Zero-percent balance transfer offers are a great option if you’re able to eliminate the debt within the introductory promo period. Similarly, a personal loan is a viable approach if you can secure an interest rate that’s lower than what you’re currently paying on your debt. Be sure to crunch the numbers to reveal your best option.

From there, it’s all about protecting yourself so that you don’t slide back into a new debt cycle. Creating a budget, reeling in your spending, building your emergency fund and using credit wisely are your best defenses.

 

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