Best Way to Pay Off Credit Card Debt and Other Loans

The average adult in the U.S. has credit card debt and multiple other types of loans, yet are unaware of how they truly work and accrue interest. This major misunderstanding is costing them money. A lot of money. 

So what’s the best way to pay off credit card debt and other loans that will save you money?

On average, a person may have a mortgage loan, auto loan, credit card, and student loans. Each requires a monthly payment that is made up of a percent of the principal balance and interest.  

The dollar amount of the minimum payment is mostly made up of the interest charged on the current balance. The minimum payment can be 99% interest. 

Yes, if you make the minimum payment then you’re mostly paying interest every month and not making much progress paying off the loan. 

What you may not know is how that loan is accruing interest. Depending on the type of loan, you’re accruing interest daily or monthly. 

The APR (annual percentage rate) is divided by 365 to determine the daily interest rate. The lender isn’t assessing the interest due once per month on the balance of the loan. 

Daily vs. monthly loan types

The type of loan that accrues interest monthly is: 

• a traditional mortgage loan.

These types of loans accrue interest daily: 

• Student loans,
• Credit cards, 
• Auto loans, and 
• Personal loans.

Interest is calculated daily, but it is usually added to the balance at the end of the statement period. This is right before the lender creates the statement that shows your minimum payment due.

Paying off credit card debt can be the hardest of all as the interest rates are usually the highest. Currently, the average credit card interest rate is approximately 21% with good credit to about 28% with bad credit.

Best Way to Pay Off Credit Card Debt

Here is the best way to pay off credit card debt and other loans in two steps that will also save money.

1) Split your monthly payment in two. Try to make one payment on your credit card from each paycheck. After the first payment, the reduced total balance is used to accrue interest the rest of the billing cycle i.e. month.

2) Make the payments before the statement date to save money. Interest will be assessed on a smaller balance so less interest is added. 

If you can’t make both payments before the statement date. Make the first payment before the statement date. Make the second payment on the due date.

This trick can save you thousands of dollars you won’t have to pay in interest. You will pay a much lower total paying off the loan and pay it off sooner. 

Debt Elimination Methods

Couple this trick with a debt elimination method like the snowball or avalanche methods.

With the snowball method you put your debts in order by the total amount due. You aggressively pay down The first debt on the list by adding extra to the payment. You do this while paying the minimum on your other loans.

With the avalanche method, you put your debt in order by the interest rate, highest first. You aggressively tackle the debt with the highest interest rate first while paying the minimum payment on your other debts.