How to pay off credit cards: how payment works

3rd July 2018

By Kurt Wood

Having a credit card can be extremely handy when you need to access emergency cash. For many people, a credit card can offer convenience, flexibility and total peace of mind. Used well, credit cards can make our lives easier. Used carelessly, you could end up paying over the odds and incurring debt that’s hard to pay off.

Here we offer some of our best tips on how to pay off credit cards without being hit with interest and hidden costs. Plus, advice on choosing the right card and knowing how to shop for the best deals to switching credit cards at the right time.

How credit card payments work

To repay what you owe, you will need to meet the minimum payments each month. You will receive a credit card statement, either monthly or every 28 days depending on your billing cycle. Your statement will detail your total outstanding balance, the minimum payment required, and the date by which it is due.

Today’s typical minimum payment is set by your lender and is usually between 1% and 3% of your total balance. As long as you can make your minimum payments each month, your credit rating should remain nice and healthy. However, this is not a good way of paying off your debt and will cost you a lot more money in the long run.

Balances should be paid off every month in full (or as much as possible) if you want to avoid running up huge interest bills. Although this is easier said than done, so many people like to spread the cost over a number of months.

Understanding APR and interest rates

APR is the ‘annual percentage rate’. In simple terms, it’s a way of calculating your monthly interest into a yearly cost of borrowing. At the most basic level, you can multiply your monthly interest rate by 12 to get your APR. So a monthly interest rate of 1% would be 12% APR. However, the reality is a lot more complicated.

This is because the interest rate may vary based on different uses of your card. For example, cash withdrawals have a higher rate than store purchases. Also, there may be additional costs and fees which can increase your APR.

When shopping around for a credit card, you may see the words ‘typical APR’ or ‘representative APR’ being advertised. This part is very important to note. The APR offered will actually differ according to your personal finances and credit rating. Typical APR refers to around 50% of customers only.

The best ways to pay off credit cards

Looking for the best ways to pay off your credit cards quickly? Here are our top tips for getting out of credit card debt fast:

Make more than the minimum payment – just paying the minimum each month can be a dangerous trap. Not only are you only scratching the surface of your balance and barely paying off the debt, but it will cost you a lot more in the long run.

Set up direct debit payments – you can set up a direct debit payment of any specified amount. This ensures that you don’t miss any payments and also keeps you on track with paying off what you owe.

Pay off high-interest cards first – do you have multiple cards? Don’t know which one to pay off first? This should be a no-brainer if you want to save money. Settle the one with the highest interest rate first so you’re not left with mounting debt from that account.

Or pay off small balances first – alternatively, another quick win for paying off multiple cards is to close the smallest balance first. This is perhaps the most affordable option and will free up your finances to focus on paying off any remaining cards.

Track monthly spending – using a budget spreadsheet is a great way to cut back on your monthly outgoings. This way, you can work out exactly how much you can afford to pay back comfortably.

Switch credit cards – play the credit card game and transfer your balance to another lender. This shifts your debt to a new card, which can sometimes give you a better deal or lower interest rates. If you can find a card with an interest-free period, it could help you pay off your debt quicker. 

Should I get a loan to pay off credit cards?

Using a loan to pay off credit cards is becoming extremely common with credit customers. If you are struggling to make all the minimum payments on different cards, having one single monthly payment instead can be helpful. Consolidating all your debt into one place can be cheaper, and may leave you with more cash to pay a bigger percentage of your balance back.

Compare loans online to find the best deal to see if you could make a saving through consolidation. Be aware that there are some important things to think about before you apply. Customers who are already in serious debt need to consider their options carefully, as getting out more credit that you can’t afford will only set you back further.

What if I can't pay off my credit card on time?

If you’re struggling to make the minimum repayments, it’s worth contacting your credit card company to see if they can help. For loyal customers who can’t pay credit cards on time, lenders may sometimes be more lenient. In some cases, they may lower your interest rate for a period of time or even waive late fees.

There are also other, more extreme, options for anyone who has mounting debt problems and can’t see any way out. These include an IVA (Individual Voluntary Arrangement) which can help you write off debts and freeze interest payments. However, IVAs will be recorded on your credit profile and will remain there for the next six years.

For impartial advice, you can visit your local Citizens Advice Bureau or talk to a debt charity such as Step Change or the Debt Advice Foundation.

 

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