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How to pay off credit card debt

Worried about your Christmas spending and how to pay off your credit card bills in January? Here is our step-by-step guide to help you pay off credit card debt, rebuild your credit score and regain your financial health.

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Worried about your Christmas spending and how to pay off your credit card bills in January? Here is our step-by-step guide to help you pay off credit card debt, rebuild your credit score and regain your financial health.

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1. Check how much you owe

One of the major stress points for people with credit card debt is not being sure how much they owe, and how much interest they are paying. Where you feel your finances are out of control, then the first step is to take stock of your debt situation. 

Look at your credit card statements and work out how much you owe on each card and what the interest rate is on each one. Where you have online credit card banking, you can check your real-time statement.

Find out what is the minimum payment due every month. This is the money you need to pay back in to avoid being in default. As long as you pay back this amount you will not be subject to any penalty charges, although you will be charged interest.

Although it can seem daunting to work out all your debt, you will have a clearer picture of your financial situation and you have taken the first step to becoming debt free. If you are confused about how credit cards work, you can read our Guide to Credit cards.

How to pay off credit card debt

2. Pick the cards with the highest charges and pay them back first

Next, look at your credit card interest rates and pick the card with the highest interest rate and start to pay back that one first. This may not be the card with the largest outstanding balance.

It's better to pay off the most expensive debt first. Paying down the debt on your highest interest credit card should be your top priority. This makes sense because you will save more money by repaying the costliest debt than any other.

Once you have started to pay back the most expensive debt you can start to think about repaying your smallest debts, as that will give you a boost knowing that you are steadily reducing your overall debt.

Or you can tackle your debts one by one, prioritising the most expensive debt and moving down your list to the debts with the lowest interest rates. This process is a simple and effective way to become debt-free in a relatively short time. Compare credit cards and find the best rate.

3. Consider switching to a balance transfer card

You might also be able to manage your debts and reduce interest with a balance transfer credit card. Read our guide on the topic to see if this is a good option for you.

Many people find that switching an outstanding balance from a high-interest card to a zero or low-interest credit card gives them some financial breathing space. You may have to pay some fees for the transfer, but you will save more money over time because of the lower interest rates that now apply to the unpaid balance. Make sure you have a repayment plan in place for when the zero interest period ends. See below for how to free up spare money to make these repayments.

How do I switch? If you have debt on a credit card enter your details in our calculator to work out what you could save. You can compare balance transfer cards with Uswitch.

After you have made the switch try to maximise payments on this card using any cash saved from the household budget through better planning.  This will help you get out of debt faster. Read more about balance transfer cards.

Credit card calculator

Use the credit card calculator to help work out the costs of owning a credit card.

4. Find ways to free up spare money

It is tough to balance even a modest household budget with your debt obligations. There are two ways to generate more spare money – cut your expenses or increase your income.

It can be hard to generate more income, especially in the current economic climate, so the easiest way to give yourself more financial flexibility is to cut down on your expenses.

Firstly, write down all your monthly household costs: utilities, services, mobile phone, broadband and rent or mortgage. These are the essential bills you need to pay each month. You can shop around for a better deal on these contracts when they come up for renewal and you could save yourself hundreds of pounds this way.

Then look at other spending - leisure activities, meals out, spending and treats. Are there areas where you could economise? Think of this as a spending plan rather than a budget – it sounds more fun and could give you the incentive you need. Then you can use the spare money to start to pay off debt. As your debt reduces, so will your interest costs, so you will start to generate even more surplus money.

5. Cut the number of cards you own

When you have a lot of credit cards it can be difficult to keep track of them. Check to see whether you really need multiple credit cards. If not, surrender the high-interest cards after you have paid back the debt on it.

This will eliminate the desire to spend more than you can afford and keep you from falling into a debt trap.  Slowly, yet surely, you will rebuild your financial health and improve your credit rating.

What’s more, having fewer cards and paying off debt regularly will improve your credit rating. This is the measure of your financial health that banks, phone and broadband companies and other financial services companies use to decide whether to offer you credit. The better your credit rating, the cheaper any future borrowing will be. Here are some other ways to Improve your credit score.

6. Use apps to manage your money better

There are lots of great apps which you can use to help you budget, save money, reduce bills and clear your debts.

You can use apps to manage your money and see all your accounts in one place. You can also get nudges and reminders to pay bills on time or put your spare money into a savings account.

Apps to consider for savings and investment: 

  • Plum: helps you analyse your bills and invest your spare money.

  • Moneyhub: helps you work out where your money is going, and gives you tips on investing and savings for your future.

  • Chip: sweeps your spare money into a savings account so you save steadily and regularly

Apps to consider for tracking debt and saving money

  • Emma: helps you avoid paying for overdrafts, wasting money on things you do not need and keeping track of your debt. 

  • Money Dashboard: enables you to see your accounts, spending patterns and budgets in one place

  • Yolt: shows you where your spending is going and gives you information on ways you can save money

  • Snoop: helps you watch your spending and enables you to spot ways you can save as well as seeing all your accounts in one place.

Compare balance transfer cards

Find a balance transfer card with a long interest-free period