Five things about credit card debt that may surprise you

You’ve done all the unhelpful self-flogging about overspending during the holidays and now you need to make a plan to pay off your credit card debt. These five bits of knowledge will help you get that balance down, and better understand your overall credit health going forward.

Your interest rate is probably negotiable

You read that right. Many people assume that the interest rate on their credit card is locked in, but in reality, you can often negotiate a lower rate. 

Most cards range between 19.99 and 23.99 per cent interest. But by calling your credit card company and asking for a lower rate, you can sometimes reduce the amount of interest you pay, making it easier to pay off the balance faster. 

They’ll explain your options to either lower the rate, on the spot and on your current card, but may instead suggest you switch to a low-rate card — indeed, these do exist (no frills, no points, just less interest). Most major banks offer low-interest credit cards. Be prepared to walk your business out the door if they don’t want to help you.

The goal is to slice the interest rate in half, or close to that. If they’ve got a better idea like opening a lower-interest line of credit (LOC) instead, be open to it. The Bank of Canada just reduced rates again last week, making products like the LOC more attractive; that’s because typically the interest on LOCs has a variable component.

Avalanche vs. snowball method 

This is the part where you should definitely go down a Google search rabbit hole, because these two debt-reduction methods are strategic and work wonders in clearing credit card balances.

Unfortunately, most people often just pay what they can each month without a clear strategy. The snowball method focuses on paying off the smallest balance first, building momentum. This leverages the “power of small change” principle that you often see in weight-loss programs — swap your pasta with a vegetable at dinner kind of thing, or implement a 20-minute daily walk versus forcing yourself to go to the gym for 60 minutes a day. You’d pick off the small balance first, feel that amazing rush that comes with success, then move to the next smallest balance.

The avalanche method prioritizes the highest-interest debt first, saving more money over time, but sometimes means you don’t get a “quick win.” Typically the most expensive balance is larger, and will take longer to clear. Once paid, you move on to the next most expensive debt. This method requires a lot of consistency and patience. The rush of success is delayed, but knowing you’re saving the most money possible on interest can be very rewarding.

Choosing the right method for your personality can make a big difference because the one that motivates you the most is the one you’re way more likely to stick with. 

Again, both approaches work! Whatever you choose, track your progress.

Balance transfers can help, but not if you mess them up

You’ll see these offers via snail mail, in your social media feed and through your online banking. Transferring your credit card balance to a low-rate or sometimes even zero per cent annual percentage rate can help you pay down debt faster by avoiding interest. I had one student clear $74,000 in credit card debt over three years by transferring the balance to a new offer once the old one expired. 

A word of caution: Many people don’t realize that failing to pay off the balance before the promotional period ends can lead to an even higher interest rate than what the original credit card balance was being charged. And there can be balance-transfer fees. Both factors can make matters worse!

The balance-transfer approach only works for people who stay on top of their financial game — inserting reminders into calendars about when to move the balance, where to, and are always on the lookout for the next offer. To say this strategy is easy would be a lie. It requires diligence, attention to detail and a deep understanding of all the strings attached with any offer you get.

Weekly or biweekly payments help you pay the balance off faster

Just like saving a bit of money into your emergency fund each week helps build savings up faster, paying your credit card balance weekly or biweekly helps pay it off faster. Not only can you usually fit a few more payments into the calendar year — typically equivalent to another month’s worth of payments — but because credit card interest is unfortunately charged based on an average daily balance, the more frequent you pay, the potential for paying less interest.

If you can put a bit extra toward paying the balance weekly or biweekly versus monthly — perhaps from extra income or selling your game console — this further reduces interest charges.

Your credit score might go down as you pay off the balance

Surprise! You thought it would go up, right? As you clear off the balances your score might dip temporarily. It’s because there will be changes in your credit utilization and account history. If you close paid-off accounts, your available credit decreases as well, which can increase your credit utilization ratio. It’s often better to keep old accounts open and slowly close them over a few years — don’t close them all at once!

Your score will eventually improve as you manage your credit and overall finances better over time. Stay the course, and whatever you do, stay out of more debt!

This article was originally published in The Star. Lesley-Anne Scorgie is a Toronto-based personal finance columnist and a freelance contributing columnist for the Star.