Why now is a critical time to pay off credit card debt (2024)

FAQs

Why is now a crucial time to pay off debt? ›

Delaying the payoff costs you more in interest

Because of this, some high amounts of credit card debt can take decades to pay off, resulting in thousands of dollars in interest charges. So, paying off your debt now could lead to significant savings in terms of interest.

By paying your debt shortly after it's charged, you can help prevent your credit utilization rate from rising above the preferred 30% mark and improve your chances of increasing your credit scores.

For cardholders unburdened by debt or a waning credit score, waiting to pay until close to the end of a billing cycle can allow you to earn more interest in your bank account or give you more time to manage your money in the best way possible.

High credit card interest rates and minimum payments can be difficult to stomach in today's inflationary environment. So, if you owe $7,500 in credit card debt or more, it's advantageous to pay your debt off as soon as possible. Debt relief services can help.

When you have high-interest consumer debt, paying it down first can help you solve ongoing problems with managing your money. The more you reduce your principal and the amount of interest you owe, the more money you'll have in your budget each month to devote to savings or other line items.

If we don't have much in savings, we're more likely to lean into credit cards and carry higher-interest balances when budgets are strained. Current credit card provider APRs make this strategy more treacherous. When inflation hit a 40-year high in 2022, the Federal Reserve stepped in to try to slow down the economy.

Less discretionary spending money

Whether you're paying off a loan with a lump sum or you plan to chip away at it with larger payments, paying off your loan faster will likely mean tightening up your budget.

Emotional relief.

You may feel liberated and relieved to no longer have the stress of paying off debts. You've now broken free from difficult times in the past, and you're able to move forward with better habits and financial freedom.

You'll pay less in interest.

If you decide to pay off some or all your loan early, you won't have to pay the full amount of interest detailed in the original credit agreement.

What is the 15/3 rule? The 15/3 rule, a trending credit card repayment method, suggests paying your credit card bill in two payments—both 15 days and 3 days before your payment due date. Proponents say it helps raise credit scores more quickly, but there's no real proof. Building credit takes time and effort.

Is it bad to pay off credit cards immediately? ›

Whenever possible, paying off your credit card in full will help you save money and protect your credit score. Paying your entire debt by the due date spares you from interest charges on your balance.

If you take out a loan to consolidate debt, you could see a temporary drop because of the hard inquiry for the new loan. Your credit score can take 30 to 60 days to improve after paying off revolving debt. Your score could also drop because of changes to your credit mix and the age of accounts you leave open.

Emptying your savings to pay off or pay a portion of your debt can be good until it isn't. If using your savings to pay off credit card debt means leaving yourself financially vulnerable, don't do it. That's not a good situation to put yourself in.

Since paying only the minimum on your credit card debt could end up costing you thousands and take you years to repay, you shouldn't follow this strategy once you can afford to pay more.

Bottom line. If you have a credit card balance, it's typically best to pay it off in full if you can. Carrying a balance can lead to expensive interest charges and growing debt. Plus, using more than 30% of your credit line is likely to have a negative effect on your credit scores.

The real value of debt decreases when inflation is high. Think of it this way: While wages don't always keep up with inflation when prices are rising rapidly, they do tend to increase during these periods, and that can make it easier to cover the payments on a fixed-rate loan product such as a mortgage or student loan.

A nation saddled with debt will have less to invest in its own future. Rising debt means fewer economic opportunities for Americans. Rising debt reduces business investment and slows economic growth.

Option 1: The “high-interest first” strategy

Paying off high-interest debt first is commonly referred to as the avalanche method. This involves making the minimum monthly payments on all of your credit cards and loans, but putting every extra penny you can toward the card or loan with the highest interest rate.