Number of credit cards used… 3.

Free money earned… $2,222.75.

Finance charges paid… $0.

Having credit card companies pay you instead of the other way around… priceless.

Last year, I earned over two thousand dollars in free money using an arbitrage strategy with cash back credit cards. I say this not to pat myself on the back, but to make a point that credit cards do not necessarily have to be a bad thing. When used in a certain way, they can be quite profitable.

Credit cards make me money (instead of costing me money) because I pay off my balances in full each month. I realize though that I am in the minority of the credit card using public. Due to family emergencies, unexpected repairs, or even a bit of impulse spending, many people have credit card balances that exceed their capacity to pay off in one fell swoop.

This multi-part series of posts will show you how to pay off credit card debt and get to the happy place where you can turn the tables on the credit card companies and have them pay you for a change.

Choosing a Debt Pay Off Strategy

Paying only the minimum due on all your debts (credit card and otherwise) can take a tremendous amount of time to get any of them paid off. Unfortunately, this approach is a major reason why people lose motivation to become debt-free.

Luckily, there are smarter ways than just making minimum payments. Below are three other strategies that you can apply that work better:

1. Pay smallest balances first. In this strategy, you pay the minimum amount due for all your balances except for the creditor that has the smallest remaining balance. For this debt, you pay much more than the minimum to get it paid off as quickly as possible. Once that balance is paid, you focus on the next smallest balance. You not only pay the minimum on this, but also the full amount of the payment you were paying on the first debt. Once the second debt is paid off, then you turn your focus to the third-smallest debt, and so on. Each time you’re adding on the cumulative payment amount totals from the prior debts to the minimum payment of the current debt. By continuing with this approach, your monthly payment amount is getting larger and larger, creating a snowball effect in paying down your debt. In fact, the “debt snowball” is a popular name for this approach. The main benefit of the “debt snowball” strategy is that it gives you the earliest tangible results to keep you motivated toward knocking out your debts — one creditor at a time.
2. Pay highest interest rates first. An alternative way to pay off debts is to organize your creditors from the highest interest rate down to the lowest, regardless of balance. You then make the minimum payment on all debts, except for the one with the highest interest rate. On the highest-rate debt, you pay more than the minimum due. Once you pay off the highest-interest creditor, you tack on the payment you were making on that debt to the next highest interest rate debt. This process continues to snowball (just like the prior strategy) with the third most highest, then the fourth, and so on until all creditors are paid. The advantage here is that you will pay less in interest over the life of all your debts, as your highest-interest debts are festering for the least possible amount of time. The disadvantage is that because this approach doesn’t consider the balance amounts, your highest-interest debt could take the longest to pay off (if it’s balance is large). If this is the case, you don’t have as quick a feeling of progress, because it will take longer to whittle down the list of creditors.
3. Consolidate debts, then make one payment. Under this approach, you are looking to “merge” your debts ideally under one creditor. Through debt consolidation, you’re looking to find the new creditor that will offer you the lowest interest rate. Once consolidated, you make a payment equivalent to the sum of the minimum payments you were making plus the maximum amount of additional payment you’re able to afford. You’ll get the quick win of reducing the number of creditors, plus pay the least amount of interest over the life of the debt as compared to the other two options. The downside mainly relates to personal discipline, since having your old credit cards wiped clean makes it very easy to slip back into more debt by continuing to overuse them.

Barring the willpower drawback of the third option, that approach will end up saving you the most money. So on that basis, debt consolidation is the option I recommend.

Accelerating Your Debt Pay Off Timeframe

Regardless of the strategy chosen, there are some things you can do to maximize the amount of money you have available for debt pay off. Do them all to ensure you can plow the most money toward your debt pay off plan:

1. Negotiate, negotiate, negotiate. Even if you choose to consolidate your debts, you will still want to discuss a lower rate with your current creditors. As it may take you a couple of months to figure out the optimal way to consolidate, you can be saving money in the interim with lower interest rates. To do this, it’s really as easy as calling up each creditor and asking for the lower rate. State that you are shopping around for lower rates, and are considering moving your balance to someone else. Credit card companies know that it is much more expensive to acquire a new customer than it is to retain one, so they are willing to work with you to keep your business. Depending on what your creditors offer, you may even uncover an opportunity to consolidate your debt under one of your existing creditors– so it’s definitely in your best interest to haggle. For additional effect, be sure to research offers from similar companies prior to calling each creditor. You will have significantly more leverage if you can state concrete competitor offers that you could switch to if they don’t play ball.
2. Set up automated payments. By paying your creditors automatically each month, you’ll avoid a common contributor to debt balances… the late fee. The late fee itself is painful enough, but paying interest on it over time just throws salt on the wound. Whether you set up the payments through your bank’s bill payment service or through direct ACH withdrawal from your checking account, it’s an easy way to avoid accidentally digging a deeper hole.
3. Set a budget that’s below your income. This is an obvious one, but think about it… even if you pay cash for your daily latte, you’re really financing it– since that’s money that could have been used for a larger credit card payment. Shave off any unessential fat from your spending and apply all the savings to your debt payment.
4. Use the arbitrage strategy for a larger principal payment. I use my cash back strategy to create extra seed capital for other passive income investments. However, if you have existing credit card debt, using the strategy’s proceeds to help pay down those double-digit interest loans is a compelling instant return on investment.

For folks who are in debt because of impulse spending, the arbitrage strategy may not be suitable– as the undisciplined use of it may result in even more debt. Reason being is that it involves the heavy use of credit cards. It’s similar to using a sharp knife; handled with care, a knife is a great tool; used haphazardly however, and things can get painful in a hurry!

What’s Next

As I mentioned above, I believe debt consolidation is the best way to pay off credit card debt. In the next installment of this series, we’ll start looking at the main ways debt can be consolidated and take a deep-dive into the advantages and drawbacks of each. Until then, pick up that phone and start haggling with those creditors!

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