How to pay off credit card debt

A credit card is a useful tool. It can help you manage your spending and spread the cost of a big purchase. It can also give you extra protection when you buy something. However, it can also lead to spiralling debts. That’s why it’s essential to plan how you will pay off what you owe. 

Is it better to pay off a credit card in full?

In a word, yes. If you can, you should pay off your credit card in full each month. This is because clearing your balance means you won’t pay any interest. 

However, if you only clear a part of what you owe – you have to pay interest on the remaining balance. So, if you only make the minimum payment – which is the smallest amount you can pay without being charged a fee by the card provider and having a missed payment recorded on your credit report – you will be charged interest on everything else you owe.

Depending on your credit card provider, the minimum payment could be 2.5% or 3% of your balance, or £5 if that amount is higher. This leaves the vast majority of your balance unpaid and subject to interest. If you only pay the minimum each month, it could take years to clear your debt and you’ll end up paying a significant amount in interest in the meantime. 

How to clear a credit card debt

If you can afford to clear your credit card debt but haven’t paid it off yet, you should pay what you owe straight away. Once you have eliminated the debt, set up a Direct Debit to pay off the full balance each month to cover any future spending on the card and avoid building up new debt. Setting up a Direct Debit means you will never forget to pay it or miss the due date.

It’s a different story if you don’t think you have the money to clear your credit card (or cards). In this case, you need to follow different steps: 

• Add up what you owe in total across all of your cards 

• Create a budget recording everything you spend on your bills and other essentials each month. Include costs such as your mortgage or rent, utilities, council tax, food, travel, etc. Make sure this is a realistic amount that factors in all your necessary expenses 

• Work out how much you have left over and how much you can put towards your credit card debt

• If you can’t afford to pay off the full amount, set up a monthly Direct Debit to pay an affordable fixed amount 

If possible, you should aim to pay more than the minimum payment each month. This will reduce your debt faster. Also, the higher your monthly payment, the less interest you’ll pay overall.

If you have more than one credit card and can’t afford to reduce the debt on all of them, you could try one of these two options:

• Pay off the card with the highest interest rate first and continue to pay the minimum on the others. Once you’ve cleared the most expensive card, you can work to pay off the second most expensive, and so on 

• This is a similar method to the first option, but you target the card with the lowest balance first. This enables you to clear the debt on one of your cards more quickly, which should give you a motivational boost to keep going and clear the others. This second approach means you’ll save less on interest, though.

Balance transfer credit cards

Another option is to transfer the debt elsewhere, which will allow you to pay less interest while you pay it off. 

One way to do this is by taking out a balance transfer credit card. Depending on the card, you may be able to transfer your debt for up to 28 months without paying any interest. However, you often have to pay a transfer fee, so try to find one with no transfer fee. If that’s not possible, check how much the transfer will cost before taking the card out. It could be up to around 3.5%, which equates to a fee of £35 on a £1,000 balance. This is still likely to be cheaper than keeping it on a card charging you interest.

If you do choose this option, it's important to make sure you pay off the balance by the end of the balance transfer card’s interest-free period, as you’ll be charged a relatively high rate of interest once it ends. You should also avoid spending any more on the card unless you can afford to pay the resulting bills in full. Unfortunately, there’s no guarantee that you’ll be offered a balance transfer credit card or that you’ll be given a high enough credit limit to transfer your existing debt onto it. It’s a good idea to use an eligibility checker like the one at the top of this page before you apply. 

Debt consolidation loans

You can also consider taking out a debt consolidation loan to pay off your existing credit card and any other debts. This type of loan will enable you to pay a lower rate of interest on the money you owe. You’ll have to be able to afford the regular repayments required, but you’ll be guaranteed to clear your debt by the end of the loan term. The interest rate you’re offered will depend on your credit score and other factors. 

What to do when you can’t make payments

If you're experiencing financial difficulties and cannot make payments, contact your credit card company as soon as possible to discuss your options.

It may be able to:

• Temporarily freeze interest and charges

• Pause your repayments

• Work with you to agree a realistic repayment plan 

Consider getting free debt advice from an organisation such as Citizens Advice, National Debtline or StepChange if your situation is unlikely to improve any time soon.

Should you close a credit card after paying off debt?

It’s worth keeping a credit card open once you’ve paid it off as it will show lenders looking at your credit report that you’re able to successfully pay off credit. Your credit utilisation ratio (the proportion of your available credit that you’re currently using) could also increase if you cancel it. This can have a negative effect on your credit score. Plus, it’s a good idea to have at least one credit card for emergencies.

On the other hand, closing the card eliminates the risk that someone could use it fraudulently. It also removes the temptation to overspend.

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