How to pay off debt and use your credit card at the same time

Written by
Erica Sandberg
Terms apply; see the online credit card application for full terms and conditions of offers and rewards. Please note: Any balance transfer savings vary depending upon account usage and payment behavior.

If you’re like many Americans, you carry a balance on at least one of your credit cards. According to an Experian report, the average revolving debt in 2021 was $5,525. Because that financial obligation is also racking up financing fees, devising a payment plan so you can delete that balance will be in your best interest. 

Does that mean you have to stop using the card for transactions as you’re paying what you owe down?  Not necessarily. Here are the simple steps you can take to use a card for transactions as you’re also working on going from the red to the black.

Step one: Get your account details in order

If you don’t know exactly how much you owe right now, access your credit card statement to learn your latest balance, as well as the APR that is attached to the debt.

If you’ve been actively charging, though, don’t go by the monthly billing statement since it won’t include your most current activity. Go online and get your real-time balance.

Imagine you owe $5,000 and the APR is 22%.

Step two: Calculate your maximum minimum

On your statement, you will also see the minimum requested payment. If you only pay that figure, it’ll be ages before you get out of debt.

Instead, review your income and expenses so that you know the amount of money you can afford to send the creditor every month. It will be very important that that payment is based on a realistic budget, because it is what you will promise to yourself as a fixed payment.

Imagine you determined that you have $400 to commit. Using an online credit card payoff calculator, plug the numbers in. With the $5,000 balance that has a 22% APR, sending a regular $400 payment will enable you to get out of debt in 15 months.

To know how much the fees would be, use a credit card interest calculator.  For this example, your total interest would cost $655.

Once you know the amount you can promise to the bill, enroll in your bank’s automatic bill pay system. Have that figure deducted from your checking or savings account on a specific date every month.

Step three: Charge only what you can afford

Okay, that’s the repayment part. Now for continued usage.

Paying with a credit card often makes sense because these products are safe and convenient tools. Most give rewards for charging, too, so essentially pay you to use them. However, because you are in debt repayment mode, your approach will have to be different.

Perhaps you want to purchase plane tickets with your CardName because you do not want to sacrifice the 5X the points you can earn with this card for this purchase. The tickets are $600.

Before hitting the “pay” button, make sure you have that amount in your bank account. As soon as you make the charge, you will turn around and send the $600 to your credit card account via your bank’s app. This way the charge never has a chance to accumulate interest or add to your debt. You get the pros and none of the cons.

You can also use this system for regular expenses that are a normal part of your budget, such as groceries.

Let’s say you have a credit card that offers a high rate of cash back for food shopping, such as the CardName, which offers 3% cash back in the category of your choice,  plus 2% at grocery stores and wholesale clubs (up to $2,500 in combined choice category/grocery store/wholesale club quarterly purchases).

After reviewing your budget, you determine that your trips to the supermarket run you $800 a month.

You’ve already figured out that you have $400 available for your credit card bill to cover past debt, but now you also want to add that $800 supermarket tab to the card. Since that money should be coming out of your checking and savings anyway, simply add the $800 to the $400, equaling $1,200 a month. You will remain on the same path toward debt deletion, as you come out ahead with the cash-back rewards.

Step four: Stay the course

The most important aspect of this plan is to stay dedicated to the process. Although it’s easy on the surface, it can be challenging in action. Here’s how to stay the course:

  • Resist the temptation to lower your predetermined sum. You created your budget thoughtfully and mindfully, with debt repayment as your goal. Now honor it. Remember, it’s only for a limited time. You can do it!
  • Check before you charge. If you don’t know for certain that you have the cash to cover a new charge, stop and log onto your bank account first. Those funds need to be good to go. If they’re not, don’t do it.
  • Overpay when possible. There is no reason to drag credit card debt out when you don’t have to. If you get a bonus from work, throw at least some of it to your credit card account. Or maybe you finish your car loan obligation and suddenly have $350 more in your budget than you did before. Rather than that money being absorbed back into your expenses, add it to your fixed payment. The sooner you’re out of debt, the faster you will have all that cash back to spend, save, and invest.

Finally, enjoy the rewards

Accelerating credit card debt payoff with a fixed monthly payment while also charging affordable goods and services provides you with a number of benefits. You will pay less in financing fees for all that old debt, saving you a lot of money. If your card offers rewards, you’ll be generating a flow of cash, points, or miles each time you charge.

But there’s more! These actions act as powerful health food for your credit report and credit score. Your activity with the account will be noted on your credit report. It will ensure a healthy payment history, which is the most important credit scoring factor. If your debt exceeded 30% of your credit line when you started the plan, steadily reducing the balance until you have 70% available credit should also give your scores a boost.

At the end, you’ll be free of expensive debt, your rewards bank will be richer, and you may have a credit score that is far better than when you began.

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Disclaimer:

The information in this article is believed to be accurate as of the date it was written. Please keep in mind that credit card offers change frequently. Therefore, we cannot guarantee the accuracy of the information in this article. Reasonable efforts are made to maintain accurate information. See the online credit card application for full terms and conditions on offers and rewards. Please verify all terms and conditions of any credit card prior to applying.

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