3 Simple Ways to Cut Credit Card Debt Faster

By Nathan Hamilton Markets Fool.com

Getting out of debt can happen at too slow of a pace for many, as high interest charges pile up alongside debt balances. But there are simple tips indebted cardholders can use to pay off their debt faster.

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At The Motley Fool, we're advocates for living a debt-free lifestyle, improving your personal balance sheet, and not making lenders rich at our expense. That's one reason we compiled our picks of the best balance-transfer credit cards-- a powerful tool cardholders can use to potentially get out of debt.

In the following video segment, Motley Fool analysts Michael Douglass and Nathan Hamilton discuss balance-transfer strategies and two other ways to cut credit card debt faster.

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Michael Douglass: On the internet there's a lot of information about credit cards and about debt, too. Unfortunately, there's really not that much information about how to reduce it.

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Nathan Hamilton: Actionable tips.

Douglass: Yeah, exactly. There's a lot of like, "Oh, look at your budget and find ways to spend less money." It's like, "Well, OK." That's not really terribly helpful. Let's get specific. Fortunately, Nathan, you have basically figured out three rules of thumb and ways of going about things.

Hamilton: These are personal ways that I've actually paid down debt faster.

Douglass: Nathan Hamilton personally revealing his --

Hamilton: Personally.

Douglass: His secret tips.

Hamilton: Yep.

Douglass: First off, let's talk big picture. I mean, the average American household has, what, $16,000 worth of interest-bearing credit card debt, and so these sorts of tips are incredibly needed.

Hamilton: They're relevant to many people.

Douglass: Yeah. Absolutely. All right, so let's talk about these. What's the $5 challenge?

Hamilton: It's super simple. Essentially, when you're paying with cash, anytime you get a $5 bill back, you put it away. You stash it and put in a piggy bank if you've got it, some sort of box. What you use is, take that money once you've built up enough over time and funnel it toward paying down debt.

Douglass: Nice. Yeah. It's --

Hamilton: Very simple.

Douglass: Simple, easy way.

Hamilton: Actually, it can build up fast. I know in my certain scenario, I actually don't use cash that much. I pretty much use credit cards for everything now and pay off the balances, but I found with my family and my personal financial situation, I was able to essentially, without any impact to myself, without any thought of losing money, was able to easily save a few hundred dollars just by using the same approach.

Douglass: Nice. Simple and easy.

Hamilton: Yep.

Douglass: Let's talk about the 5% ratchet.

Hamilton: 5% ratchet. I coined this term, but essentially it's starting with 5% of your income and automatically putting that in savings, and then ratchet that amount up every month from there to start saving more until it gets to that breaking point where you're saying, "OK, I don't have enough money to cover my groceries. I don't have enough money to cover my expenses."

Douglass: Sure.

Hamilton: The reason why it works is, first off, you're automating savings. You're taking money and paying down debt that you never even thought you had, really, and over time is increasing that number to start paying down debt faster, is going to have a snowballing effect on interest and getting out of debt faster.

Douglass: It's basically forcing you to budget, right, because you have less money each month to spend, which means that you also kind of help break that cycle of debt because you're used to living on, let's say, 80% or 90% of whatever of your income, and then having the rest so that if something crazy happens, you're ready.

Hamilton: Yeah. Because it is hard to budget. I mean, if you bring emotions into it, we're all going to make stupid purchases throughout our lives. We're going to spend money we don't need to. Best way to stop doing that is take away that money without you feeling much of an impact.

Douglass: Exactly. Third thing. Balance-transfer credit cards, and these are a big no-brainer, right?

Hamilton: Yeah. We're going back, again, personal story, to early-20s Nathan Hamilton. I had some credit card debt at that time. I looked at it and said, "OK, I can transfer my balance to a 0% APR card. introductory APR card, and get some interest reprieve, and to me it is really is a no-brainer.

I'm sure there are scenarios out there for people where it doesn't make sense, but for the most part, if you have interest debt, credit card interest debt ... looks like the average American household is about $16,000 worth of it, take advantage of balance transfer credit cards. Take it from a high-APR card, move it to a 0% card that may get interest reprieve for 12, 15, 18 ... 21 months is one of the longer offers I've seen on the market.

Douglass: Cool. For more on balance-transfer cards, for more on figuring out how to reduce debt, for more on how to use this money that you're spending each month better, check us out at fool.com/credit-cards. We've got a lot of free information and a lot of good guides to basically help you spend your money smarter.

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