How to Pay Off Credit Card Debt Fast Using Your Cash Back Rewards

▶

There may be a faster way to become debt free than you realize, and it starts with money you're probably already earning and spending without thinking about it. In this video I walk through a $10,000 credit card balance at 28% interest and show what happens when you add $40, $100, or $200 a month to the payment. The numbers surprise most people.

What you'll learn

• Why only a small piece of your minimum payment actually reduces what you owe
• How credit card interest is calculated on your current balance, month after month
• How to turn 2% cash back rewards into an extra principal payment
• What an extra $40, $100, or $200 a month does to your payoff date and total interest
• How to run your own numbers in the free debt reduction calculator

The starting numbers

I used the free calculators on this site and picked the debt reduction calculator. The example: $10,000 in credit card debt at 28% interest, with the card company telling you the minimum payment is $320. The average balance in the US is probably closer to $6,000 or $8,000, but $10,000 keeps the math clean. Hit calculate with $0 extra and the result is 57 months. That's over four years and nine months. Total interest: about $8,000. So you pay back the $10,000 principal plus $8,000 on top. Roughly $18,000 handed to the bank.

Where your $320 actually goes

The amortization chart is the part I really want people to see. Each row is a month. Every $320 payment gets split into two pieces: principal, which pays down the $10,000, and interest, which pays the bank. In month one, only about $86 goes to principal. The other $233 is interest. By month six, principal is up to about $97 and interest is down to about $222.

Why does that shift? Because interest is calculated on what you owe. Month one, you owe $10,000. Pay a little principal and you owe slightly less, so next month's interest is slightly smaller, so slightly more of your payment goes to principal. It's slow at the start. That's the whole problem.

Using rewards as a principal payment

Say you have a cash back card, or you switch to one, that pays 2%. You spend about $2,000 a month on gas and normal expenses and you pay that card off from your bank account, so your balance doesn't grow. 2% of $2,000 is $40 in rewards. Instead of spending that $40, apply it to your debt payment.

Here's why it's powerful: your $320 minimum gets split between principal and interest, but anything above the minimum is not split. It goes straight to principal. You may need to tell the servicer that the extra is a principal payment so it isn't just applied to next month's bill. Remember, the difference between month one and month two was only about $2 more toward principal. So $40 straight to principal is substantial.

What the extra money does

With $40 extra a month, the payoff drops from 57 months to 46 months, and interest falls from about $8,000 to about $6,300. That's roughly $1,800 saved and about 11 months earlier.

Then I asked a bigger question: what if you also shaved $100 off your monthly bills? Shop the cell phone plan with four lines, look at a different internet provider, cut a subscription for a while. Not forever, just while you're digging out. With $100 extra, interest drops to about $4,700, you save roughly $3,300, and the payoff term falls to 36 months. Three years instead of almost five. At $200 extra, the payoff drops to about two years and the savings get close to $5,000.

And when it's done, you don't just save interest. You free up the whole payment. Pay $320 plus $100 and that $420 a month is yours again two years sooner. Banks don't care about you. It's up to you to take control of your financial future.

Key steps

1. Open the debt reduction calculator and enter your balance, interest rate, and minimum payment with $0 extra.
2. Look at the monthly chart and see how little of your payment goes to principal right now.
3. If you have a cash back card you pay off in full every month, calculate your monthly rewards and commit them to the debt instead of spending them.
4. Find $60 to $100 in recurring bills you can reduce temporarily: phone, internet, subscriptions.
5. Add that total as your "extra payment" and recalculate. Note the new payoff date and interest saved.
6. Make the extra payment each month and make sure it's applied to principal, not to next month's minimum.

FAQ

Does an extra payment really matter if I owe the same $10,000 either way?

It isn't the same. Interest is calculated on what you owe right now. Pay the balance down faster and every future interest charge is smaller. In the example, $40 a month extra cut about $1,800 in interest and 11 months off the term.

Should I use a rewards card while I'm still in debt?

The version in the video only works if you pay the card you're charging on in full every month so the balance doesn't grow. If you're spending $2,000 a month anyway and clearing it from your bank account, 2% back is about $40 you can throw at the old balance. If charging tempts you to spend more, this isn't the move for you.

Where do I find the extra money if I don't have rewards?

Bills, usually. Cell phone plans with several lines often have real savings in them, and so do internet plans and subscriptions you've stopped using. See cutting expenses temporarily, or compare payoff orders with the avalanche vs. snowball tool.