5 steps to take after paying off your credit card debt

Americans have a love/hate relationship with credit cards. While they enjoy the ease of use, many cardholders rue the high-interest rates and the burgeoning amount of personal debt accrued by overusing credit cards. According to an Experian survey, the average personal credit card debt figure stands around $2,326, with an average monthly bill of $780 per cardholder.

It's clear: Paying off your credit card debt is key — but what happens when your credit card bills are down to zero? How do you ensure you don't end up back in debt?

“There are quite a few avenues that can be taken once a credit card is paid off,” said Jonathan Hess, founder of Hess Financial Coaching in Memphis, Tenn. “For example, a cardholder may decide how to handle credit card spending going forward. In that scenario, there needs to be a plan in place to either avoid getting into debt again or keep the card and to start using the card to its maximum benefits.”

Once a cardholder has paid down credit card debt, they should take the following steps:

1. Check your credit score
2. Build an emergency fund
3. Use the debt avalanche or debt snowball method
4. Add to your mortgage payments
5. Invest in your financial future

1. Check your credit score

“I'd be most interested in checking my credit score,” said Scott Bates, founder of the personal finance site, MoneyandBills.com.

“With a huge pay down of debt, your credit score should go up,” he said. “This will make it easier to shop around for better interest rates on any existing loans you have (i.e., mortgage, auto or student loans.). If you find a better deal you could refinance your existing debt into a better deal.”

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2. Build an emergency fund

Stashing money away in an emergency savings fund should be a big priority after paying down credit card debt.

“That’s particularly the case right now during the pandemic and record-high unemployment levels,” said Lauren Bringle, an accredited financial counselor with Self Financial in Austin, Texas. “Having at least three to six months of expenses set aside if you lose your job is critical.”

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3. Use the debt avalanche or debt snowball method

If there’s more household debt to payoff, the money you’ve freed up by paying down credit card debt should be steered toward total debt elimination.

“If you have other debt that you need to pay off, there are repayment options that can make it easier for a consumer,” said Kalicia Bateman, a credit card expert at BestCompany.com, a consumer review platform based in Pleasant Grove, Utah.

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Bateman points to the debt avalanche method to get that process rolling.

“The debt avalanche approach can help save money and time, as the debtor will allocate money to make minimum payments on all debts, with remaining money being put toward paying off the debt with the highest interest rate,” she said. “Or there's the debt snowball method, which involves paying off the small debts first before paying off the big ones. The momentum of paying off the debt can keep you going, helping you get closer and closer to a debt-free lifestyle faster.”

4. Add to your mortgage payments

Paying down your credit card debt – and keep that debt down – offers homeowners a great chance to accelerate their mortgage payments and pay down their debt more quickly.

“If you have a mortgage, start making a second principal payment each month,” said Mark Zander, former national spokesperson at Franklin Templeton and founder of Mark Zinder & Associates in Nashville, Tenn.

Zinder did this for his own mortgage - with great results.

“For example, let’s say that your monthly mortgage payment is $1,000. Let’s also say that $800 is going to interest and $200 towards the principal,” he added. “Instead of making a $1,000 payment, pay $1,200 which means you just made two payments. Every month you do this, that principal payment will go up slightly, and I learned, it went up as my income increased as well. I was able to pay off my home in half the time.”

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5. Invest in your financial future

Set up a savings account and/or fully fund your retirement account. “The mistake most people make is they pay their creditors first and then save what is left over,” Zinder said. “Going forward, learn to pay yourself first.”

Why? It’s all about the “rule of 72.”

“Divide the rate of return into 72 and the answer tells you how long it takes money to double,” Zinder noted. “For example, at a 10% rate of return, the historic return on equities when dividends are reinvested, divided into 72 would equal 7.2.”

“Simply said, $100 dollars invested today become $200 in 7.2 years,” he said.