How To Pay Off Credit Card Debt
If you’re wondering how to pay off your credit card debt, you're not alone. The New York Federal Reserve Bank's Center for Microeconomic Data reported a record-high $986 billion in credit card debt in the last quarter of 2022, an increase of $61 billion from pre-pandemic levels.
This article will explore some of the best tactics you can use to pay off your credit card debt so you can get back on the road to financial freedom.
Strategies for Paying Off Credit Card Debt
You want to get out of debt, but where and how do you start? The truth is, there's no one-size-fits-all solution to paying off credit card debt. Fortunately, there are a few strategies that can help you tackle your financial situation and get back on track. These are some of the steps you should consider:
- The debt snowball method
- The debt avalanche method
- Pay more than the minimum payment
- Negotiate with your credit card company
- Consider debt consolidation
- Adjust your spending habits
- Look into credit counseling services
The debt snowball method
The first step in paying off credit card debt involves choosing the strategy that works best for your unique situation. One of the most popular strategies is the debt snowball approach.
Popularized by personal finance expert Dave Ramsey, the debt snowball method focuses on paying off your smallest debt first. You’ll still make minimum payments on all your debts, but you’ll allocate as much as you can to the debt with the smallest balance. Once that debt is paid off, you add the amount you were paying toward that smallest debt, to the next smallest balance and so on..
This payment strategy can be beneficial for people with multiple small debts. As you pay off smaller accounts, you free up more money to put toward larger debts. It can also help motivate those who have previously struggled to stick to a debt reduction plan.
According to some behavioral economists, eliminating small debts early on in the paydown process helps some people stay motivated by providing a sense of progress and relief.
However, this method may not be the most cost-effective for some people since high-interest debt can grow exponentially while you pay down the smallest balance on your list..
The debt avalanche method
Also known as debt stacking, the debt avalanche method focuses on paying off debts with the highest interest rates first. By prioritizing your debts based on their interest rates, you can reduce the amount of interest fees accrued over time and save money in the long run. Say, for instance, you want to pay off a credit card and an auto loan with the following balances and interest rates:
With the debt avalanche method, you would first take on the credit card by making more than the minimum payment on it, while only paying the minimum on your auto loan. .
Once you’re done with the credit card, you can add the money you used to pay it off to the auto loan’s minimum monthly payment and settle that debt much quicker.
Check out our guide on the debt snowball and the debt avalanche methods for more information.
Pay more than the minimum
If you have extra funds available, it's in your best interest to pay more than the minimum amount due. When you only make the minimum payment, most of the funds go toward paying interest and don't significantly reduce the principal balance.
For instance, say you have a credit card balance of $2,000 with an annual percentage rate (APR) of 18%. If your minimum payment each month is $40 and you stick to this amount, it will take more than seven years and around $1,700 in interest to pay off your original debt. However, if you make monthly payments of $100, you can pay off the debt in about two years and pay only around $400 in interest.
Credit card interest is compounded daily, and the finance charges you accrue are based on your account’s average daily balance. That means that every day you wait to make a payment, you’ll have to pay more in interest charges.
If you get paid every two weeks or bimonthly, making two payments a month might be feasible; if you’re paid more often — say, you get a weekly paycheck or you’re a tipped worker — you might want to consider jump-starting your debt-management plan by paying weekly.
Just make sure that the total amount of money you pay by the due date on your credit card statement is at least as much as your minimum payment to avoid late fees and penalty rates.
Keep in mind that lowering your overall debt can also improve your credit score by bringing down your credit utilization ratio, which can make it easier to qualify for a balance transfer credit card (read on for more information on how these can help with debt management).
Negotiate with your credit card company
Credit cards are convenient, but their high interest rates can make a small monthly balance turn into considerable debt that can take years to pay down. If you're trying to pay off credit card debt fast, negotiating lower interest rates with your credit card issuers is one of the best ways to do so.
Note that you’ll have a better chance of getting a lower interest rate if you’re a long-time customer with a good credit score and a history of paying your bills on time. If that’s your case, when you call to negotiate your debt, mention how long you’ve been a customer and your history of timely payments. You may be surprised how often these companies are willing to lower their interest rates to keep you as a customer.
Negotiating better interest rates can help you save money in the long run, and you can use the extra money you save to make larger payments toward other accounts, thus settling debt faster.
Consider debt consolidation
Debt consolidation is a financial strategy that involves combining multiple debts into a single one. It can be a good strategy if you have high-interest debts, such as multiple credit cards, offering a lower annual percentage rate (APR). You'll also only have to make one payment each month instead of bearing multiple credit card balances and due dates to keep track of.
Here are two way in which you can consolidate debt:
Debt consolidation loan
A debt consolidation loan is a type of personal loan you can use to pay off other debts, such as credit cards, medical bills and other personal loans.
When you get a debt consolidation loan, the lender usually deposits the loan amount (minus fees) into your bank account. You can then use the funds to pay off your creditors. Some lenders, on the other hand, might send the payments directly to your creditors. Once your accounts are settled, you'll only have to pay the debt consolidation loan, which will have a fixed monthly payment and interest rates.
Note that multiple lenders advertise debt consolidation loans as a different financial product than personal loans. However, both loans are essentially the same, offering fixed interest rates and a set monthly payment. That being said, it’s a good idea to compare rates for both debt consolidation and traditional personal loans, as one might be lower than the other.
Keep in mind that debt consolidation loans have the same credit requirements as other types of loans, so borrowers with bad credit scores might not qualify for the best debt consolidation loans.
Balance transfer credit cards
If you have a good or excellent credit score, you might be eligible for a balance transfer card that can help you pay down your outstanding balance sooner.
Balance transfer credit cards allow you to transfer the balance from one or more credit cards to a new one with an introductory 0% APR, which usually lasts between 12 to 21 months. This introductory period gives you a chance to pay down your debt without accumulating interest charges. Since you’re not paying interest, your entire monthly payment goes straight towards paying down the principal.
Try to pay down your balance before the promotional period ends, however, since once the regular APR starts, you’ll have to start paying interest again.
Also, know that many balance transfer cards charge a balance transfer fee of at least 3% of the balance you’re transferring — an amount that can add up if you have a large amount of debt.
For more information, check out our list of the Best Balance Transfer Cards.
Adjust your spending habits
One of the best ways to quickly pay off debt is to allocate more money to it every month.This means finding new ways to save by setting a budget, tracking your expenses and reducing unnecessary expenses.
To know how much money you can apply toward your debt payments, you must first identify where your money is going. Take the time to write down your monthly expenses as it can be a great way to identify areas where you can cut back.
You might also consider closing a credit card if you realize you have too many to keep track of, as this could be an additional source of unnecessary spending. However, note that closing a card reduces your overall available credit, which in turn increases your credit utilization ratio and can lower your credit score.
Look into credit counseling services
If you’ve already tried the tactics mentioned on this list and are still struggling to get your credit card debt under control, it might be time to call in the pros.
Nonprofit credit counseling services can look at your particular financial situation and help you create a repayment or debt management plan.
Debt management plan
A credit counseling agency can help you create the debt management plan (DMP) that works best for your situation.
These agencies will work with your creditors to negotiate lower interest rates, lower monthly payments and more. Once a DMP is set, it’s possible you’ll make one single monthly payment to the credit counseling agency and it will distribute it among your creditors.
A DMP can also help you avoid late payment fees and collection calls. Additionally, the plan will most likely include ways to deter additional credit damage by outlining ways to remove negative items from your credit report and ways to improve your credit score, if needed.
How much credit card debt is too much?
There isn't a definitive answer to this question. Various factors can indicate that your credit card debt is too high, such as when you start having difficulty making minimum payments or start using one credit card to pay off another. These are three possible ways to determine if you might have too much credit card debt:
- Your credit utilization ratio is above 30%: This ratio compares the amount of credit you use to the total amount of credit available. Ideally, your utilization ratio should be 30% or less.
- Your debt-to-income ratio exceeds 36%: This ratio compares your monthly average debt, including your credit cards, to your monthly gross income. Ideally, you want to keep your DTI ratio below 36%.
Summary of how to pay off credit card debt
While there isn't a one-size-fits-all answer when it comes to how to pay off credit card debt, the key is to find a solution that works for you. Start by setting reasonable, achievable goals and use the above methods to develop a plan for how to get there.
Make sure to do thorough research when looking for a solution, and always read the fine print when signing up for any new financial product or advisory program. By taking these steps, you'll be well on your way to paying off your credit card debt.