U.S. credit card debt reached $986 billion in March, according to the Federal Reserve Bank of New York — that’s over $7,760 per American household. Not only are Americans carrying a lot of debt, but they’re also paying over 20% interest on their outstanding balances. With a minimum payment of $155 per month, it would take a household about nine years and over $9,000 in interest to pay off the debt.
Of course, minimum payments aren’t your only option. There are far better ways to eliminate credit card debt.
How To Get Out of Credit Card Debt
When you’re sitting on a mountain of credit card debt, financial freedom might seem out of reach. It’s not. The following steps will help you get rid of your debt and remain debt-free.
1. Make a Budget
Before you can devise a plan for paying off your credit cards, you need to know how much money you’re bringing in and how much of it you can devote to paying down debt. That’s where a budget comes in.
First, track all of your after-tax income and all of your expenses for a month or two.
Next, categorize your expenses to see where your money is going. Bank of America recommends dividing them into fixed and variable expenses.
Fixed expenses are your regular monthly bills — things like house and car payments, utilities, health insurance, student loan payments and the minimum payments due on your credit cards. Variable expenses are those that change from one month to the next, such as groceries and entertainment. They’re where you’re likely to find some wiggle room, Bank of America notes.
Once you’ve identified spending you can cut back on, earmark the extra money for paying down your credit card debt. However, if you don’t have an emergency savings account, it’s a good idea to use some of the extra money to build one. That way, you can tap into your savings for unanticipated expenses instead of charging them to your credit cards.
What if there is no extra money? A second job or side gig can increase your income enough to make a serious dent in your debt.
2. Negotiate a Better Deal
Credit card issuers often set a range of interest rates for a particular card and assign customers a rate within that range based on the individual’s creditworthiness. The U.S. Bank Cash+ Visa Signature card, for example, has rates ranging from 19.49% to 29.49%. If you’re currently near the top of the range for your cards, lowering your rate could free up money to repay the debt faster.
“Believe it or not, the best way to get a lower interest rate on your credit card is to just call up the bank/creditor that issued the card and ask for a lower rate,” Lynnette Khalfani-Cox, The Money Coach, wrote on her blog, AskTheMoneyCoach.com.
3. Choose a Debt Repayment Strategy
Whether you have $6,000 or $30,000 in credit card debt, a methodical approach will help you track your progress and motivate you to stick with your plan.
Personal finance expert Dave Ramsey recommends the snowball method as the fastest way to get out of debt. List your outstanding credit card debts according to balance amount. Then pay as much as you can on the smallest balance while continuing to make minimum payments on your other cards. Once the smallest has been repaid, work on paying off the next smallest, and continue until all your cards are paid off. The idea is that you build momentum that gets you from one balance to the next with increasing speed.
The avalanche method, perhaps named with a nod to Ramsey’s snowball, takes the opposite approach. Instead of listing your credit cards by balance, you’ll list them in order of interest rate, with the highest rate first. Put your extra funds toward the highest-rate card, and make minimum payments on the rest.
You won’t get the quick gratification the snowball method provides, but paying high-interest credit cards first could save you more in interest.
Debt consolidation combines two or more debts into a single account. Here are some ways to do it:
- 0% balance transfer card: You can open a new balance transfer card with a 0% introductory rate and use it to pay off some or all of your existing cards. Then pay down as much of the 0% card as you can during the promotional period. Read all the terms carefully before you apply.
- Personal loan: The average rate for a 24-month personal loan is just 11.48%, according to the Federal Reserve. That’s a bargain compared to the 20% average rate for credit cards.
- Home equity: A cash-out refinance or home equity loan might be the lowest-rate option for consolidating your debt with a new credit account. But think carefully before you go this route. You’ll typically pay loan fees, and if you miss payments, you could lose your home.
- Debt management: A debt-management plan from a nonprofit credit counseling agency consolidates your debt, leaving you with just one bill to pay, and gets your debt paid off in three to five years. It does that by negotiating reduced interest rates, typically 8% or less, according to Debt.org.
How Can I Legally Get Out of Credit Card Debt?
If it’s not possible for you to repay your debt, you do have some last-resort options to eliminate it. Note, however, that both of the following methods will cause serious damage to your credit. In addition, you might have to pay taxes on the wiped-out debt.
Debt settlement companies charge a fee to negotiate with your creditors to settle the debt for less than you owe. However, the company might encourage you to stop making payments on your cards pending settlement, which exposes you to the risk of exorbitant interest charges and collection actions in the event the company is not able to settle all of your debts.
Bankruptcy is a legal strategy to have your debt discharged by a court. A Chapter 13 bankruptcy restructures your debt and allows you to repay it over several years. At the end of the repayment period, the court discharges any remaining debt. A Chapter 7 bankruptcy liquidates your assets to repay your creditors. Some assets, such as your house and car, are exempt from liquidation.
After You’ve Paid Off Your Credit Card Debt
Credit card debt has high financial and emotional costs, but getting out from under it is incredibly liberating. Living within a budget and charging only what you can pay off each month are the best ways to avoid falling back into the hole.
Information is accurate as of June 22, 2023.
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- Federal Reserve Bank of New York. 2023. "Total Household Debt Reaches $17.05 trillion in Q1 2023; Mortgage Loan Growth Slows."
- Experian. 2023. "How Is a Credit Card Minimum Payment Calculated?"
- AskTheMoneyCoach.com. "How to Negotiate a Lower Interest Rate on Your Credit Card."
- Ramsey Solutions. 2023. "How the Debt Snowball Method Works."
- Ramsey Solutions. 2023. "Debt Snowball vs. Debt Avalanche."
- Federal Trade Commission. "How To Get Out of Debt."