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All debt isn’t created equal. Some types of debt can be good, if they’ll help you financially in the long run — such as a mortgage or student loans. Credit card debt, on the other hand, comes with no upside. It costs a lot due to high interest rates and can make you feel stressed.
If you’re struggling to repay your credit card debt, here’s the good news: it’s possible to pay it off. The tools and strategies you use will be the same, whether you owe a few thousand dollars or more than $10,000. Let’s look at some of your options.
The first thing you need to to do
Before considering your options, it’s wise to take a step back to look at how you got into credit card debt in the first place. To do this, take a moment to review your monthly credit card statements to see where you spent your money. If you spent a lot of money on things you didn’t need, you might have to change your spending habits or save for those purchases instead.
However if you’ve used money for emergency expenses — due to a pandemic or unexpected medical expense — using a credit card may have been your only option. If that’s the case, don’t beat yourself up about it. Life happens. Take steps to get out of credit card debt as your finances improve so you can beef up your emergency fund later.
Whatever your case may be, knowing the path you traveled to get into credit card debt can help you better understand what you need to do to get out of it — and how you can avoid new credit card debt.
If you’re looking to consolidate multiple credit card debts into a single, lower-interest personal loan, you can compare rates from multiple lenders using Credible.
Steps to get out of credit card debt
If you want to reduce your credit card debt, you should come up with a debt repayment plan. Here are four steps you should take to create your plan.
1. Start a budget
Create a budget to help you minimize the amount you spend and free up extra money to put toward your credit card debt. To do this, you should write down your current monthly expenses and income. While reviewing your expenses, identify non-essentials you can cut or eliminate to free up more cash.
2. Create a plan
Choose a debt reduction strategy that fits your budget and unique financial circumstances and allows you to make more than the minimum monthly payments toward your credit card balances. Your options will depend on your credit score and income — continue reading to learn what debt reduction strategies may be right for you.
3. Decide on a timeline
After you’ve decided what strategy you want to use, come up with a deadline for getting rid of the debt. To help yourself stay motivated, celebrate paying off small amounts along the way.
4. Act on your plan
Finally, implement the plan you’ve chosen. When life doesn’t go according to plan, make adjustments to your budget and experiment with different tools and strategies.
Tools and strategies for reducing credit card debt
There are multiple tools and strategies you can use to pay down credit card debt faster. Let’s take a look at five of them.
1. The avalanche method
Using the avalanche method involves putting any extra money you have toward paying off your credit card with the highest interest rate first, while making minimum payments on your other credit card balances. After you pay off the debt with the highest interest rate, you focus on making paying more toward your credit card with the next highest interest rate.
The upside to using this strategy is that it can lower the amount of interest you pay. However, the downside is that you can lose motivation if the credit card with the highest interest rate also has the highest balance.
- Best for: The avalanche method works best if you have enough income to pay more toward your credit card with the highest interest rate and the discipline to follow through with the plan.
- How it can affect your credit: Since the amount you owe accounts for 30% of your FICO score, paying down debt using the debt avalanche method may boost your score.
2. The snowball method
With the debt snowball method, you put any extra money you have toward your credit card with the smallest balance first, while making minimum payments on your other credit cards. Once you knock out your card that has the lowest balance, you focus on putting more money toward the debt with the second smallest balance.
Using this strategy comes with the benefit of seeing your smallest debt become zero faster. This may give you the momentum you need to continue working your strategy. However, using this strategy can lead to paying more in interest.
- Best for: if seeing your credit card balances hit zero sooner motivates you to keep repaying your credit card debt.
- How it can affect your credit score: Similar to using the debt avalanche method, paying down your credit card debt can have a positive affect on your credit score.
3. Consolidate with a personal loan
Since personal loans usually have lower average interest rates than credit cards, they are commonly used to consolidate high-interest credit card debt. When using this option, you take out a debt consolidation loan and use your loan funds to pay off as many credit cards as possible.
One of the biggest advantages of using this tool is that it’ll give you a concrete payoff date. If you can afford to repay your loan off on time, this can help you get rid of credit card debt faster and pay less interest. The only disadvantage you have is the risk of defaulting on the loan if you can’t afford it.
- Best for: A debt consolidation loan works best for consumers who have good to excellent credit scores (670 or more) and can secure a lower interest rate than their current interest rate.
- How it can affect your credit score: A lender will do a hard credit check when you apply for a personal loan, and this will temporarily drop your score up to five points, but its impact will lessen over time. Also, paying off your credit cards with a personal loan could lower your credit utilization. As a result, your credit score could increase. However, if you default on your personal loan, your credit score can suffer major damage.
To learn more about debt consolidation with a personal loan, and to compare rates from multiple lenders, visit Credible.
4. 0% APR balance transfer credit card
Although credit cards usually come with sky-high annual percentage rates (APRs), some credit card issuers offer 0% interest-free periods for qualified applicants. If you qualify for one of these cards, you can use a balance transfer card to transfer your high-interest credit card debt to this one.
A balance transfer card’s interest-free promotional period typically lasts up to 18 months. As long as you can pay off the balance in time, you can avoid interest payments. Once the interest period expires, you’ll incur interest on any remaining balance.
One of the biggest upsides to using this tool is it can help you save money on interest. However, the downside is that it comes with balance transfer fees that typically range from 3% to 5%. Also, to pay off the balance during the interest-free period, you might have to make higher monthly payments.
- Best for: A 0% APR credit card may be good for someone who has an excellent credit score and can afford paying off the card’s outstanding balance before the interest-free period expires.
- How it can affect your credit score: Similar to taking out a personal loan, your score will drop when you apply and the credit card company does a hard credit check. But opening up a new credit card can lower your credit utilization rate and improve your score over time.
5. Debt settlement
When you can’t afford to repay your credit card debt in full, you can negotiate with your credit card company or hire a debt settlement company to pay a reduced amount. After you pay the lower amount, you might not be legally responsible for repaying the remaining debt.
Although you may be able to reduce the amount of credit card debt you owe and help you avoid bankruptcy, this option comes with many risks. Using a debt settlement company can land you deeper in debt, according to the Consumer Financial Protection Bureau (CFPB).
- Best for: This option should be used if you can’t afford to repay your debt and want to avoid bankruptcy.
- How it can affect your credit score: Choosing to settle your credit card debt can have a negative affect on your credit score.
While using the strategies above can help you get out of credit card debt faster, understand that it can take you years to get rid of credit card debt.
Why credit card debt is bad
Having credit card debt can be bad for multiple reasons, including:
- Negative impact on your finances: Having too much credit card debt can make it harder for you to save for other financial goals, such as retirement, your kid’s education, and vacations.
- Credit card debt can balloon due to high APRs: As long as you pay your credit card balance in full each month, you can avoid paying interest. However, if you can’t afford to pay more than the minimum payment, you can end up paying thousands of dollars more than you borrowed.
- Can have a negative impact on credit score: Your credit utilization ratio — how much credit you use versus of your available credit — accounts for 30% of your FICO score. The higher your utilization ratio, the lower your score may be. If you max out your credit limit, this can lower your credit score.
- Affect on your mental health: Racking up credit card debt can cause you anxiety and stress. In 2020, 25% of Americans said credit card debt was a daily stressor, according to a Money study.
What to do after you get out of credit card debt
You should celebrate overcoming a challenging financial situation — this is a huge accomplishment. Congratulations! Afterward, focus your attention on these finance-building steps.
1. Build an emergency fund
An emergency fund can help you cover unexpected expenses, such as medical bills or car repairs. If you don’t have an emergency fund, focus on building one so you can avoid taking on additional credit card debt when an emergency happens. You can do this by setting up automatic payment from your checking to your savings account each month.
2. Pay down other debt
Now that you’ve paid off your credit card debt, you’ve free up money to put toward other debt. By reallocating some of the money you were spending on credit card debt to student loan, mortgage, car loan and other debt, you can become debt-free faster. This can put you in a better position to avoid credit card debt.
3. Invest in your future
If you don’t have a retirement fund, now is the perfect time to build one. Even if you do have one, try to max out your IRA, 401(k), or other retirement accounts. That way, you can reduce your chances of having to rely upon credit card debt to cover your expenses during retirement.
Credible makes it easy to find your prequalified rates when you’re looking for a personal loan to pay off credit card debt.
About the author: Jerry Brown is a personal finance writer, owner of the Peerless Money Mentor blog, and a contributor to Credible. He has written for major publications such as Forbes Advisor, Business Insider, and Rocket Mortgage.