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There's nothing wrong with using a credit card—unless unexpected financial challenges result in a mountain of credit card debt.
Getting out of credit card debt might seem hard, but with a little time and strategic planning, it can be done. Here are a few strategies you can use to help you pay off credit card debt.
Figure Out How Much You Owe
The first step to paying off your credit card debt is figuring out exactly how much debt you have.
Make a list of all your credit card balances and loans, along with the minimum monthly payment and annual percentage rate (APR) for each. If you're not sure how many cards you have open, you can check your credit report for free to find out. Your credit report will list your credit card accounts with the most recently reported balances and contact information for those accounts. You can check your bank or credit card issuer to get the most up-to-date information.
Next, make a list of all the non-credit card bills you have to pay each month, such as your rent or mortgage, auto or student loans, utilities, phone bill, groceries, child care, gas and so on. Add the tallies from the two lists (your credit card bills and your monthly living costs) together to get your minimum monthly expenses.
Now, compare that total with your monthly net income or take-home pay. Ideally, your income should be more than your total monthly expenses. If you have money left over, decide how much extra you're willing to put aside to pay down your debt.
At this point, you're ready to decide which strategy is best for you to pay off your credit card debt. The following approaches will depend on the seriousness of your credit debt, along with your ability to handle the payments. Every situation is different, so what works for someone else may not work best for you. Knowing your options can help you decide the best approach for you.
A good first step is to check your credit report to get a better idea on where your credit stands. Then, you can choose which of the various credit card payoff options may be best for you.
The Debt Avalanche Approach
If you make more money each month than you owe, then the avalanche approach could be an option to pay down your debt.
For this method, focus on paying off the card with the highest APR first. Make minimum payments on all your other credit cards and put the extra money toward paying down that high interest card. Once that card is paid off, take the money that you used to pay down the first card and apply it to the card with the next highest APR, while still paying the minimum on your other cards.
This approach can reduce the total amount you'll pay in the long term by reducing the amount of interest you accrue. If the card with the highest APR also has a high balance, it can take a long time before you pay off the first credit card. However, as you pay off each credit card and apply the old payments to your other cards, your credit card payoff will accelerate.
The Debt Snowball Approach
If you want to reduce the number of credit cards with balances you have a bit faster, the debt snowball approach may be better for you. As with the debt avalanche approach, you want to make sure that you have enough positive cash flow (making more than you owe) to be able to impact your credit card debt. With this method, you make minimum payments on all your cards every month and apply your extra money toward the credit card with the lowest balance. When that card is paid off, you move to the one with the next lowest balance and apply the extra amount to that card, while paying the minimum on your other cards.
While you'll likely end up paying higher interest in the long run, you'll be able to start paying off credit cards more quickly, and that can help keep you going with your other cards.
Alternative Strategies for Paying Off Credit Card Debt
Of course, you can accomplish your goal of paying off credit card debt in more than one way. In addition to the avalanche and snowball methods, here are some alternative ways to pay down credit card debt:
Balance Transfer Credit Cards
If you have good credit, one option might be to apply for a balance transfer credit card. These cards typically come with a low or 0% APR for a set period of time, with some promotions offering up to 21 months interest-free. During the introductory period, you pay no interest on the balance you transfer from another credit card, although you could pay a transfer fee that's typically around 2% to 3% of the amount you transfer.
If you use that introductory period to pay as much as possible every month toward the balance, you can lower the amount you owe while avoiding interest charges. Ideally, you'll be able to pay off the entire balance by the end of the introductory period. If you have multiple balances, consolidating them with a balance transfer can simplify your monthly payments.
However, it's important to understand the limitations of balance transfers. The promotional APR is often only for the amount you transfer, and a higher interest rate may apply to any new charges you make using that card. Some promotional offers do include both balance transfers and purchases, so review the terms carefully. Also keep in mind that a late or missed payment may cause you to lose the introductory rate. After the introductory period ends, the interest rate on the unpaid balance can jump significantly. Reading the conditions of each offer can help you make the best decision.
Debt Consolidation Loan
In circumstances where you may not have not enough cash flow to impact your debt, a debt consolidation loan could help you pay off the credit card debt with an installment loan that has a fixed monthly payment amount. Basically, you obtain a new loan to pay off multiple other debts, such as credit cards. Depending on your credit, these loans can have lower interest rates than what you would pay on a credit card, ideally helping you pay and help you repay the debt faster. Just like a balance transfer, a debt consolidation loan can also simplify your monthly payments by rolling multiple payments into just one.
When you're deciding which strategy is best for you for paying off credit card debt, it's important to consider the interest rate and length of the debt consolidation loan. Is it more important to you to reduce the total cost of your debt by lowering interest charges? Or are you more concerned with repaying your debt quickly? You also should be aware that depending on the debt consolidation loan and how you manage it, there could be implications to your credit. Make sure you cover all the bases to ensure you understand how things will be handled by the company you work with on it.
If your credit is fair or poor, you could face high interest rates or difficulty qualifying for a personal loan or balance transfer card. For more serious debt and if you have poorer credit, a debt management plan may be an option to consider.
Comparing Credit Card Payoff Strategies
These tables below can help you compare credit card payoff strategies and get an idea for which one might be right for you. These examples are all based on beginning with $8,900 in total debt on three credit cards and assume you have $350 per month to pay back debt.
Debt Avalanche: Repay Highest Interest Rate First
This example assumes that you'll pay minimum amounts due and put additional money toward the card with the highest interest rate first.
|Balance||APR||Minimum Payment||Payoff||Interest Paid|
|Credit Card 1||$4,200||19%||$84||20 months||$702|
|Credit Card 2||$3,600||15%||$72||33 months||$1,094|
|Credit Card 3||$1,100||13%||$22||36 months||$334|
|Total Payoff Time & Interest Paid On All Cards||31 months||$2,130|
Debt Snowball: Repay Lowest Balance First
This example assumes that you'll pay minimum amounts due on all cards and then additional money will go toward tackling the card with the lowest balance first.
|Balance||APR||Minimum Payment||Payoff||Interest Paid|
|Credit Card 1||$4,200||19%||$84||33 months||$1,728|
|Credit Card 2||$3,600||15%||$72||21 months||$599|
|Credit Card 3||$1,100||13%||$22||6 months||$41|
|Total Payoff Time & Interest Paid On All Cards||32 months||$2,368|
Debt Consolidation Loan
This example assumes that you have good credit, and that you'll consolidate all of your credit card debt into a personal loan with a 36-month term.
|Principal||Interest Rate||Monthly Payment||Payoff||Interest Paid|
Balance Transfer Card
This example assumes that you use a balance transfer credit card that charges a 3% fee on the amount transferred and a 12-month period of 0% interest.
|Balance (including 3% fee)||APR After Promo Period||Monthly Payment||Payoff||Interest Paid|
|Balance Transfer Card||$9,167||18%||$350||29 months||$660|
It's important to understand that each strategy has its pros and cons, and the best solution for each person will vary. Your situation may also vary significantly from the examples provided. For example, it might turn out that you have good credit and can get a better APR for a balance transfer than the one listed or that you have poorer credit and may find it difficult to qualify for a balance transfer credit card.
If you're thinking about transferring a balance to handle your debt, check out these balance transfer cards from Experian's credit card marketplace to get an idea of what's available.
This card offers a 21-month 0% APR introductory offer on balance transfers—which is great for people looking to pay down their transferred debt over a longer period of time. The Citi Simplicity® Card is the only card with no late fees, annual fees or penalty rates (which are special interest rates charged when a cardholder violates certain terms of the agreement), which can help you save some money over time.
With the Discover it® Balance Transfer card, you will pay 0% APR for 18 months on any balances you transfer. This card also comes with cash back rewards: 5% for different categories each quarter and an automatic 1% back on everything else. As an intro offer, Discover will also match all the cash back you've earned at the end of your first year—with no limit. With no annual fee, this card is great for someone looking to transfer a balance and also get rewards for any new purchases they make.
The Capital One® Quicksilver® Cash Rewards Credit Card offers 0% APR on balance transfers for 15 months. The card offers 1.5% cash back on all purchases, with no category restrictions, and new cardholders get a one-time $150 cash bonus after spending $500 on purchases within three months of opening the account.
Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.
This article was originally published on May 31, 2017, and has been updated.