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Using credit cards regularly can be a great way to build your credit history and take advantage of rewards and benefits along the way. But overspending and unexpected financial challenges can result in a mountain of credit card debt.
You can start paying off your credit card debt by tallying up how much you owe and listing the balance and interest rate for each card. Once you have an idea of what you're dealing with, here are a few different strategies you can use to start paying down your credit card debt.
Credit Card Debt Repayment Strategies
There are several different ways you can tackle your credit card debt. And depending on your credit situation and budget, some may be better than others. Here's a quick summary of your options that could help you decide which path to pursue.
Debt Consolidation Loan
A debt consolidation loan is essentially a personal loan you use to pay off credit card debt. Unlike credit cards, personal loans are installment loans that have a set repayment schedule and fixed monthly payment amount. Debt consolidation loans can help you secure a lower interest rate and also simplify your repayment process by replacing multiple monthly payments with just one.
On average, personal loans have lower interest rates than credit cards. But your rate will depend on your credit score and other factors, so there's no guarantee you'll get a lower rate than what you're currently paying. If your credit is fair or poor, you could face high interest rates or difficulty qualifying for a personal loan. Fortunately, many lenders allow you to get prequalified before you apply. This process requires just a soft credit check, which doesn't impact your credit score, and allows you to compare loan offers with your current situation.
If you're considering a personal loan to pay off debt, make sure the new monthly payment fits within your budget. If it's too high or on the border, it may be difficult to keep up, and a missed payment could hurt your credit. You also need to commit to not running up balances on those cards again—otherwise you could end up in worse shape than when you took out the loan.
Balance Transfer Credit Card
If your credit is in good shape, another 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 an interest-free period of a year or longer.
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 3% or 5% of the amount you transfer.
If you're able to pay off the entire balance by the end of the introductory period, you can avoid paying any interest charges. And even if you can't completely pay it off in time, pay as much as possible every month toward the balance and you could still save yourself hundreds of dollars.
If you have multiple balances, consolidating them with a balance transfer can also 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, there's no guarantee you'll get a high enough credit limit on the new card to cover the amount you want to pay off. Maxing out the balance transfer card could result in your credit score going down, at least temporarily, until you can pay it down and reduce your credit utilization. Your credit utilization—your balances divided by your credit limits—plays an important role in your credit scores.
Finally, keep in mind that a late or missed payment may cause you to lose the introductory rate, and after the introductory period ends, the interest rate on the unpaid balance can jump significantly.
If you qualify for a balance transfer card and are motivated to pay off your balance as soon as possible, the savings may be worth it.
Debt Snowball Method
If you've had trouble with overspending and think taking out a new loan or credit card to pay off your balances could tempt you to rack up even more debt, the debt snowball method might be a better approach.
With this method, you make minimum payments on all your cards every month and apply any extra payments you can make toward the credit card with the lowest balance. When that card is paid off, you take what you were paying to the first card and apply it to the one with the next-lowest balance. You keep doing this with each card until they're all paid in full, with your growing payments on each new card having a snowball effect.
The debt snowball approach is best for people who need wins early to stay motivated. Even if your lowest balance is just a few hundred dollars, paying it off could help you stay focused on your goal.
Debt Avalanche Method
Like the debt snowball strategy, the debt avalanche method has you focus on knocking out accounts one by one. The key difference is the avalanche method has you focus on paying off your balances with the highest interest rates first.
Compared with the debt snowball method, the debt avalanche method may not give you early wins. For example, 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. But it could help you save more money by eliminating your most expensive debts first.
Debt Management Plan
If your credit is in bad shape, a debt consolidation loan or balance transfer card may not be an option for you. And if your budget is too tight for extra payments under the debt snowball or avalanche method, a debt management plan may be an option to consider.
A debt management plan is a repayment plan you can enter into with help from a credit counseling agency. A credit counselor will notify your creditors that you're using a debt management plan and will typically try to negotiate lower interest rates and monthly payments.
Debt management plans typically take three to five years, depending on how much you owe and your ability to pay. They can be a great way to avoid debt settlement and bankruptcy, both of which can be effective but will damage your credit significantly. Your card issuers may choose to close your accounts, which could hurt your credit, but not by much when compared with the credit damage that can result from your other options.
Debt management plans aren't expensive, either, but expect to pay a modest upfront and ongoing monthly fee throughout the plan's term. Contact a reputable credit counseling organization to find out whether this might be a good option for you.
Tips for Paying Off Credit Card Debt
As you consider your options for paying off your debt and try to find the most effective way to achieve your goal, here are some tips to help you make it happen.
Create a Budget and Stick to It
The more money you can pay toward your credit card debt each month, the faster you'll eliminate what you owe.
If you don't already have a budget in place, start by writing out your average income and expenses over the past few months. Categorize each of your expenses to get an idea of exactly where your money is going. Then you can pinpoint areas where you can cut back and repurpose those dollars for debt reduction.
If you're living paycheck to paycheck, this step can be tough. Even if it's just a few dollars extra a month, though, it can make a difference in the long run. Do what you can to create a budget and continue looking for opportunities to earn or save more in the future.
Work to Lower Your Bills and Day-to-Day Expenses
At first glance, you may not be sure where you can cut back in your budget. But with a deeper dive, you may be able to find some opportunities. Start with your recurring bills. For example, if you have multiple streaming services but don't use one or two very often, consider cutting them temporarily until you've paid off your debt.
Also, take a look at your car insurance premiums and shop around to see if you can get the same coverage with another insurance company for less.
In addition to those regular bills, take a look at how you spend your money every day. If you tend to go out for lunch during the week instead of bringing something from home, making that small change can free up a lot of cash flow.
Again, remember that you don't necessarily need to change your lifestyle and spending habits permanently. But making small temporary changes now can put you in a better financial position in the future.
Find Ways to Make Extra Cash on the Side
- Take on more hours at your current job.
- Ask for a raise.
- Take a second job.
- Look for temporary or odd jobs on job boards.
- Turn something you're good at into a side business.
- Sell some of your personal belongings that you no longer need.
In addition to these, there are several other ways you can earn a little extra money each month to help pay down your debt. Take time to consider which approach works best for you based on your situation.
Consider Nonprofit Credit Counseling or Financial Assistance
Credit counseling agencies do a lot more than just create debt management plans. If you're having a hard time making heads or tails of your debt situation, a credit counselor can help.
For example, they can review your debt situation, help you create a budget, explain your options, review your credit report with you and also provide some educational courses. Many agencies do all of this for free.
If your financial situation is dire, you may also consider seeking financial assistance. This may come in the form of rent relief, food stamps, legal aid and other assistance programs from federal and state agencies, as well as nonprofit organizations. You can use the 211 network to find programs in your area.
Should You Close a Credit Card After Paying Off Debt?
Even if you manage to tackle your debt swiftly, it can feel like you're spinning your wheels if you're adding more to your balances each month. Consider putting a moratorium on your current credit card spending while you focus on eliminating the balances. Instead of canceling the accounts, however, consider keeping them in a safe location where you don't have convenient access to them.
When you cancel a credit card account, it can potentially hurt your credit scores by reducing your overall credit limit. This can impact your credit utilization, which makes up 30% of your FICO® Score☉ .
If you cancel a card with a high credit limit and have high balances on your remaining cards, even if you pay them in full each month, it could increase your credit utilization and negatively impact your credit scores.
On the flip side, if your card has an annual fee or a security deposit attached and you don't plan to use it, it may be worth it to cancel and save money or get your deposit back. You can also consider downgrading your credit card to one without an annual fee.
If you decide to hold on to the cards you no longer plan to use, try to use them occasionally (and pay them off immediately) to keep the accounts active. Otherwise, your card issuer may choose to close down the account for you, which they can do without notice.
Learn How to Use Your Credit Responsibly in the Future
After you reach your goal of paying off your credit card debt, it's important to be proactive about developing good credit habits to avoid ending up in the same situation again.
- Sticking to your budget to avoid overspending.
- Paying off your balance on time and in full every month.
- Avoiding racking up a high balance.
- Taking advantage of credit card rewards and benefits to add more value to your everyday spending.
It's also a good idea to check your credit score regularly to know where you stand at all times. This can also help you spot potential issues that could hurt your credit, so you can address them quickly. In addition to your credit score, make sure you also frequently review your credit reports, which give you a deeper understanding of what's affecting your credit score.
Take the First Step
Regardless of how much you owe, the task of paying off your credit card debt can feel daunting. But the sooner you take the first step toward your goal, the easier it will be and the faster you'll achieve it.
Keep in mind, too, that your strategy may change over time as your financial situation changes. Be willing to evaluate your plan regularly and make adjustments as needed. Paying off credit card debt can take months or even years, but the effort is well worth it.