How to Pay Off Credit Card Debt

Carrying credit card debt? You’re not alone. The average household now has an average of $11,507 of credit card debt. Happily, there are proven strategies for paying down credit card debt — and plenty of upsides to doing so.

Paying off credit card debt can:

• liberate you from high interest charges. Many credit cards charge high interest rates, with the average (on balances with assessed interest) being around 21%.
• improve your credit score. Having a high credit utilization ratio — how much money you owe compared to your credit limits — can lower your credit score. It’s best to use no more than 30% of your available credit. As you pay down your credit card balances, your credit score will likely improve.
• free up cash for other financial goals like saving for a down payment or building your emergency savings.
• help you qualify for loans. If you’re seeking a mortgage loan or business loan, a low credit utilization score can help you qualify for a loan or get one at a better interest rate.
• relieve money worries. Debt can cause significant financial stress. Paying off a credit card can help give you peace of mind.

Understand your debt

To tackle your debt, it’s important to first know what you owe. Start by gathering recent statements for any debt you have such as credit card debt, your mortgage payment, car loans, and student loans. Note the interest rate on each loan.

Then tally up your other regular bills such as rent and your cell phone bill. Don’t forget automatic payments for streaming subscriptions and such. This will give you a clear picture of your monthly expenses.

Limit charges to your credit card

When possible, avoid using plastic. Continuing to use credit cards will simply add new debt and interest charges, so it will take longer to become debt-free.

Also, avoid discretionary spending and review your expenses to see if there are any opportunities to cut back. Being thoughtful about your budget may help you avoid using credit cards.

Increase payments

Your monthly credit card statement details your charges over the past month. It also shows your balance (the total amount you owe) and your minimum payment (the minimum amount you must pay that month).

Your minimum payment may be just 1% or 3% of your balance. So, if your total credit card balance is $2,000, your minimum payment may be $60 or less. It might be tempting to pay the minimum, but that can be expensive in the long run.

Let’s say, for example, you buy a new flat-screen TV that costs $2,000. You buy it with a credit card that charges 18% interest on that $2,000. Your minimum monthly payment is just 2% of your total balance. So you get a brand-new TV and pay very little each month.

If you make the minimum payment every month, however, it would take you 15 years and 10 months to pay off your balance, and you’d pay $3,415 in interest. That means you’d paid $2,000 for the TV and another $3,415 in interest, bringing the actual cost of that TV to $5,415.

It’s best to pay off your full credit card balance each month. If you can’t do that, at least try to pay more than the minimum required payment. The higher your monthly payments, the less interest you’ll pay and the sooner you’ll be debt-free.

The cashless effect

People tend to spend less when using cash than when swiping a card, a phenomenon known as the “cashless effect.” Cash payers especially spend less on discretionary purchases and luxuries. Why? Because handing over tangible money — actual greenbacks — causes more psychological discomfort. So to avoid impulse purchases at the grocery store, consider paying with cash.

Transfer your balance to a low-rate credit card

Carrying a balance on a high-interest-rate credit card can be costly. So consider transferring the balance of that card to a credit card with a lower interest rate.

Before you do, read the fine print. Some credit card companies charge you a fee to transfer your balance. The fee is usually a percentage of the amount of money you transfer. So do the math to make sure the transfer makes financial sense.

Take out a loan to pay your credit card debt

Taking out a debt consolidation loan might be an option for paying down your credit card debt more quickly. This is a new loan that consolidates your various debts into a single monthly payment. It simplifies your financial life and can save you money if you qualify for a lower interest rate than you’re currently paying on your credit card debt. That, of course, means that you’ll pay off your credit card debt more quickly.

Before taking out a debt consolidation loan, make sure you understand the terms. You may need to pay fees such as a balance transfer fee or an annual fee. And the interest rate for the debt consolidation loan may — or may not — be much better than your current rate. Also, when applying for a debt consolidation loan, the lender will run a hard inquiry on your credit, which could ding your score, usually just 5 points or so.

Another option is taking out a home equity loan or HELOC to consolidate credit card debt. Similar to a debt consolidation loan, your credit card bills will be streamlined into one convenient monthly bill. The interest rate for home equity loans is typically lower than credit card interest rates, and your monthly bill is usually lower. Also, the loan is backed by collateral — your home — so the interest rate is locked in. That means you don’t need to worry about surprise rate hikes.

On the downside, you may pay fees for a home equity loan, so make sure you understand the terms. And keep in mind that you’re offering the lender your home as collateral, so if you default on your home equity loan or HELOC, you may lose your home.

Get help

In some cases, the solutions described above won’t work. You may be so deep into credit card debt that you feel overwhelmed. Perhaps you’re struggling to make your monthly payment, or you lost your job and need to reduce your monthly expenses. Here are some steps you can take to get back on track.

Speak to your credit card company.

Oftentimes, your credit card issuer will work with you to create a manageable payment plan. Depending on your circumstances and your credit card company, you may be able to reduce your monthly payment, get your interest and fees waived, or postpone a few payments.

In some cases, you may be able to pay less than your total balance, such as 60%, in a lump-sum payment. Using this approach to settle your account will have a significant impact on your credit score, however, and will remain on your credit report for seven years.

If you decide to speak to your credit card company, do it as soon as possible. Don’t wait until you’ve missed a payment. And make sure to get the details of any agreement you negotiate in writing.

Work with a debt settlement company.

Another option is to work with a debt settlement company, which can negotiate with your credit card company on your behalf. They work to reduce the total amount you owe, but it doesn’t happen right away, as it would if you negotiated with your card issuer on your own. So your debt will continue to creep up for a while. The result is that you’ll generally spend more money than you would if you negotiated yourself. Also, the debt settlement company may ask you to temporarily stop making monthly payments, which will lower your credit score.

Talk to a certified credit counselor.

A credit pro can take a look at your finances and help you map a sound strategy to repay your debt. They may work with your creditors to lock in lower interest rates, for example. A credit counselor can also connect you with other resources that might be helpful.