Struggling With Credit Card Debt? Here’s How To Pay It Off for Good

If you’re like many Americans, you spend a significant amount of time wondering how you’ll ever be able to pay off your credit card debt. Making the minimum payment and hoping for the best won’t cut it. Here’s what you need to know about tried and true strategies to get rid of those high-interest balances and secure your financial future.

Change Your Perspective

The thought of having $15,000 in credit card debt is overwhelming. Reframe your situation by mentally grouping the debt into smaller chunks: three cards with a $5,000 balance each, for example. If you have multiple cards, list each balance amount, interest rate, and minimum payment. Then, take a look at your budget and determine the amount of money you can put toward your credit card bills each month. If you can’t make at least the monthly payment on each, you’ll need to either cut down spending on other budget items, increase your income with overtime or a second job, or seek help from a credit counseling service.

Choose a Strategy

Now that you’re looking at your credit card debt head-on, it’s time to choose a method of repayment. Refer to the numbers you wrote down above. Let’s say you can dedicate $500 to your credit card debt each month. The minimum payment on each of your cards is $100, which means you have $200 left over. You can opt to put this amount toward either the credit card with the highest interest rate (avalanche method) or the card with the lowest balance (snowball method).

No matter which of the two methods you choose, you’ll be paying $100 to two of your cards and $300 to the third card every month. When the third card is paid off, you’ll be able to pay $100 to one of your remaining cards and $400 to the other. Finally, you’ll be left with one card and paying $500 a month toward the outstanding balance.

From a strictly financial standpoint, it makes the most sense to focus on the card with the highest interest first because it costs you the most over time. However, some people prefer the snowball method because it gives them the psychological win of paying off a small card quickly, which provides the motivation to continue on the right track.

Accelerate Your Progress

Having a solid plan is the first step to making headway on your credit card debt. Now that you’ve chosen your strategy and are well on your way to becoming debt-free, you can consider opportunities to boost your success by paying down your balances faster. Tricks to try include the following:

• Apply for a credit card with a 0% interest rate on balance transfers. Move your highest-rate balance to that card. However, carefully review the terms and conditions, since you may only have a few months to make payments before the interest rate skyrockets. You can also lose the introductory rate if you miss a payment. Keep in mind that you will need a good credit score to qualify for this type of card (at least 700 in most cases). You should also account for balance transfer fees, which are often assessed at 3 to 5% of the transferred amount.
• Consolidate your credit card debt with a personal loan. If you’re able to qualify for a low-interest-rate loan from your bank or credit union (typically requiring a credit score of at least 600), you can use it to pay off your high-interest credit cards and then make payments on the loan. Even though your loan payment will be lower than your combined credit card payments, you should continue to dedicate the full amount you budgeted to pay the debt. Look for an online consolidation calculator to see if this route makes sense for you. Interest rates on these loans range from 10 to 20%, which is likely less than your credit card interest. With good credit, you could qualify for a loan at just 5 to 6% interest.
• Create a household budget that realistically accounts for all your expenses. If you find you’re overspending in certain areas, you’ll need to cut back. This can keep you from accumulating more debt even after you pay off your existing cards.
• Put extra money toward your credit card debt. If you get a raise, roll that amount into your monthly debt payment. The same goes for bonuses, birthday money, tax refunds, and other windfalls that can make a serious dent in your debt.
• Stop using your credit cards, but don’t close the accounts. Cut the cards up if you need help to curb your spending. Because the age of your accounts is a factor in your credit score, canceling old accounts will likely lower your score (the exact opposite of your goal). Closing the credit card account will also increase your debt utilization ratio, which is the percentage of available debt that you are currently using. Having a high debt utilization ratio negatively impacts your FICO score.

When You Can’t Pay Your Debt

If you are unable to make even the minimum payments on your credit card debt, it’s important to seek assistance. Non-profit credit counseling organizations can help you explore options to repay, reduce, or eliminate your debt. These strategies could include:

• Attempting to negotiate with the credit card company to lower your interest rate or forgive late fees and penalties
• Negotiating to settle the account for less than the full amount
• Filing for Chapter 7 or Chapter 13 bankruptcy

You will need to gather information about your complete financial picture, including credit card statements, bank account statements, pay stubs, and other documents that will help make the case to your creditors that you are experiencing hardship.

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