Financial Guides

How to get out of credit card debt

Here's a quick review of strategies to get out of credit card debt, including: the snowball method, the avalanche method, plus the pros and cons of balance transfers and debt consolidation loans.

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The average amount of credit card debt for American households with credit cards is $8,398.

That is, though, just the average. Some people might have tens of thousands of dollars worth of credit card debt they need to get out of.

When you consider that Americans typically also have other types of debt, like mortgages, auto loans, and student loans, it's understandable that debt can be an enormous weight on people's shoulders.

There's hope, though. With a little the right strategy, organization, and motivation, you can get out of credit card debt once and for all. Here are ten tips on how you can make the journey to debt-free living:

Gather All of Your Information in One Place

There are a number of different methods you can use to get out of credit card debt. If you have multiple credit cards carrying high balances, the first thing you'll want to do is get organized.

Collect all of the information for every card you currently have a balance on. Make a spreadsheet or otherwise note down each cards' balances, due dates, interest rates, and minimum payments.

By understanding the debt you have on each card as well as the minimum payments and interest rates, you can come up with a smart and effective plan to get out of debt. But the first step is to write it all down in one place.

Take a Look at Your Spending and See What’s Practical to Cut

Everyone has so many expenses these days, it can be hard to keep track of. There are a number of things that are essential, such as food, housing, utility bills, insurance, and vehicle costs. Depending on how much debt you have, it might even make sense to look for a cheaper apartment or downgrade to a more reliable and less expensive vehicle.

As far as your utilities go, you can check in with your internet and cable providers to find out if there are any discounts or deals that can reduce your costs. You can often also bundle home and auto insurance for savings.

On top of the essentials, there are likely some expenses that could be cut for a period of time while you focus on reducing your debt.

Look at your credit card bills and bank account to get a sense of where your money goes. How much money are you spending on eating out each month? How much are you spending on monthly subscription services for entertainment?

Be thorough and honest with yourself during this process. You don't want to beat yourself up--everyone deserves a little fun and recreation-- but you do want to fully understand where your monthly income is going. Take a look at purchases like clothing, make up, electronic equipment, or other things that could be secretly keeping you in debt, and either make a pledge to stop spending on those categories while you’re getting out of debt, or at least give yourself a dollar ceiling on what you spend there. This will keep non-essential spending under control.

Build a Budget

Once you understand where your money is going, it's time to make a budget. Write down all of your necessary expenses, like your mortgage or rent, student loans, utility bills, gas, and groceries. Then, calculate exactly how much money you make each month. If you’re a freelancer, or your income isn’t always consistent, just work with what you know your relative average is.

Now you can deduct your total necessary expenses from your average monthly income. The amount leftover is how much money you can put towards your debt every month. You can make room in your budget for things like eating out, entertainment, gifts and other non-essential purchases, but remember that this just extends the length of time that you'll be in debt.

Is it time for you to learn more about finances in general? Check out our financial glossary.

Negotiate For a Lower Rate

A lot of people don't realize that you can negotiate with your lender. Whether it’s a credit card company or a bank, give them a ring and ask them to lower your interest rate. If you have a history of timely payments and have been a customer for a long time, they'll be more likely to do this for you.

While whether or not your lender says yes to your request, it never hurts to ask.

Pay More Than the Minimum

In general, the minimum payment on any credit card bill is going to be about 2% of the balance from the previous month. If you only pay the minimum, though, most of the money you're paying is actually going to the interest and not the principal. This means that you aren't actually paying down your debt when you make minimum monthly payments. Unless you begin paying off the principal on your loans, you are guaranteed to stay in debt.

Every month, you can apply as much as you can beyond the minimum payments to your card. Set yourself a realistic goal for how much you'll pay each month and be consistent.

Find a Side Hustle

Sometimes, our monthly expenses just don't leave much money left over from our income. If this is the case and you're motivated to get out of credit card debt, consider finding a side hustle that works for you. You can then put the income you make from your side hustle towards your debt and pay down your principal much faster.

Are you wondering what kind of business you could start? Check out our guide to small businesses that have grown online during COVID.

Use the Avalanche Method

The avalanche method is a method for getting out of credit card debt that has you pay your minimum monthly payments on all of your cards. Then, any extra money you have left over, pay that towards the card with the highest interest rate.

When you take care of the card with the highest interest rate first, it helps you minimize how much interest you're paying in total. Once you fully pay off that first card (congratulations!), you can get to work on the card with the next highest interest rate, until you are finally out of debt completely. Many people find the Avalanche method gets them out of debt faster than any other system.

Use the Snowball Method

If the avalanche method is a bit overwhelming to you, the snowball method is a great way to pay off your debts while experiencing the satisfaction of checking credit cards off your list.

The way this works is that you repay your debts in the order of smallest to largest. With this method, there is no attention paid to the interest rates.

What's great about this method is that it helps you realize individual goals sooner and build momentum. Imagine you have four credit cards, with balances ranging from $75 to $5,000. Tackling the card with the $5,000 balance might be completely overwhelming, but $75 doesn't sound so bad!

By focusing on the smallest card first, it will give you a taste of how good it feels to pay off a card. Looking at the cards one at a time, smallest to largest, can make the process more manageable and give you smaller goals to meet faster.

Get a Balance Transfer Card or a Debt Consolidator Loan

If one or more of your cards has a high interest rate, it can feel like you'll never get on top of your debt. However there are credit cards you can get that have introductory APR rates as low as 0% for balance transfers. This means that you can move your credit card debt over to a new card with 0% APR, and work on paying off the principal without continuing to rack up the interest. 

It's important to know that most of these balance transfer card offers do include a balance transfer fee. Also, the 0% interest tends to expire after one year, before you start getting charged interest again. The point is, make sure to read the fine print before making a decision like this.

Another option is to take out a loan, but you should only do this with a lot of consideration. If you have a high credit score, you might be able to qualify for a debt consolidation loan. This is a personal loan that you can use to pay off your cards and then make payments towards the personal loan.

There are pros and cons to working with a debt consolidator. The pros include the fact that you can:

  • Repay your debt sooner
  • Have simplified finances by only paying one lender back each mother
  • Have potentially lower interest rates
  • Have a fixed repayment schedule
  • Boost your credit

On the flip side, there are some cons to debt consolidation. These include:

  • The fact that it isn't a solution to your financial problems in itself
  • There might be upfront costs to consider
  • You could end up paying a higher interest rate

It is possible to get a debt consolidation loan with a low credit score, but keep in mind that there will likely be higher interest rates attached to this option.

Some people find that the Avalanche or Snowball method actually saves them thousands of dollars in the long run compared to working with a debt consolidator. The best way to figure this out is to map all your payments out on a spreadsheet, and see how long it would take to get out of debt by using one of the above methods.

Credit Card Debt Doesn't Have to Rule Your Life

Debt can be very helpful. Sometimes you need large upfront sums of money to make critical purchases, recover from a disaster, invest in a business or buy a house. But debt should be a temporary state, not a permanent struggle. Getting out of debt can help improve your credit score, increase your financial security, allow you to spend without feeling guilty, reduce the number of bills you pay, and increase your future earnings, to name a few benefits. On top of all that, though, perhaps the most meaningful reasons is because you won't feel like it rules your life anymore.

Are you looking for more useful financial information? Don't forget to check out the rest of our blog!

Originally posted: 10/31/2020

Updated on: 8/26/2021

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