When you’re overwhelmed by credit card debt, or you’ve grown accustomed to carrying a balance, finding a way out may seem impossible. But you can create many paths to a debt-free future.
Sometimes getting started can be the hardest part. Jen Lee, a debt and credit strategy attorney and the owner of Jen Lee Law in Northern California, says she has clients make a list of their creditors, account balances, monthly payments and interest rates. “One of the biggest issues I see is that clients are not even sure what they owe and to whom,” Lee says.
Once you have a big-picture understanding of your debts, you can begin to prepare a plan that fits your financial situation and personality. Your plan may include:
- Using two common payoff tactics
- Embracing budgeting
- Changing your lifestyle
- Transferring high-interest debts to lower-interest credit cards or personal loans
Paying off credit card debt also involves introspection. Take time to reflect on why you’re in debt and what you’re willing to do to get out. Acknowledge the personal component as you determine which options could work best for you.
Avalanche vs. Snowball to Pay Off Debt
If you have debt across multiple credit cards, consider the snowball and avalanche payoff methods. Christopher Kimball, certified financial planner and owner of CK Financial Services in Lakewood, Washington, also refers to them as the emotional and logical methods, respectively.
These are the steps for each method:
Snowball. Make minimum payments on your larger debits, and pay off your smallest balance first. Once you pay off that account, tackle the second-smallest debt, and so on.
Avalanche. Pay off the credit card with the highest interest rate first. Then, address the debt with the next-highest interest rate, until you’ve paid off each card.
The avalanche method can save you money on interest payments, which is why Kimball calls it the logical method. But that doesn’t mean it’s the right option for everyone.
“The emotional way gives you little victories as you pay off the debts one by one,” Kimball says. These victories can help you stick to your plan. Otherwise, months could pass before you get to celebrate paying off an account, and you might get discouraged.
No matter which method you choose, Kimball says, after you pay off your first account, “Take all the payments you were making to the first card and add that to the second card. Keep it going, and your payments ramp up.”
Creating a budget or improving it can be one of the best ways to reduce credit card debt. Budgeting offers several benefits: It can help you pinpoint ways to save money, track your payoff progress and estimate when you’ll be debt-free.
Many free and low-cost budgeting apps, such as Mint and YNAB, make managing your finances easier. You can even link your debit and credit cards to them for real-time views of your spending.
Kimball suggests making a few budget categories and tracking your spending within each one. “Say you want to spend $75 a month for dining out,” he says. “When you get paid, add a portion of your income to the dining column. When you spend money, take it out.”
If you run out of money in the column, you will have to skip dining out until you get another paycheck. But if you budget monthly and have a surplus, you can roll it over or apply it toward your credit card debt.
A budget also helps you plan for expenses. If you know you will pay for your car registration or take a vacation every year, you can create a category for these expenses and put aside a little money each month. You can also budget for longer-term expenses or goals.
Of course, sticking to a budget can be difficult, especially if you feel like you’re placing limits on yourself. But consider the long-term benefits: Once you pay off your credit card debt, you could be saving hundreds of dollars in interest each month. That’s money that you can save or use however you please.
Lifestyle Changes That Can Cut Credit Card Debt
If you’re serious about paying off your credit card debt, making some lifestyle changes will help you do it faster.
Overcoming overspending is the primary goal most people with credit card debt may want to focus on.
Credit card debt due to a one-time medical emergency and credit card debt from repeated shopping sprees aren’t the same. And sometimes a spending plan on paper or in an app isn’t enough. If you have a compulsive spending habit, try to take that option off the table.
Cut up your credit cards, and remove your saved payment information from websites and apps, or even close your accounts and pay them off over time. Switch to using your debit card, and link it to a budgeting app to continue tracking your spending.
A major part of overcoming overspending is sticking to the budget you’ve created. But further lifestyle changes may be needed to reduce your debt.
Some simple changes include switching from a luxury car to an economy car, canceling subscription services and packing your lunch instead of buying it every workday. You could clean out your home and sell unwanted or rarely used items.
If you have tens of thousands of dollars in credit card debt, you could consider more drastic measures to free up cash. You could sell your home and move to one with a cheaper mortgage payment.
Also, look for chances to increase your income. You may be able to take on extra shifts and earn overtime, find a new part-time job, or try one of the many flexible gig economyjobs.
If you land a windfall, such as a bonus from work or a big tax return, use it to pay down your credit card debt.
More moves to cut your credit card debt include:
- Taking on a roommate
- Scaling back on entertainment, such as concerts, meals out and vacations
- Cutting back on optional expenses, such as hobbies
- Negotiating lower bills, such as utilities
For those who have a tight budget and live frugally, keeping your credit cards open as you pay them down could help your credit score. Also, a cash back credit card might make sense if you can use the rewards to pay off debt. It’s a tricky line, though. You don’t want to use your rewards card to justify purchases.
Transfer High-Interest Debts to Lower-Interest Options
A balance transfer card, a personal loan or a secured loan could offer a lower interest rate than your credit cards. With a balance transfer card, the card issuer will handle the debt transfer process. If you are approved for a personal or secured loan, you will receive cash to pay off your credit cards.
Here’s more on these choices:
Balance transfer cards. These credit cards offer a 0% interest rate on transferred balances, and sometimes purchases, often for a promotional period of about six to 18 months. Although many cards have a 3% to 5% balance transfer fee, you can still save money by avoiding interest charges while you pay down your debt. But you may need a good credit score to qualify for a card, and you are not guaranteed to get a high credit limit.
Personal loans. If you don’t qualify for a balance transfer card, you could look to banks, credit unions or online lenders for a personal loan. Using a personal loan to pay off credit card debt frees up credit on those cards. This may lead to a credit score increase if you leave the cards open. But if you can’t control your spending, you may want to close the cards to avoid temptation.
As with balance transfer credit cards, your eligibility and loan amount can depend on your credit score and debt-to-income ratio. That is the percentage of your gross monthly income that goes toward debt payments.
If you have excellent credit, you can get an interest rate of about 6% to 10% on a personal loan. This is much lower than most credit cards. Some lenders also charge an origination fee of 1% to 6% of the loan amount. Compare your options to see if a personal loan makes sense.
Secured loans. Compared with an unsecured loan, qualifying for a secured loan may be easier because you provide an asset as collateral. The lender can repossess the collateral, such as your car or home, if you don’t repay the loan as agreed.
Lee says, “If someone is very disciplined, has run the numbers to be able to afford the new payments, and does not take on any new debt, using collateral for consolidation can work.”
She has also seen some people use secured loans to pay off their credit cards and then wind up overspending on credit cards again.
Think carefully, and perhaps consult a financial planner before using a secured loan to repay credit card debt. You can use the National Association of Personal Financial Advisors website to find a financial advisor.
Balance transfer cards, personal loans and secured loans all can help you save money if you qualify for a lower interest rate. But there is no one-size-fits-all solution, and you don’t have to stick to only one tool.
For example, if you don’t think you’ll qualify for a balance transfer credit card because of your credit score, you may still be able to take out a personal loan. If you can move half your credit card debt to a personal loan, you’ll lower your credit utilization rate – the percentage of your credit limit you’re using – which could quickly increase your credit score. This could, in turn, help you qualify for a better offer on a balance transfer card.
If you’d like help understanding your options for eliminating credit card debt, maintaining accountability or dealing with creditors, look for a local nonprofit credit counselor. Choose an agency that belongs to the National Foundation for Credit Counseling.
You may be able to schedule a free consultation, which might be all you need. The agency also can help you enroll in a debt management plan for a small fee.