Credit card debt in the United States is so common, the question isn’t really if you’re in credit card debt—but how much you have. U.S. credit card debt hit $930 billion in the fourth quarter of 2019, the highest it’s ever been, according to the Federal Reserve. So if you’re stuck with high credit card debt, you’re not the only one. Paying down your debt isn’t easy and requires a strategy and self-discipline.
Wonder where that money goes on your card? Freedom Debt relief surveyed over 2000 Americans in 2019 to find out more about their debt. Here is what increases our credit card debt each month.
In order to make a plan to put your credit card debt behind you while continuing to spend on the things you need, you have to understand your options. You also need to consider your current debt, how soon you want to be out of debt, how much you can afford to pay, and other factors.
The following is an explanation of how credit card debt works and five of the most common ideas on how to get out of credit card debt.
Understanding credit card debt
The average (mean) amount of U.S. household credit card debt was $2,700.00 in 2019, with 45% of families reporting an unpaid balance after paying their last bill, according to recently released results of the Federal Reserve Board’s Survey of Consumer Finances. While credit card debt dropped slightly in 2020, it is still very common among U.S. households, and learning how to get out of credit card debt isn’t easy — but don’t let that discourage you.
If you want to get out of credit card debt, you need to understand what credit card debt is—and what it isn’t. So let’s begin with some common terms that can help you better understand how credit cards work:
- Money that a person or organization is willing to lend to you with the expectation that you will repay them in the future.
- People who lend you the money, typically a bank or financial institution.
- The length of time you have to repay your debt, the monthly amount you need to pay, your interest rate, and other stipulations.
- The money you owe your creditors after you accept a loan or pay with a credit card.
Credit card debt is unsecured debt
When you take out an auto or home loan, the debt you owe is secured by the asset you bought. If you fail to make your payments each month, your lender might repossess whatever you took the loan out for. That’s why a home loan, auto loan, or any other type of loan attached to an asset is referred to as either a secured debt or collateralized debt.
Credit card debt isn’t attached to any asset or collateral, which makes it unsecured, or uncollateralized debt.
Interest rates are more complicated than you might think
Since credit cards are unsecured debt that you can use however you want, there’s more risk involved for the creditor. That’s why interest rates on credit cards are typically higher than other types of credit.
If you have credit card debt, your interest rate is charged on the unpaid part of your balance, typically on a monthly basis. The two types of rates your creditor could offer are:
- Fixed interest rates. These are set when you first take out credit card, loan, mortgage, or any other kind of debt. The rate never goes up on fixed interest rate debt unless you are more than 60 days late on a payment, or if you signed up for a credit offer with a promotional period that has expired.
- Variable interest rates. While variable rate debt could start lower than fixed rate debt, the rate could increase over time. As the prime rate (the lowest rate at which your lender will let you borrow) fluctuates over time, your margin interest (the rate based on your creditworthiness) will change, too.
Making minimum payments could be the worst way to get out of debt
If you make only minimum payments, it could take you years to pay off your credit card debt and cost you a ton in interest. Say you have three credit cards and owe a total of $15,000 with an average fixed interest rate of 16.99% APR. If your minimum payments are 3% of the total amount ($450), it would take you over 21 years to pay it off. During that time you will have paid over $13,000 in interest—spending a total of $28,140.41 on the $15,000 you borrowed.
Do the math on your credit card debt and you’ll soon realize that making minimum payments is not a good way to get out of debt—especially when you consider the fact that you will likely keep using your credit cards, which will add more to your debt and make it even harder to get caught up on your payments.
If you want to get out of credit card debt, consider the following five approaches.
1. How to pay off credit card debt by paying more than the minimum
If you’re currently making minimum payments on your debt but could afford to pay more each month, you could be debt-free faster by simply putting your extra money towards your credit card bills. There are two ways to use your extra cash to get out of debt sooner:
The avalanche method
To get out of credit card debt using the avalanche method, you essentially put your extra cash toward the card with the highest interest rate first. Once it’s paid off, you pay off the card with the next highest rate—and on and on until all of your credit card debt has been dealt with.
The snowball method
With the snowball method, you find the card with the lowest balance first and pay it off. You continue down the line, paying off each card with the lowest balance until all of your credit card debt is gone. This solution is ideal if you have a lot of cards and want an organized way to pay each one off faster.
2. How to pay off credit card debt through debt consolidation
Just like the name sounds, debt consolidation is a way to roll all of your debts into a single account and pay it off in less time and at a lower interest rate. There are two main ways to do this:
Both online lenders and banks offer personal loans that you could use for debt consolidation. After paying off your outstanding debt using this loan, you make monthly payments to your loan provider until your debt is paid. However, a consolidation loan could be hard to qualify for if you don’t have a good credit score, and your monthly payments may be higher than you’re paying right now.
Typically, debt consolidation loans are a good option if you can get a low interest rate and terms that make your monthly payments affordable.
Balance transfer credit cards
With a balance transfer credit card, you could consolidate all of your credit card debt into a single card with a low promotion rate—often as low as 0%. While this might sound attractive, there’s usually a balance transfer fee and the promotional rate only lasts an average of 16 months. After that, the card functions as any other credit card, the rate goes back up, and you’re on the hook for all the debt you didn’t pay off.
If you can afford to pay off all of your credit card debt in a very short amount of time, balance transfer cards could be the right solution for you. But since most people wouldn’t have to struggle with credit card debt if they could afford to pay it off in that sort a time, balance transfer cards could end up being a short-term solution for a long-term problem.
3. Use credit counseling to get out of credit card debt
If you are paying high interest rates on debt you could otherwise afford, a credit counseling agency could help. These non-profit organizations work with consumers who need help with debt management, budgeting, and financial education. They also offer Debt Management Plans (DMP) to eligible clients who owe 15 to 49% of their annual income in debt but who have enough to pay it off at a reduced interest rate.
Here’s how to get out of credit card debt through a credit counseling agency:
- If you qualify for a DMP, the agency will negotiate lower interest rates with your creditors and set up a repayment plan for you to follow.
- After you pay money to the credit counseling agency each month, they pay your creditors on your behalf.
- This process continues until all of the debt is paid—typically lasting about 60 months.
The interest rate reduction could be anywhere from 8 to 25%, depending on the credit counseling agency, creditors, and other factors. This solution could be right for you if your biggest struggle in paying off your credit card debt is the high interest rates.
4. How to pay off credit card debt by negotiating with creditors on your own
Believe it or not, your debt can be negotiable. If you can show that you’ve been through a financial hardship that makes you unable to pay your credit card debt, your creditors may work with you to reduce your interest rate, change the amount you owe each month, or even forgive part of your debt. First, ask about your credit card issuer’s hardship program (or “credit card forbearance”), which may include skipping a few payments, or only paying the principle on your debt until you’re in better shape.
You also may be able to pay off credit card debt by negotiating. Negotiating with your creditors could be a challenging and time-consuming process, but you could be out of debt much faster than with other methods if you’re successful.
Here’s how to get out of credit card debt through direct negotiation:
- Find the correct creditors’ contact information. If you’re behind on payments, your creditor may have sold or transferred your debt to a debt collector. You’ll need to call or email the entity that currently holds your debt.
- Create a repayment proposal. Write out a plan that you can actually afford, including the new debt amount, interest, and monthly payment.
- Discuss your plan with your creditor. If your creditor accepts your debt reduction proposal, make sure they sign a document agreeing to the new terms.
- Pay your debt according to the agreement. You can pay a lump sum or over time — but if you miss a payment, your agreement could be null and void.
Here is some more information on how to negotiate credit card debt with your creditors.
5. How to pay off credit card debt with help from a professional debt settlement company
Negotiating with creditors on your own can be a long and painful process, but there are companies that can do it for you. If you’re struggling with a significant amount of credit card or other unsecured debt and don’t think you’ll be able to repay them, a debt settlement (also called debt relief) company can negotiate with your creditors and settle your debt for less.
In addition to having the professional expertise necessary to get the best settlement possible, debt settlement companies often leverage existing relationships with creditors and get favorable deals when representing multiple clients.
Here’s how to pay off credit card debt with a debt settlement company:
- As part of the negotiation process, you’ll stop making payments to your creditors and instead pay into a special bank account that you control.
- Your debt settlement company will negotiate with your creditors on your behalf, with the goal of lowering your overall debt and considering it resolved once the new amount is paid.
- When you have enough money in your special account, you’ll use that to pay your debts under the new terms.
Keep in mind, however, that your credit score likely will take a temporary hit and you may be threatened with legal action. This is a great option for those who are unable to keep up with payments and have a large debt load.
Top three questions people ask about how to pay off credit card debt
There are many different ways to pay off credit card debt, some better than others. To help you further understand your options, here are three of the most frequently asked questions about how to pay off credit card debt:
Should I continue to use my credit cards when paying off credit card debt?
Ideally, you should put your credit cards away or perhaps even cut them up if you’re struggling with credit card debt. However, the reality is that an increasing number of our regular purchases are conducted online, including subscription services (which, if you’re in debt, you may want to cut down on). One solution is to use PayPal or other online payment services that link to your bank account, but you also may want to consider using prepaid cards that don’t allow you to pay on credit.
Is it a good idea to withdraw 401(k) or other retirement funds to pay off credit card debt?
It’s almost never a good idea to take an early withdrawal from your retirement account, not just because you’re robbing from your future self, but also because of the steep penalties you may incur. If you take an early withdrawal of 401(k) funds before reaching a certain age (typically 59½), you’ll have to pay a 10% tax penalty on top of the regular taxes you’ll be charged for those funds.
I don’t know how to pay off credit card debt at this point, so I’m considering bankruptcy. Is that my last resort?
While bankruptcy is considered a last resort option for those experiencing severe financial hardship, it’s not the only one. If you qualify for Chapter 7 bankruptcy, most of your liquid assets will be sold off to pay your creditors. However, if you don’t pass the “means test” for Chapter 7, you may consider filing for Chapter 13 bankruptcy protection, also called the “wage earner’s” bankruptcy option.
Those who qualify for Chapter 13 bankruptcy are often good candidates for debt settlement, the process by which you negotiate lower debt payoffs with your creditors. If you’re able to work out a debt settlement plan, it could produce better results than bankruptcy and often help you learn to stay out of debt once you’ve recovered. There are pros and cons to either method, but it pays to compare the two before taking the plunge into bankruptcy
Which credit card debt solution is right for you?
Choosing the right solution can be tough, but knowing how to pay off credit card debt is the first step. There’s no one-size-fits-all solution, so you’ll want to consider factors such as how much debt you have, your credit score, your income, and your long-term financial goals. No matter what method you use to resolve your credit card debt, once you’re out—do your best to stay out.
Get started on your plan to overcome credit card debt
Learning how to get out of credit card debt, understanding that there are several options, is a great first start. But if you’re worried about making your payments, it might be time to take further action. Freedom Debt Relief is here to help you understand your options, including our debt relief program. Our Certified Debt Consultants can help you find a solution that will put you on the path to a better financial future. Find out if you qualify for the Freedom solution to credit card debt right now.