How to Pay Off Credit Card Debt

Will Your Credit Limit Be Cut?
Aly J. YaleJanuary 21, 2022
Key Takeaways:
  • Credit card debt is an expensive drag on your finances.
  • Debt acceleration, debt management, debt consolidation and debt settlement are all techniques for getting rid of credit card debt.
  • Deal with overspending problems before starting a debt reduction strategy.

There are several proven strategies for paying down credit card debt. From least to most drastic, they are:

  • Accelerating your repayment with the “snowball” or “waterfall” methods

  • Negotiating better terms with your credit card issuers

  • Consolidating debt with a debt consolidation loan, balance transfer, or debt management plan (DMP)

  • Writing off some or all of your credit card balances with debt settlement or bankruptcy

The right solution for you depends on your needs and resources. 

Get Out of Credit Card Debt Faster

Credit cards can make spending easy, but repaying those debts can be quite challenging — and expensive. Additionally, making only minimum payments can exacerbate the challenge, increasing your costs and extending your repayment time.

Fortunately, there are several ways to tackle these debts. But first, you’ll need to get a handle on your spending. This means setting a strict budget for your household, halting additional credit card purchases, and consistently setting aside funds to put toward your debts. 

You will also need a clear picture of those debts. List your cards, their current balances, their interest rates, and your minimum monthly payments before going any further.

Snowball and Avalanche for Credit Card Debt

There are two common approaches to paying down credit card debt — or any debt for that matter. These are called the snowball method and the avalanche method (it’s sometimes referred to as the “waterfall” method).

Both are meant to accelerate payments and help you pay off your debts faster, but they use slightly different strategies. Here’s how they break down:

Snowball debt payoff method

The snowball method is meant to give you a fast feeling of accomplishment and keep you motivated. Suppose that after budgeting, you find an extra $100 that you can put toward debt repayment. You tackle the account with the smallest balance first, adding the extra $100 to that while only making the minimum payments on your other balances. 

Then, once that debt is paid off, you move on to the next-smallest debt – adding the extra $100 plus the payment on the first account. And so on until one by one, you’ve cleared all debts.

Avalanche debt payoff method

The avalanche approach may not give you the quick feeling of progress like the snowball strategy, but it saves you the most interest. Instead of focusing on your smallest-balance debt first, using this method, you direct the extra $100 toward the account with the highest interest rate.

Once your highest-rate debt is paid off, you move on to the next-highest-interest debt next. This pattern continues until you’ve paid off all indebtedness down the ladder.

 According to a study from James Madison University, about half of consumers can pay off their debts using either method in about the same amount of time. A third would see a difference of under three months, while 1% to 2% of consumers would experience a 12-month payoff difference or more.

How to Negotiate With Credit Card Companies

Negotiating is another intelligent way to make paying down your debts more manageable. It sounds surprising, but many credit card companies are willing to negotiate interest rates — particularly if you have a good history of on-time payments.

You can lower your minimum monthly payment by reducing your interest rate and putting more of your discretionary income toward that principal balance (effectively paying off your debt sooner). 

If you’re having significant financial struggles, your credit card companies may even be willing to reduce your balance or payments outright, but this depends on your unique situation and your credit card issuer’s policies. 

In some cases, your issuer may also be able to:

  • Change your payment date to better align with your payday

  • Offer you forbearance, which puts your payments on pause due to financial hardship

  • Set up a long-term repayment plan that comes with little or no interest

  • Offer you a lump-sum payoff amount to settle the debt immediately

To start negotiations, you can contact a professional credit counselor or debt settlement company or get in touch with your credit card company directly. If you go the DIY route, make sure to get whatever terms you agree upon in writing.

What Is a Debt Management Plan?

One approach to tackling credit card debt is a DMP — debt management plan. These are programs offered by credit counselors. Credit counselors contact your credit card companies to negotiate lower payments, reduced interest, and waivers of penalties and late charges. 

DMPs allow you to make a single lump-sum payment per month to the agency. The credit counselor takes a small fee off the top and divides the payment among the creditor as agreed.

As with anything, there are both pros and cons to these plans.

Pros include:

  • It can make repaying your debts simpler. You only have one payment to keep track of, and a professional manages the payments to your creditors.

  • It may qualify you for reduced or waived interest. This can save you significantly in the long run and help you pay off your debts faster.

  • It can help your credit score. Enrolling in a DMP keeps you paying your accounts on time. (According to research from the National Foundation for Credit Counseling and the Ohio State University, the average consumer on a DMP sees a 50-point credit score increase in just 18 months.)

Cons include:

  • Not all creditors participate in DMPs. There’s a chance one or more of your credit card companies may not participate in a DMP or be willing to budge on their terms.

  • You have to close your credit cards. While enrolled in a DMP, you can’t make additional charges to your credit cards. This could be challenging if you find yourself with a significant or sudden expense and have little cash in savings. And closing credit cards can cause your credit score to drop at first.

  • You’ll need to make payments consistently. If you fail to make your DMP payments, you could lose all the perks that come with your plan.

In addition to DMPs, credit counselors also offer budgeting advice, credit repair help, and other services that can get your finances back on track. Look for a non-profit service with a good reputation.

How to Consolidate Credit Card Debt

Debt consolidation means using a new loan to pay off your credit card balances. It can be a personal loan, home equity loan, balance transfer card, or a line of credit. This allows you to make one single payment. Your new loan should offer a lower interest rate, lower payment, or both.

Here’s how to consolidate credit card debt:

  • Balance transfer: Balance transfer cards offer introductory interest rates that are very low or even 0% for six to 24 months before adjusting to a higher rate. The idea is to use the initial period to pay off your balances. You have more money to put toward repayment because you’re paying less or even no interest during that time. You’ll have a balance transfer fee of 1% to 5%, so consider that when weighing the potential savings.

  • Personal loan: Personal loans can be used for any purpose, including paying off credit card debt. On average, personal loan interest rates run about 7% lower than those of comparable credit cards. However, your payment can increase because personal loans are designed to be repaid in a few years, while credit card minimum payments can keep borrowers in debt for decades, 

  • Home equity loan: Home equity loans come with some of the lowest interest rates because your property secures them. And the payments are low because the repayment can take ten years or more. However, you can cut your interest cost by paying extra every month.

  • HELOC: Home equity lines of credit let you pull cash from your home as needed. They often come with variable interest rates that are much lower than credit card interest rates. Maximize your savings by repaying the loan as quickly as you can. 

The most important thing to remember about debt consolidation is that it does not “wipe out” your debt. You still owe the money, and if you don’t change your spending habits, you’ll be worse off after consolidating debt than you were before.

What Is Debt Relief?

If you’d like to steer clear of bankruptcy (maybe you want to avoid publicizing your financial struggles, or you don’t want a court selling everything you own), debt settlement might be your best option. 

Debt settlement occurs when a creditor accepts less than the total amount owed as payment in full. It usually works like this: you stop paying your creditors (this makes them more likely to accept a settlement offer), and you put that money into savings. Once you’ve saved about 50% of the amount you owe, you or your debt settlement company negotiates a settlement with the creditor. You can also borrow money to offer, pull it out of savings, or sell assets to speed up the process. 

According to the Consumer Financial Protection Bureau, most creditors offer settlement amounts of around 50 to 51% of the balance. 

The potential downsides of debt relief are the phone calls you’ll get when you miss payments, the damage to your credit score, and possible lawsuits. And the IRS considers forgiven balances to be taxable income.

How Does Bankruptcy Work?

Your last-ditch option is bankruptcy, which may allow you to discharge unsecured debts like credit card balances.

There are two types of bankruptcy: Chapter 7 and Chapter 13. With Chapter 7 bankruptcy, the court will liquidate your non-exempt assets to repay your debts. This might mean selling your house or car or emptying your bank accounts. Most people don’t qualify to file Chapter 7 and file Chapter 13 instead. 

Chapter 13 lets you keep your assets but requires you to get on a long-term repayment plan. In both cases, you can get your credit card debts discharged.

Make sure you’ve exhausted all other options before filing for bankruptcy. Though it may help you reduce your debts or discharge some entirely, it can have long-term effects on your credit and financial capabilities. A bankruptcy will stay on your credit report for at least seven years (sometimes 10) and could make it hard to buy a home or achieve other financial goals.

The Best Way to Pay Off Credit Card Debt

If you’re wondering how to pay off credit card debt, there are lots of options at your disposal. The right choice depends on your credit score, income, and overall financial situation, so talk to a credit counselor or debt settlement company for guidance.

And remember: No matter which strategy you choose, controlling your spending will be crucial to success. Set a budget, cut up your cards, and commit to more responsible money management from here on out. 

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