How to Get Out of Credit Card Debt Fast
- There are several strategies to get out of credit card debt fast.
- Tools to get out of credit card debt include debt acceleration, debt consolidation, debt management, debt relief, and bankruptcy.
- The best way to pay off credit card debt depends on your resources and the amount of debt you have.
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Your credit card balances probably have the highest interest rate of all your debt. So to achieve financial security, it’s essential to get out of credit card debt. Then you can put money into savings instead of your credit card companies’ pockets. Of course, some strategies will get you out of credit card debt faster than others, and some tactics have their downsides. Here’s what you need to know to make the right call.
Why It’s Important to Get Out Of Credit Card Debt Fast
Credit cards make purchasing extremely convenient. But it’s easy to take this privilege for granted and charge beyond your means, leaving you unable to pay off your balance each month. Before you know it, you’ve tallied significant credit card debt and are having trouble covering your bills.
While this experience can feel overwhelming, don’t despair. With the right strategy, you can recover your financial footing – probably faster than you think. The first step is to acknowledge the issue.
“The power of compounded interest is immense, especially when your credit card interest rates are high. The longer you wait to tackle this problem, the more money it’s going to cost you in the meantime,” Melanie Hanson, editor-in-chief of EDI Refinance, comments.
Connor Tyson, owner of Progress Solutions LLC, a financial coaching firm in Pleasantville, New York, subscribes to that theory.
“Your biggest wealth-building tool is your income, and if the majority of that is going to others in the form of payments, it will prevent you from building wealth and getting ahead,” he cautions. If you don’t take action, your creditors might, Tyson cautions, “Eventually, the decision to do something may be taken from you via collections, foreclosure, legal action, and liens.”
What Are Strategies to Pay Down Credit Card Debt Fast?
You’ve racked up a lot of purchases using plastic. The bills arrive every month, with the increasingly impossible balances. And you feel like you are getting in over your head. Before things get worse, it’s time to learn how to get out of credit card debt fast and get your financial house back in order.
While there is no single best way to pay off credit card debt, there are different tactics you can pursue, including combined strategies. Here are some of the most effective and popular methods:
Debt acceleration: snowball and avalanche
Debt relief/debt settlement
Each solution has pros and cons, and some are more drastic than others. The right one for you depends on your resources and the amount of debt you have.
Debt Acceleration: Snowball and Avalanche
Many consumers follow two popular debt repayment approaches: the debt snowball and debt avalanche.
With the debt snowball, you prioritize your credit card debt repayment from the smallest to the largest balance owed. While making the minimum payment on the rest of your card balances, pay as much as you can to the account with the lowest balance. Then target the next smallest, and so on.
Say, for example, you have a $500 medical bill ($50 minimum payment), $2,500 credit card bill ($63 minimum payment), $7,000 car loan debt ($135 minimum), and $10,000 student loan debt ($96 minimum).
“Here,” suggests Tyson, “You will make minimum payments on every one of these bills except for the $500 medical bill. You decide to pay that medical bill in full so that debt is completely gone in one month. Now, you can next attack your $2,500 credit card debt, which you can aim to pay off in five months. Next, pay your car loan off using the same method, followed by the student loan debt.”
But many prefer the debt avalanche approach, in which you attempt to repay your debts with the highest interest rates first, as these are the most costly. Although it may take longer to clear that first balance, the debt avalanche method will eventually dig you out of debt faster and save you the most money on interest payments.
“The basic idea is that you choose a single debt to tackle first, the one with the highest interest rate, such as your credit card bill. Pay more than the monthly minimum on this debt until it is wiped out, then roll everything you were paying on that debt into your next debt and so on until they are all paid off,” recommends Hanson.
Debt consolidation involves combining several debts into one monthly bill, creating a streamlined payoff plan.
“With this method, you essentially roll all of your debts into a single consolidated loan with a single monthly payment,” Hanson continues. “The interest rates available on these are almost always lower than those on credit cards, so this can be a good way to get a lower monthly payment and interest rate. And especially if you have several different credit cards or other forms of debt, this can be an effective way to get your debt under control.”
However, “this isn’t the best solution for everyone. You might find that you are making large payments to that single lender every month for a long period,” cautions Michael Throckmorton, CEO and finance expert for Merchant Cash Advance.
The most common methods for debt consolidation include home equity loans, personal loans, and balance transfer cards.
Balance transfer card
Here’s a popular strategy for consumers with lower balances and good-to-excellent credit: Apply for and use a balance transfer card that offers a zero-interest introductory period (which ranges from six to 24 months). When you don’t owe interest, your entire payment reduces your balance.
However, this approach may backfire if you cannot pay off your outstanding credit card debt before your zero-interest period expires. The new interest rate may be higher than the cards you’re trying to pay off. In addition, you’ll pay a balance transfer fee between 1% and 5%. Consider that when you compare balance transfer offers.
Personal loans are unsecured installment accounts with terms ranging from one year to more than ten years. According to the Federal Reserve, their interest rates average about 7% lower than comparable credit cards.
Your payment may increase even if your interest rate drops because personal loan payments tend to be higher than minimum credit card payments. To save the most interest, choose the shortest repayment you can afford.
Home equity loan
If you’re a homeowner with some equity, you may be able to clear your credit card balances with a home equity loan or line of credit. These loans usually have the lowest interest rates available, and your payment will probably drop as well. However, your loan term can be as long as 30 years. If you stretch out your credit card balances over 30 years, you’ll pay more interest even if the interest rate is low. Try to pay off any home equity financing as fast as possible to save the most money.
You’ll also have closing costs, so factor them in when deciding on a loan. And remember that if you fail to keep up the payments, you could lose your home to foreclosure.
Nonprofit credit counseling agencies can help you solve overspending problems. Credit counselors are typically certified and experienced in consumer credit, financial and debt counseling, and budgeting. Counselors consult with you, review your finances, and help develop a personalized strategy to get you out of debt.
Debt management plan (DMP)
One service credit counseling agencies offer is the debt management plan (DMP). Debt management plans (DMPs) are similar to debt consolidation loans because you replace many accounts with one monthly payment. Credit card companies work with credit counselors and often agree to lower your interest rate or waive penalties. DMPs can be an excellent solution if you have trouble repaying your credit card bills monthly.
When you start a DMP, you usually have to close your credit cards, so you can’t add to your balances when you’re supposed to be paying them off. Make sure that you can afford the monthly payments and commit to sticking with your DMP.
Debt Relief/Debt Settlement
One drawback to the solutions listed above is that none of them reduce the amounts you owe. You might restructure your debt, but you still owe the same amount of money. Many consumers who undertake debt consolidation end up even worse off because they run their balances back up.
The only solutions that actually reduce what you owe are debt settlement and bankruptcy. Debt settlement is a process in which a creditor agrees to accept less than the entire amount owed as full payment. Typically, you stop making payments to your creditors and pay into a debt settlement savings account instead. When you have saved enough to make a respectable offer (typically about half of what you owe), you open negotiations with your creditors.
The advantages of debt settlement include:
You may be able to get rid of enrolled debt faster and for less money.
Debt settlement, unlike bankruptcy, does not create a public record. You have more privacy.
You only have to settle your debt if you agree to the terms. With bankruptcy, a judge or trustee tells you how much you have to pay and what assets you must turn over.
You don’t pay any fees until your debt is settled. With bankruptcy, you pay filing fees and usually legal fees.
The drawbacks of debt settlement include:
Your creditors are not required to settle with you. They might keep calling you, turn you over to a collection agency, or even take you to court.
If you hire a debt settlement company, expect to pay fees (15% to 25% of the enrolled amounts).
If you’re insolvent, says the IRS, amounts forgiven in debt settlement are not generally taxable. “Insolvent” means your liabilities (amounts you owe) are greater than the value of your assets. Otherwise, your forgiven debt is considered taxable income.
Bankruptcy (Chapter 7 and Chapter 13)
If you’ve run out of options, it may be time to consider filing for bankruptcy – either a Chapter 7 or Chapter 13. With bankruptcy, you arrive in court and explain to a judge why you can’t pay your debts. The judge and a court trustee will thoroughly review your finances and decide if any of your obligations can be canceled.
With a Chapter 7 bankruptcy, most debt can be discharged and you can get a “clean slate.” However, you also lose your assets (except for exempt assets like tools required for your work). Chapter 7 is only available to filers with low income. Most people have to file Chapter 13.
With a Chapter 13 bankruptcy, the court reviews your finances and determines how much you can afford to pay. You must pay that amount into your plan every month, and the bankruptcy trustee distributes it to your creditors. After three to five years (it’s usually five years), any remaining balances are forgiven, tax-free. To qualify for Chapter 13, your total unsecured debt cannot exceed $419,275. Every year, you’ll submit tax returns to the court, and the trustee may increase or decrease your payment.
“Bankruptcy can be an effective way to reduce or even forgive your debt load. But it’s going to have major negative consequences for your credit score going forward. You may also end up with garnished wages, forcing you into a faster repayment than you can comfortably afford,” says Hanson.
Tyson advises consulting closely with a bankruptcy lawyer before choosing either Chapter 7 or 13.
There are many ways to pay off credit card debt faster, but some have serious consequences. Every option is probably not available to you, and you should probably choose the least drastic method for debt reduction. You can always switch directions if your situation changes.