Trying to pay off credit card debt is daunting if you carry significant balances, but it is possible. Paying off this debt entirely is challenging and will take work and time.
Taking a glance at credit card statistics, you’ll realize you’re far from being alone:
- The average APR for a new credit card offer is 23.55%, the highest since 2019.
- 33% of Americans believe paying off their credit card debt will take more than two years.
- 55% of people carry a card balance monthly, with one in five owing more than $20,000.
- The average US credit card debt is $6,569 for those with unpaid balances.
- 15% of Americans have been in credit card debt for 15 years.
- 49% of Americans depend on credit cards for essential living expenses.
- 44% of Americans will use their credit cards for $2,000 in emergency expenses.
Since the pandemic, strong consumer spending has resulted in surging debt levels, especially on credit cards, and if left unpaid, become quite toxic to your finances. It is more important than ever to learn to pay off credit card debt.
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Carrying large credit card balances provide impediments to having peace of mind and will prevent you from:
- reaching your financial goals
- boosting your emergency fund
- sticking to a reasonable budget
- improving your credit report
This post provides options for paying off your credit card balances, making room in your budget with extra savings, and improving your financial health.
Start paying for your purchases with cash, checks, or debit cards. Only use your credit cards once you have virtually no balance. Otherwise, you will make no progress and only boost your balance.
Staying on top of your budget is essential to ensure you save more than you’re spending. Review your budget monthly and track your spending, especially when you need to save money and carry high credit card balances.
Start by finding quick places to cut discretionary spending on items that you don’t need immediately. Reduce monthly subscriptions, eat home more, sell unwanted things, and make extra income, to build up savings to pay down debt and become more financially secure.
Paying the required monthly minimum amount is usually set at a low percentage, or 1% to 5% of your balance, and doesn’t hurt or improve your credit score. However, by paying your entire balance, you avoid potentially massive finance costs by paying the entire balance.
Paying just the minimum benefits the card issuers who charge your card with exorbitant interest rates (i.e., APR) that result in income for them and growing balances that can outpace your ability to pay these bills. If you have an unpaid balance of $2,500 at age 22 and pay only the minimum, you’ll likely carry that balance as a “permanent debt” for years. By age 37, if you have never paid those charges at an 18% APR for fifteen years, the finance charges will amount to $6,750!
As part of the Credit Card Act of 2009, the issuers provide Minimum Payment Warnings on your credit card, giving holders the total time it will take to pay off the balance, and the interest amount cardholders will pay. Heed that warning by paying as much of the balance as possible if you can’t pay the entire amount.
As you achieve extra savings from these options, like reduced spending, mortgage refinancing, debt consolidation, windfalls, and earning extra income, drive down your card balances. You should also refresh your emergency fund, especially if you use some of these savings to pay off debt.
The snowball method prioritizes credit card debts from the smallest balance to the most significant, irrespective of the loan’s interest rate. This behavioral method aims to get small but quick wins to further your motivation by paying off small amounts first.
This motivational approach works for many who benefit from checking off their card debt list. Say you have five credit card balances in the following amounts, $2,500, $4,150, $3,200, and $2,100. The snowball method would lead to paying off the $2,100 first. The problem for many is overwhelming credit card debt grows faster from high-interest costs.
The Avalanche method prioritizes the highest interest rate first and lists all your card debt in that order rather than the smallest amount first. For example, if you have five credit cards with the following APRs of 23.45%, 19.85%, 18.66%, 20.73%, and 14.59%, you would focus on the card with the highest interest rate of 23.45% because it’s the most costly, using the avalanche method.
Under debt consolidation, consumers would combine all their credit card debt with varying due dates and interest rates for a single large loan or one line of credit to reduce their monthly payments. Debt consolidation loans allow you to combine higher-interest credit card balances into a lower-interest loan. This option allows you to save on interest, pay less monthly, and pay off your debt in as few monthly payments as possible.
The available debt consolidation options (discussed below) you can look into:
- Mortgage Refinance
- Home Equity Line of Credit (HELOC)
- Zero or Low Balance Transfers
- Personal Loan
Refinancing your mortgage is advantageous when interest rates decline, as your new mortgage replaces your existing mortgage with a lower monthly payment on your home. You can apply these savings to pay off your credit card balances.
A home equity line of credit, or a HELOC, is a line of credit if you have available equity. You use your home as collateral to secure a loan at lower interest rates to pay off higher-interest credit card debt. Facilitating this loan may come with application and closing fees. Tapping into your home equity is not necessarily the best way to pay off credit card debt, as you may endanger your most significant asset.
A zero-balance transfer credit card gives you a fresh start to pay off credit card debt over an extended period. If you have a lot of high-interest credit card debt and at least a FICO credit score of 670, consider a 0% balance transfer card with a typical period of 12 to 21 months to pay off your card balance.
The higher your credit score, the longer you’ll have the zero interest rate. Reduce your credit card balances to zero, so you never have to pay the issuer any interest owed in the future. Be aware that there may be fees of 3% to 5% of the balance you’re transferring.
Unfortunately, a zero-balance transfer option will only work if you have a good credit score or a high credit utilization ratio of over 30%. However, you may be able to get a lower interest than your credit cards.
A personal loan is a popular way to consolidate your higher-cost credit card debt into a personal loan at lower interest rates based on your income, credit score, and history. The loan term typically runs 12 to 60 months at a fixed or variable rate and has upfront fees.
A financial windfall, such as a tax refund, lottery win, bonus, or inheritance, is a one-time unexpected financial gain. Taking on a second job or working longer hours can be effective in helping you get over the mountain of debt you want to pay off.
You can borrow from a family member as a quick and straightforward way to pay off your credit card debt. Although it may be easy to turn to someone you know, consider making it a loan with that person with specific terms in writing, especially if it is for a significant amount.
From the IRS perspective, they may see it as a gift eligible for a gift tax. When you borrow from a loved one, there may also be some family drama you may want to avoid.
Reach out to your creditors to try to work out a new payment plan with each of your creditors. They want to see you resolve your financial problems to avoid bankruptcy. Ask if they have a repayment or hardship plan. Let them know if you are working on a debt management plan, which can take time.
When overwhelmed with debt, especially high credit card balances, you should turn to a debt settlement company for debt relief. A debt settlement is a third party that will help you settle your debt for less than what you currently owe, with the promise that you’ll pay the amount agreed for in full. They charge high fees, amounting to 1% to 25% of your debt, so consider this option carefully.
There are several risks when employing a debt settlement company instead of bringing down your debt yourself. Credit card issuers may accept debt settlements, for example, accepting 50% of the balance as a settlement, but you must have the cash on hand to pay that amount, and you may be liable for income taxes on the 50% savings. Debt settlements affect your credit score for seven years and will impair your ability to borrow.
A nonprofit credit counseling agency (CCA) can be a desirable way to create a debt management plan. Their counselors can arrange with unsecured creditors to collect payments from overly indebted consumers to repay debts. They may be able to get creditor concessions like reduced interest rates.
Besides helping you pay off your debt, they assist you with financial problems, educational materials on credit, and budgeting. They may charge small flat fees regulated by the state, but your initial sessions are usually free.
When debts are so overwhelming that life seems bleak, a situation may arise due to unemployment, illness, divorce, or the death of a loved one. Consider bankruptcy through Chapter 13 and Chapter 7. Declaring bankruptcy is a guaranteed right that permits people (and businesses) to ask the court to find them officially unable to meet debts like credit card debt.
However, you may not be able to discharge all debts. Such debts include education loans within the past seven years, fines, alimony, child support, income taxes for the most recent three years, and obligations associated with the injury caused while driving under the influence. Bankruptcy is not a quick fix and should be used only as a last resort, as it remains on one’s credit record for ten years and impacts your ability to rent housing, get loans, or get a job.
There are many options to explore in paying off your credit card debt, though some are difficult if you let your balances get out of hand. It’s best to proactively begin the process by shedding some debt, targeting some easy ways as soon as possible. Once you eliminate your credit card balances, plan to pay your entire balance each month or cut out non-essential spending.
This article by Linda Meltzer originally appeared on Savoteur, and was republished with permission.
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