One thing that Americans have plenty of is debt. While the collective $1.75 trillion in student loans gets the most attention, did you know that the US owes over $750 billion in credit card debt?
If you break it down, the average credit card holder owes over $4,000, and unfortunately, many people owe much more. Consumers run up a balance for a variety of reasons, and it isn’t always as simple as careless overspending.
Credit card debt is one of the trickiest financial problems to navigate, especially if your financial footing is shaky, but never fear. This article will explain some popular debt management methods that you can start using right away to climb out of the hole.
The Problem with Credit Card Debt
In an ideal world, your actions as a credit cardholder would look like this: Each month, you spend a certain amount with your credit card — this is known as your credit card balance. At the end of the month, you pay off the total amount of your balance with money from your bank account.
If you do this every month, you’re in great shape. You’re earning credit card rewards and boosting your credit score. However, if your monthly payment is less than your total balance, the remainder turns into credit card debt. The more of a habit it becomes, the more that debt piles up. This is where people can get into trouble.
The main reason that credit card debt is a problem is the interest rate. When you don’t make a repayment in full, the remaining balance is subject to interest. This means that you have to pay back even more than you spent, and the higher your outstanding balance, the more you pay in interest.
So, if there is one thing you can do to avoid getting into debt, it’s this: never charge more than you can afford to pay back right away.
Credit Card Debt Impacts Your Credit Score
On top of costing you money, credit card debt also has a negative impact on your credit score. This is significant if you plan on taking out a mortgage or securing another type of loan (e.g., a car loan).
When you carry a credit card balance, it shows up on your credit report. Credit utilization is one of the main factors that affect your credit score, and the higher your outstanding balance, the more your score will drop.
All that said, life happens. If you find yourself in trouble, the first thing to remember is that there is a way out. Credit card debt can feel isolating and hopeless, but there are resources out there to get you back to debt-free. The key is to simply take that first step and stay focused.
5 Steps to Get Out of Credit Card Debt
Now, let’s dive into how you can start getting out of credit car debt today.
Step 1: Stop Using Your Credit Cards
Maybe this step is obvious, but you might be surprised to find out how common it is to keep spending when you’re in debt. If the money coming in isn’t enough to cover your bills, you might not have another option but to continue to use your credit cards.
However, adding to your balance when you’re already in debt is an easy way to make your situation exponentially worse. Not only are you adding to the interest you owe, but you’re setting yourself up for more stress as you prolong your repayment.
And make no mistake: credit card companies are in the business of encouraging you to stay in debt. Interest charges on outstanding balances are how credit card issuers make tons of money, so it’s in their best interest for you to keep spending and to stick to the minimum monthly credit card payment. Trust me, you don’t want to fall into this trap.
Step 2: Ask for Help
If you’re in debt, one of the most helpful things you can do is tell someone about it. Credit card debt is something that’s easy to feel embarrassed about, so people often sweep it under the rug. However, if you share your situation with a friend, family member, or credit counselor, you’ll almost definitely feel better. You might even be surprised to find that others have been in the same situation before.
Plus, you might gain some helpful insight on how to get yourself out of debt. If you choose to enlist a credit counseling agency, you might even get some tips on how to negotiate a debt settlement, though these are usually reserved for extreme cases.
Overall, the biggest benefit to sharing your personal finance situation with someone is that it won’t feel like it’s entirely on your shoulders. If you have a significant amount of debt, it’s going to take some time to get out of it. It’s helpful to have people who can help you through it.
Step 2: Make a Plan (and stick to it)
A good debt repayment plan should be steady, actionable, and realistic. Credit card debt reduction will take a significant amount of time to tackle, so it’s essential to stick to a plan that’ll minimize your interest paid while ensuring that you steadily chip away at your balance.
As you come up with a plan to get yourself out of debt, think about what will help you stick with it.
To get your wheels turning, let’s take a look at a couple of the most common debt payment strategies for you to consider: the Avalanche Method and the Snowball Method.
Debt Avalanche Method
With the Avalanche Method, the idea is to target your highest interest rates first. This is the ideal approach if you’re aiming to limit how much you pay in interest while you pay down your debt — the faster you pay off a balance, the less you get hit by that high rate.
The downside of this method is that if you have a high balance on your highest-interest debt, it might not feel like you’re making a ton of progress. Since your attitude is a crucial aspect of debt management, this can negatively affect your ability to stick with a plan.
Debt Snowball Method
On the other hand, the Snowball Method encourages you to pay off your smallest balance first, no matter what the interest rate is. The idea here is that when you pay your lower balances, you gain momentum, creating a snowball effect. This may give you more confidence to stick with your repayment plan.
While the Avalanche Method is the more pragmatic of the two, the Snowball Method appeals to the mental side of debt reduction.
As you deliberate between the Avalanche or Snowball approaches, consider which one might motivate you more. For me, it was the Snowball method, but every situation is different.
Step 3: Consider a Balance Transfer Credit Card
While opening a new credit card might seem counter-intuitive when you’re already in debt, it can actually make a ton of sense when done correctly. This is because credit card companies are competitive. They like to take business from each other, which is where balance transfers come into play.
Here’s how it works:
Say you have a $5,000 balance on your Chase credit card that you’re having a hard time paying back. You can only afford the minimum payment, which barely outpaces the high-interest rate each month.
Instead of paying off the Chase card at a snail’s pace, you could open a balance transfer card with another credit card company. For example, with the Citi Simplicity card, you get a 0% intro APR for your first 21 months — this means almost two years of no interest while you pay back your debt.
In this case, a balance transfer makes a lot of sense, but there are still things to be aware of. To start, you should always know what your interest rate will be once the introductory period expires. The reason that credit card companies offer lower interest rates in the first place is to get you in the door, so try your best to pay it off before the deal runs out. You’re also likely to pay a balance transfer fee, but these are usually pretty low.
Step 4: Consider a Personal Loan
Unfortunately, if you’re in debt, you might not have excellent credit — which can make it tough to get approved for a new credit card.
If this is the case, you might want to look into getting a debt consolidation loan instead. While a personal loan will still come with an interest rate, you can probably find a lower one than your credit card interest (e.g., 7% instead of 18%).
Plus, even aside from cost, a loan can help you consolidate all of your debts and reduce the entirety to one consistent payment. I’ve already mentioned the mental aspect of getting out of debt, which can have a hugely positive impact.
Another benefit here is that a loan can actually help you build your credit back up fairly quickly. Outstanding loan debt doesn’t hurt your credit as much as credit card debt does, and each on-time payment you make is reported to the major bureaus.
Step 5: Change Your Habits (And Stay Debt-Free)
No matter how you go about it, once you’ve worked your way out of credit card debt, it’s a great feeling — enjoy it!
But also, don’t forget the feeling of being buried in that debt. I talk to tons of people who finally pay off their credit cards, only to find themselves in the same position a year later — don’t let this happen to you.
Have an honest conversation with yourself about your financial situation. What led to your debt in the first place? Were you being irresponsible, or did your emergency fund run out? What would you do differently if you could go back?
From there, set up a budget and stay on top of it. This doesn’t mean that you need to pinch every penny, but it does mean giving deeper consideration to where your money goes each month.
Frequently Asked Questions
What is the best way out of credit card debt?
It’s a little different for everyone, but in general, start with these steps: stop using your credit cards, set a budget, and stick to it. It takes time, but if you’re careful and deliberate, you’ll get there.
How do I pay off a credit card with no money?
In this situation, your best option is a balance transfer. At the very least, you’ll still need to come up with enough for the minimum payment each month, but you’ll buy yourself some time to pay interest while you figure out a plan.
Otherwise, you can attempt to negotiate with your credit card company or file for bankruptcy.
Is there credit card forgiveness?
Rarely. A credit card company might settle for slightly less than what you owe in total, but the chances of total debt forgiveness are pretty low.
What percentage will credit cards settle for?
It totally depends on the lender and your particular situation. If you’re planning to try and get a settlement, always start low, around 30% of your total debt. The worst that can happen is they make a counteroffer.
You Can Get Out of Credit Card Debt!
If you can take away anything from this article, let it be this: There is a light at the end of the tunnel, and you don’t need to be in credit card debt forever. However, it won’t be a walk in the park.
There’s a reason that significant debt is better avoided — it’s a pain (and pretty a costly one) to get out of. But, there are ways that you can approach the situation that can make it easier on your stress level and your wallet. A good plan will save you time and anxiety, and you’ll hopefully learn some valuable lessons along the way.
While there are a ton of factors working against you, from a flawed credit system to borderline-predatory credit card companies, the good news is that you can beat the system. All it takes is a solid budget and some attention to detail, and you can say goodbye to credit card debt for good.