How to Pay Off Credit Card Debt
If you feel like you're drowning in credit card debt, you are not alone. Americans have roughly $1.08 trillion in revolving debt, which includes credit card debt, the Federal Reserve reported in October 2019.
Almost everyone agrees that the less debt you carry, the better. If you want to pay off credit card debt, you will need to learn some ways to do it faster and which approach is best for you.
Here are the best ways to pay off credit card debt:
-- Focus on why you want to pay off your debt.
-- Stop using credit cards.
-- Choose the payoff method that best suits you.
-- Consider using a loan or credit card to save on interest charges.
-- Take additional steps if your debt is serious.
[Read: Best Balance Transfer Credit Cards.]
Focus on Your 'Why'
First, address the reasons that you want to knock out your credit card debt.
Rather than fixate on staying in debt, think about the positives of getting rid of it, says Chase Peckham, community outreach director for the San Diego Financial Literacy Center.
"Be positive about the steps you're going to take and how they're going to improve your life," he says. "It could be that if I pay off my debt, my kids are going to be able to play on that club soccer team they've been really wanting to play for, or I might be able to start saving for that vacation that we haven't taken in 10 years."
Of course, paying off credit card debt won't happen overnight. Remind yourself why you want to pay off your debt to stay motivated when you feel discouraged or tired of trying.
Try to figure out why you got into debt in the first place, Peckham says. Without knowing the root causes of your debt problem, you may be more likely to fall back into your old ways.
Stop the Bleeding
That means stop using your credit cards until your bills are paid off. If you keep using your cards, you may feel like you're taking two steps forward and one step back.
Giving up credit cards can be tough for some people, especially if you like earning rewards on your everyday purchases. But if you're paying interest on your card balances, the costs usually outweigh the benefits.
How Can You Pay Off Credit Card Debt?
When you want to wipe out debt, you can choose from three main methods: debt snowball, debt avalanche and debt snowflake.
Each takes a slightly different approach and has pros and cons. Here's more about each one:
Debt snowball method. You make minimum payments each month on all of your credit cards and apply any extra money toward the card with the lowest balance. Once you pay off that card, put the payment you would have made toward your next-lowest balance, and so on.
The biggest benefit of the debt snowball method is that by paying off your lower balances first, those little wins can keep you motivated.
The drawback is that you may end up paying more interest overall than with the debt avalanche method.
Debt avalanche method. The debt avalanche method is nearly the same as the snowball method, but you target cards with the highest interest rates first. This approach saves more money than the snowball method.
Debt snowflake method. Both the snowball and avalanche methods require you to budget a certain amount of money to repay debt each month. With the debt snowflake method, you earmark small amounts of cash you find or save each month and use that money to pay down your debt faster.
The debt snowflake method can help if you can't afford to budget extra money for card payments each month. But it's less reliable and more work than the other two methods.
Say you keep a change jar. You could use that money, or even money saved from grocery store coupons or odd jobs, to repay your credit card debt.
Regardless of which method you use, the key is to put as much money as you can toward paying off your debt. This may mean looking for parts of your budget to trim or finding ways to earn extra money.
[Read: Best 0% APR Credit Cards.]
Can I Use a Loan to Pay Off My Credit Card?
If you have a decent credit score, then a consolidation loan or balance transfer credit card can make paying off your debt easier. Here's how they can help.
Debt consolidation loan. A consolidation loan is a personal loan you use to pay off higher-interest debt. This type of loan lets you combine several credit card balances for one monthly payment and a lower overall interest rate.
The average personal loan interest rate, according to August 2019 data from the Federal Reserve, is 10.07%. Credit cards, on the other hand, have an average interest rate of 16.97%. And card rates tend to be variable, meaning they can fluctuate.
"Most debt consolidation loans offer fixed rates that won't get more expensive if interest rates rise," says Todd Nelson, a senior vice president at LightStream, an online lender and division of SunTrust Bank.
Another major benefit of a consolidation loan is that it has a set repayment plan, which you won't get with a credit card. If you choose a three-year loan repayment term, for instance, you know that you'll be debt-free in three years.
But a word of caution: You may not get a better rate on your loan than what your credit cards charge. That could mean a higher total monthly debt payment. And that may be a problem if you're already struggling to get by.
Look for lenders that let you prequalify with a soft credit inquiry, which won't affect your credit score, to see what rates you might get.
Balance transfer credit cards. Most credit card issuers allow you to transfer a balance from one credit card to another. But some go the extra mile and provide an introductory 0% APR promotion on balance transfers. In fact, you could get up to two years to pay off your credit card debt interest-free.
"If you have debt across multiple cards, you can also save by consolidating those into one payment with a lower rate," Nelson says.
Before going this route, know that most balance transfer credit cards require good or excellent credit. Also, many cards charge a balance transfer fee -- typically between 3% and 5% of the transfer amount -- to process the transaction.
And if you have a lot of debt, you are not guaranteed a credit limit high enough to transfer all of it. Even if you can move all of your debt, you could end up with a high interest rate again if you don't pay off your balance within the promotional period.
What Can You Do When Your Debt Situation Is Serious?
If your debt burden is so heavy that you are worried about bankruptcy, more options are available to you. These include credit counseling and debt settlement.
Credit counseling. With a credit counselor, you can set up a debt management plan to pay down your debt. You'll make monthly payments to a credit counseling agency, which will then pay your unsecured debts.
These agencies may have a set interest rate with lenders that's lower than what you're paying, which can save you money. Still, credit counselors often charge a setup fee and a monthly fee to help you.
Debt settlement. Debt settlement companies can negotiate with your credit card issuers to settle your debts for less than what you owe. But the debt settlement process may require you to stop making payments to creditors and send them to the debt settlement company.
This process can be dicey, as debt settlement companies charge fees for their services but do not guarantee that they will save you money.
You'll still face collection activity, which can include lawsuits and lead to wage garnishment. And missing payments can further damage your credit score, as can accounts that remain on your credit report as settled for less than the full amount.
[Read: Best Low-Interest Credit Cards.]
What to Do When You're Debt-Free
When you're debt-free, you will want to focus on staying that way. The best thing you can do, Nelson says, is live within your means.
If old habits start to creep up again, you can:
-- Use credit cards less often, and mix in more cash and debit transactions.
-- Choose an accountability partner, such as a spouse or other family member or friend, to keep you honest.
-- Request alerts from your card issuer when you've reached a certain balance threshold.
-- Stop using credit cards if the temptation to overspend is too strong.
If you lose motivation, try to remember how great it feels to be debt-free and how living within your means reduces stress in your life. Keep setting financial goals that will excite you.
Whatever you do, "Take time to create a budget, planning out your upcoming expenses against what you have in the bank," Nelson says. "And do your best to stick to it."
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