Americans are swimming in credit card debt. In the third quarter of 2023, retail credit card debt and consumer loan balances were $530,000,000, a 5% surge from the previous quarter. Recent increases in inflation and interest rates have placed families under considerable financial burden, especially low-income households.
Paying off credit card debt takes discipline and planning, but it’s by no means an impossible feat. We’ll explain why credit card debt gets out of hand, how to approach credit card balances, and what you can do to help get your financial head above water.
Understanding Credit Card Debt
Credit cards are useful financial tools. They allow consumers to pay for major items, emergencies, travel, online purchases, and everyday necessities when cash flow is limited.
Most credit card companies expect customers to make monthly payments to lower their account balances. They require a minimum amount every month, but if customers can afford to pay more than that, they can maintain healthy balances while improving their credit scores.
How Debt Can Accumulate
Especially if you have multiple credit cards, it’s unfortunately easy for debt to accumulate quickly. If left unaddressed, credit debt can snowball and eventually become an avalanche.
Credit cards usually come with high interest rates, typically between 15% and 30%. Interest is calculated on the balance of your credit statement. The more you can pay off the debt, the less interest you’ll incur. But if you only make the minimum monthly payment every time, interest charges will accrue rapidly.
Late fees and penalties also impact credit card usage. Of course, continuing to spend on credit when you’re underwater with debt only adds to the problem.
Types of Debt
Understanding different kinds of credit debt is useful when strategizing about how to get it under control. This can help you form an effective repayment plan and limit your exposure to interest and penalties.
Secured vs. Unsecured Debt
Creditors and lenders may require you to put up collateral for protection in case you fail to pay back your debt. This obligation is called “secured” debt. The most common kinds are mortgages, car loans, and secured personal loans. If you fail to pay back secured debts, lenders may seize your house, car, or any other collateral you’ve committed. Secured loans generally have lower interest rates since there’s less risk to the lender.
Unsecured debt doesn’t require collateral. Approval for an unsecured loan or credit is based on your credit merit. Since there’s no collateral, there’s more risk, and interest rates are usually higher. Credit card liability is an example of unsecured debt, as are medical bills and most student loans.
Revolving vs. Installment Debt
Credit card debt is “revolving” debt. You pay for something using your credit card, incurring a new debt. Then, you continue to use the card up to a given credit limit while you make regular payments on the debt. Since you use credit and repay your debt simultaneously without having to re-apply for a loan, the credit arrangement “revolves.”
With other kinds of loans — such as mortgages, car loans, or student loans — the lender gives you a lump sum up front. You repay the debt in equal installments over a fixed payment schedule. The installments cover both the principal and interest on the loan.
Assessing Your Credit Card Debt
The first step in repaying credit card debt is to get clear on your obligations and circumstances. What do you have to work with?
Start With Your Budget
The budget is the heart of your financial profile. If you’ve set one up, take a close look at it. Analyze your monthly bills, operating expenses, debts, income, assets, and liabilities. If you haven’t set one up, now is the time to do so.
Calculate Your Total Debt
Gather all statements, bills, invoices, and other documentation to determine the total balance of your outstanding debt. They should include every item you’re on the hook for, including the following:
- Car payments
- Student loans
- Personal loans
- Medical bills
Write down the names of each creditor and itemize the balances owed. Also, determine how much interest each debt incurs; this will be important when you plan your repayment.
Understand Your Spending Habits
Ruthless honesty about your spending patterns can be the key to reshaping your credit status. Review credit statements over the last year and categorize each expense (groceries, utilities, entertainment, etc.). Look for incidental or discretionary expenses that you can cut. Budget apps can help you analyze your spending habits.
Methods To Pay Off Credit Card Debt
Once you’ve gotten clear on your debt situation, you have a few options for how to pay off credit card debt.
The debt snowball method focuses on paying back the smallest debts first. Pay the smallest debt off in full or as much over the required monthly minimum as possible.
Once it’s paid off, apply the amount you were paying on that debt (including the minimum) to the second smallest debt on your list. Repeat this process, “snowballing” your payments as your ability to repay larger sums increases.
As you might expect, this method is the reverse of the snowball method. With the debt avalanche method, you first focus on debts with the highest interest rates. Pay as much over the minimum due as you can. After you pay a debt in full, apply its payments toward the debt with the next highest interest rates.
The avalanche method is more efficient than the snowball method, as it usually results in faster debt settlements. However, the snowball method may be more feasible for those with limited means. It also offers the ongoing reward of a consistent sense of progress.
Credit Card Consolidation
If you owe debt on several credit cards to multiple creditors, you may combine the total balance of all of them into a single debt. Credit card consolidation makes repayment simpler, sometimes resulting in lower interest rates and monthly minimum payments.
You can form a credit consolidation plan with a reputable, accredited credit counselor or agency. They’ll negotiate with your creditors, structure the consolidation, and establish terms for your repayment.
Balance Transfer Credit Cards
If you owe high-interest debts on credit cards, you might combine and transfer the cumulative balances to a single, new credit card. This kind of card is typically issued with an introductory period — usually between 6 and 18 months — during which interest rates will be extremely low or even zero. This initial period gives you time to tackle more debt.
Balance transfer fees, complex terms, and limits can come into play. But as another form of credit card consolidation, a balance transfer card can make repaying your debt simpler.
Tips for Lowering Credit Card Debt
After you’ve gotten clear on your debt obligations and set up a program for repayment, what else can you do to keep credit card debt under control? Here are a few ideas.
Changing the manner of living you’re accustomed to can be the hardest part of managing debt, but you can accomplish it in small steps — and it may be easier than you think. Setting up a budget can be your most pivotal lifestyle adjustment, as it outlines where your money’s going and identifies where you will cut back.
Consider reducing discretionary spending on non-essential items like entertainment, dining out, and impulse buys. Eliminating unhealthy habits like smoking and drinking can also save an incredible amount of money and has obvious benefits in other ways.
Those of us who remember the days of writing physical checks to pay bills every month appreciate the convenience of automated payments. They assure consistent, reliable payments on monthly bills, including credit cards.
Automated credit card payments can reduce the stress of bill paying while instilling a better sense of accountability, organization, and self-discipline. Setting automated payments against credit card debt can eliminate your balance faster.
Call Your Credit Card Company
Proactiveness is something debtors appreciate from their customers. When you’re building your repayment plan, it’s always worth reaching out to a human representative of your credit card issuer. Doing so shows you’re committed to being transparent and settling your debts.
Talking with your credit card company can open the possibility of negotiating lower fees or interest rates. It can also help you form a customized repayment plan, modify terms, and simplify debt management.
Explore a Debt Management Plan
Credit counseling agencies help clients repay their bills with formal debt management plans. These are strictly defined structures for financial assessments, consolidated payments, creditor negotiations, and ongoing reviews to facilitate settlement.
Since this will impact your credit score, it’s extremely important to select a qualified, accredited agency for your debt management plan. Be clear on the agency’s fees, agreement terms, and business practices before you enroll.
Debt Consolidation Loans
Another form of credit card debt consolidation involves putting up the equity you’ve gained via homeownership as collateral for funding all credit card debt repayments. There are two basic instruments for home equity debt consolidation.
Home Equity Loan
With a home equity debt consolidation loan, you receive a secured, lump-sum loan to be repaid over a specified period. The lender uses your home equity as collateral. You use the loan to make regular repayments on multiple credit card debts consolidated into a single bill. Repayments are usually scheduled over extended times, anywhere from 5 to 30 years.
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Home Equity Line of Credit (HELOC)
You can also use your home equity to obtain a line of credit as a revolving debt. A HELOC comes with variable interest rates so you can borrow funds as you need them. It’s similar to how you use a credit card — only it is secured by your home equity as collateral.
Monthly payments on a HELOC are not necessarily as regular as those for installment loans. They can change based on moving interest rates and outstanding balances.
It’s fairly easy to calculate your home equity for this option. Be aware that this figure can increase as your home value appreciates, especially if you make home improvements and maintain consistent mortgage payments. These considerations may also impact your ability to initiate a home equity loan or HELOC.
How Does A HELOC Work?
Dig deeper on the common questions surrounding a home equity line of credit.
Answer Your Questions
Final Thoughts on How to Pay Off Credit Card Debt
Fighting off a mountain of credit card debt can be frightening and intimidating. But it’s far from impossible. Consumers are realizing financial freedom every day through proactive measures to pay off debt.
Counselors, budget apps, agencies, and even credit card companies are here to help you pay off your credit card balance. Put aside your fears and trepidations and tackle your credit card debt head-on — there’s no better way to do it.
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