Despite having the best intentions, many people find themselves carrying balances on their credit cards from month-to-month. The result is often a pile of expensive credit card debt that causes unnecessary stress.
Nationwide, Americans owe more than $1 trillion in credit card debt as of Q2 2023. The average American household carries $7,951 in credit card debt according to data from the Federal Reserve and the U.S. Census Bureau.
If you’re struggling with credit card debt, there are ways to improve your situation. Here are three easy strategies to help you pay off your credit card debt. You’ll also find details on the best practices for managing credit card debt and answers to frequently asked questions.
1. Identify the problem
The key to avoiding future credit card debt is often understanding why the overspending happened in the first place. Maybe you spent more than intended due to the lack of a financial plan (aka a monthly budget). Or perhaps you had a budget, but you overspent in certain areas because you didn’t track your spending or had an unexpected emergency or life change.
Other potential factors contributing to a credit card debt problem could be:
- Job loss.
- Income reduction.
- Illness.
- Divorce.
- Making minimum payments.
Once you identify the reasons behind your credit card debt issues, you can create a plan that helps you avoid adding to your credit card balances going forward. However, if the problem is routinely spending more than what you can afford to pay off every month, you risk creating a frustrating situation where you progress two steps forward and fall one step backward in your debt elimination journey.
2. Focus on one debt at a time
The average consumer has three credit cards, according to Experian data. A study by the Consumer Financial Protection Bureau (CFPB) also found that consumers carried a revolving balance on two thirds of their actively used credit cards.
If you owe outstanding credit card debt, there’s a good chance it might be spread out across multiple credit card accounts. As a result, many people struggle to figure out the order in which to pay down multiple card balances.
It’s easier to focus on paying down the balance of one credit card at a time with larger payments while continuing to make the minimum payment on all of your accounts to keep them from defaulting. You can select the card to pay down first by deciding which of the following debt elimination methods appeals most to you.
- Debt snowball: Make a list of your outstanding credit card debts from the highest balance to the lowest. Then focus on making larger payments on the credit card with the smallest balance first. (This approach may also help you reduce your credit utilization rate as your balance drops and could improve your credit score). After eliminating the balance on that account, move up the list to the credit card with the next smallest balance and repeat the process until all of your credit cards are paid off.
- Debt avalanche: Order your credit card debts according to the interest rates on your accounts — from the card with the highest APR to the lowest. Focus on paying off the credit card with the highest APR first. (This approach can help you save money on interest charges). Next, move to the account with the next highest interest rate and repeat the process until you pay off all of your credit card balances.
Know that to be successful in your efforts to get out of debt, you should avoid adding to your balances with new charges during this time.
3. Consider consolidation
If juggling multiple card debts is too burdensome, debt consolidation might be worth considering. Depending on your situation, consolidating credit card debt into one lump sum has the potential to save you money and help you get out of debt faster.
Debt consolidation may be a good idea if you have decent credit that could help you qualify for lower interest rates than you’re paying your current creditors. It’s also important to make sure you avoid future overspending on your credit cards before you use a personal loan for debt consolidation or balance transfer credit card to combine your existing debts into a single new account. Otherwise, you could set yourself up for potential financial problems down the road.
If you’re interested in debt consolidation, take the time to shop around and compare your options. Researching financing offers from multiple lenders and credit card companies can help you make sure you find the best deal available for your situation.
Best practices for managing credit card debt
If your goal is to earn and keep good credit, you should only charge on your credit cards what you can afford to pay off each month. If you create a habit of revolving a balance on your credit card, it’s easy to remain stuck in the cycle of credit card debt for an extended period of time. According to the CFPB, once people pay less than the full balance on a credit card account, they continue to do so for an average of 10 months.
Below are four simple tips to help you manage the credit card debt you already owe and avoid creating new balances to pay off later.
- Create a budget.
- Track your spending.
- Use cash or debit instead of credit.
- Share your debt elimination goal with a family member or friend.
How to create a budget
Creating a budget doesn’t have to be complicated. There are many personal finance apps and budget calculators that can help you track your income and expenses to create a financial plan.
One of the easiest ways to budget is using a 50/30/20 budget calculator to plan how you’ll spend your income each month. This budgeting approach has you take your after-tax income and split it into the following categories:
After you divide your income into each category, you can dive deeper and figure out how much cash you have available to spend on fixed and variable expenses each month. Plus, if you can find ways to cut expenses in certain areas or to generate extra income, it can free up money you can use for getting out of debt.
Can you settle credit card debt?
It may be possible to seek debt relief, also known as debt settlement, from your credit card company in certain situations. Debt settlement typically involves offering your credit card company a one-time payment that’s less than the total amount you owe — sometimes as much as 50% to 80% less than your account balance. However, you’ll generally have to be in default on your card accounts before an issuer will consider your request.
You can attempt to negotiate a debt settlement arrangement with your credit card company on your own. There are also for-profit companies that negotiate with credit card companies on behalf of their customers (for a fee).
Keep in mind that some companies that offer so-called debt settlement services are scams. And even if you work with a legitimate debt relief company, you could have to pay significant fees for their services (often 15% to 25% of the debts they settle).
Furthermore, whether you settle a credit card balance yourself or have a third party negotiate on your behalf, you could develop bad credit that you need to try to fix later. The credit card issuer is likely to close your account after settlement and may also report the account to the credit bureaus as “not paid as agreed”. This negative entry can remain on your credit report for up to seven years, though its negative impact should decrease over time.
Frequently asked questions (FAQs)
There’s no perfect solution to paying off credit card debt. Personal finance decisions are personal. Because everyone’s situation is unique, it’s important to understand your financial responsibilities and goals when you create a credit card debt payoff plan.
For one person, a plan to consolidate debt with a balance transfer credit card might be the ideal way to reduce credit card debt while avoiding future overspending. Yet for a consumer who’s been out of work for an extended period of time and having trouble affording basic necessities, a more aggressive debt management plan could be in order.
If you’re charging more on your credit card than you can afford to pay off each month, you aren’t using your account responsibly. In this situation, you owe too much credit card debt.
Unless you have a 0% APR promotion on your credit card, revolving outstanding balances on your credit card from one month to the next will trigger interest charges that make it more difficult to pay off what you owe. Even with a 0% APR promotion, credit card debt could lead to higher credit card utilization ratios which might negatively impact your credit score, until you bring that balance down.
Applying for a new balance transfer credit card (or any type of new financing) will result in a hard inquiry on your credit report. Hard inquiries have a slight (and temporary) negative credit score impact, and so could the appearance of a new account on your credit report.
However, if you qualify for a new balance transfer credit card, the account also has the potential to help your credit score. A new balance transfer credit card could reduce your credit utilization ratio as you move debts to the new card and zero out those old credit card balances. And, since a lower credit utilization rate is typically good for your credit score, you might see your credit score go up after you open the new account, as long as you manage it in a responsible manner.
It’s always best to pay off your full credit card balance every month. Paying your credit card balance to zero each month not only saves you from incurring interest charges, it also has the potential to improve your credit score.
