Credit card debt can be debilitating for borrowers. What can start as a few purchases here and there can quickly become a mountain of debt that seems hopeless to pay off.
Luckily, thousands have been in your position before and have successfully gotten rid of their debt, which means you can too. Continue reading to explore the best ways to eliminate credit card debt.
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Best Ways to Eliminate Credit Card Debt
Regardless of how you found yourself in credit card debt, you aren’t alone. Credit card debt in America tops more than $1 trillion. But there are a bevy of options to dig yourself out. This includes do-it-yourself strategies, consolidation loans, or seeking professional help to achieve financial stability.
Do-It-Yourself Debt Relief
Many borrowers can take their debt relief into their own hands and start on a repayment strategy that works for them. Some of the most common ones are:
1. Debt Avalanche Method
The avalanche method to debt repayment involves first tackling the highest interest rate debt you have, then working your way down from there. This strategy makes sure you eliminate the most damaging loans first so that you slow the pace that interest is accruing. Typically, borrowers will make minimum payments on all their debts, then they will use all of their remaining funds toward the high-interest-rate debt. After one debt is paid, you move on to the next one.
2. Debt Snowball Method
The debt snowball method is the concept where you pay off debts with the smallest balance first. The goal behind this method is that after paying off one loan, you feel motivated to tackle the next, creating a “snowball” effect where one repayment leads to the next. You’ll pay more in interest charges this way, though. This method is often advocated by financial guru Dave Ramsey.
Snowball or avalanche: Check out this video to learn which might work best for you:
3. Pay More Than the Minimum Due Each Month
An easy way to avoid getting into credit card debt in the first place is to pay the lender more than the minimum due each month. Even if you’ve already gotten into debt, this strategy can help get you debt-free faster. If possible, try to pay your full statement balance at the end of the month. This may not be feasible for your financial situation, but if you operate with the mindset that you can only use your card if you have the money to back it up, you can avoid ever falling into debt again.
4. Automate Payments
Setting up automatic payments is a great way to never miss a payment again. This takes the thought out of making the payment, enabling you to not worry about it as another mundane task you have to remember. Just ensure there are adequate funds to pay for the debt each month and you can say goodbye to late fees.
5. Negotiate With Your Creditors
While it can seem intimidating, there’s no harm in trying to negotiate with your creditors. It’s free, and the worst case is they say no. Whereas the best-case scenario, you save money on either your monthly repayments or the funds you’d pay a debt settlement company to negotiate with your creditors for you.
6. Cut Up Your Credit Cards and Use the Envelope Method
This strategy isn’t popular with credit card issuers, but you can’t rack up credit card debt if you don’t have any credit cards! The envelope method is the idea to put cash in designated envelopes for each of your expenses: groceries, utilities, debt, etc. This budgeting strategy helps to cut down on overspending since once you empty the envelope for the month, that’s it for that category. To help you allocate the amounts for each category, record what you normally spent over the next month on all your expenses and set aside the necessary amount in each envelope.
Consolidate Your Debts
If you’re looking to simplify your repayment strategy, consolidating your debts is a great way to get everything on one plate with the benefit of superior loan terms. That said, most consolidation methods require a new loan, meaning you’ll need to have good credit to qualify.
7. Debt Consolidation Loan
This repayment strategy involves taking out one bigger loan, ideally at a lower interest rate, to pay off your other high-interest debt. Not only will a lower interest rate save you money in the long run but you’ll only have to worry about a single monthly payment instead of a collection of smaller loans every month. There are debt consolidation loan options for borrowers with fair credit, those with bad credit, and even borrowers who are in the military.
8. Personal Loan
Another debt relief option to consider is taking out a personal loan from a bank or credit union. Generally, you’ll need a credit score of around 600 to qualify. Borrowers can explore both unsecured and secured loan options if they want a variety of rates and terms, but unsecured loans are recommended.
9. Balance Transfer Credit Card
Transferring your credit card balance to a new credit card can allow you to take advantage of lower, introductory interest rates, often starting at 0%. You will have to pay a balance transfer fee, but since you aren’t paying interest for several months, you can save a significant amount of money.
Seek Professional Debt Relief Help
You don’t have to go it alone when it comes to debt relief. If you’re looking for assistance, consider the options listed below.
10. Debt Settlement
If you came up empty-handed after trying to negotiate with your creditors on your own, you can work with a third-party debt settlement company to negotiate on your behalf. The company will work to offer a lump-sum payment to the creditor in exchange for a portion of the debt being forgiven, sometimes as much as half of the original loan.
Check out our top recommendations here.
11. Debt Management Plan
You can visit a nonprofit credit counseling agency where a credit counselor will work out a debt management plan (DMP) with you to repay your loans. This can make your debt more manageable to repay as the counselor will create a plan in agreement with your creditors that rolls multiple loans together into a single debt, typically with a lower interest rate.
READ MORE: Debt management vs. debt settlement
12. Bankruptcy
Bankruptcy should be considered an absolute last resort option and only one you’d make if you exhausted all your other routes. Two main types of bankruptcy exist, Chapter 7 and Chapter 13. The main difference between the two is how you repay your debt. With Chapter 7, you’ll surrender all your non-exempt property to pay off your debt. Chapter 13 meanwhile involves creating a court-mandated repayment plan lasting three-five years to cover your debt.
Regardless of which option you choose, your unsecured debts (such as medical and credit card bills) are discharged, meaning you won’t have to pay them. The main things to keep in mind when considering bankruptcy is that your credit score will take an enormous hit for up to 10 years, there are certain eligibility requirements to keep in mind, and not all debts will be wiped away. Mortgages, student loans, tax debt, and child support or alimony are all debts you still have to pay.
Consult a lawyer before considering filing for bankruptcy.
Tips to Get Started
If you want to take control of your debt and stop it from dictating your life, then here’s how to get started.
Use a Debt Consolidation Calculator
First, figure out how much you’re paying in credit card debt each month and how much you can afford in monthly payments. Calculate the total loan amount you need to consolidate everything into one payment, and the loan term you need to keep the minimum payment required each month within your budget. These debt reduction strategies won’t work if your monthly payment is impossible for your financial situation.
This debt consolidation calculator is a great place to figure out all these numbers.
Check Your Credit Report and Credit Score
Your credit report is the official file kept on you and all your credit transactions. A credit score is attached to your file to help determine your creditworthiness and how good a borrower you are. This score is determined by your payment history on all your loans, your credit history, income, income-to-debt ratio, credit utilization, and other financial details.
Essentially, the higher the score the better, and you can increase your score by making on-time payments consistently and by limiting the amount of debt you take on and apply for. The most common credit score is the FICO model which ranges from 300 to 850. Score ranges look like this:
- Exceptional credit score: 800-850
- Very good credit score: 740-799
- Good credit score: 670-739
- Average credit score: 580-669
- Poor credit score: 300-579
You can check your official credit report for free here to see where you stand. There are also free options to view your unofficial credit score with your credit card company. Your credit score is important because it will determine most of your financial life. If you want a loan for a house, a car, or a debt consolidation loan, your credit score will be looked at to see if you qualify for the loan.
If you find any errors on your credit reports, make sure to take the steps to repair them. The better your score, the better rates and loan terms you’ll receive. Having a poor score can cost you tens of thousands of dollars or more over the course of your life. Just one late credit card payment will stay on your report for seven years.
Pros and Cons of Debt Consolidation
Debt consolidation can be a great debt relief option for some, but it’s not the right choice for everyone. Consider the pros and cons to see if it makes sense for you and your financial situation.
Pros
- A single payment is easier to keep track of
- It will help you get rid of your debt faster
- Could boost your credit score in the long run
- You can extend the life of the loan to keep your debt payments manageable
- The extra money you save by consolidating several payments into one can be used to build an emergency fund
Cons
- There will be a credit check, and a high credit score is required
- You could end up paying more interest over the life of the loan
- The loans can pull you further into debt
- Your collateral or assets could be at risk
- You might have to pay origination fees
The Bottom Line
Credit card debt that continues to pile up can leave you feeling helpless. However, no matter your specific financial situation, all is not lost. The best ways to eliminate credit card debt are listed above, offering you a multitude of options to get debt free for good. Start by understanding your financial standing — how much you owe, what you can afford to pay each month, and your current credit score. From there, adopt a repayment method that works the best for you, or try out a few simultaneously. It might take a while, but once you start down your repayment journey, you’re one step closer to being debt-free.
FAQs
A credit card pays for purchases you make using your line of credit. This is essentially a short-term loan, due at your next billing cycle. Your real money only comes into play when you make payments on this amount. A debit card meanwhile utilizes the funds you have in your checking account to make a purchase. There is no loan element as you are paying directly with money you already have.
Once you’ve ensured they are truly errors, contact at least one of the big three credit reporting agencies — Experian, Equifax, and TransUnion — and dispute the information. Explain in writing what you think is wrong and include documents that support your position.
You can get your official credit score for free here. Your credit card company also may have an unofficial version you can view that is pretty accurate to the official one.
Start by setting aside a small sum of money every month. Even just $20 a month can get you started. Put this in a savings account or somewhere you won’t be tempted to touch it so that you can let it grow.