To pay off your debt you must know how much you owe
The very first step in creating a debt management plan is knowing what you owe your creditors, what your monthly payments are, and how much you’re paying in interest. (This is especially important if you have multiple debts or multiple credit cards.) Once you do the math you might find that the annual interest rate on your revolving credit card debt is costing you more than you thought. And your minimum payment may only make a small dent in repaying your original charge.
Debt reduction starts when you stick to a budget
When you don’t pay careful attention to where your money goes each month, you may continue increasing your credit card debt, overspend in unnecessary areas, and allow your debt to snowball. A budget allows you to compare your expenses to your income—which is the best way to figure out how much you could spend toward debt repayment.
Instead of a source of financial anxiety, think of budgeting as a game, and the goal is to free up extra cash so you can get out of debt faster.
How to create a budget: There are all different kinds of budgeting models. A lot of people like the 50/30/20 rule because it creates buckets for “needs” (housing, transportation, food, etc.), “wants” (such as restaurants, gym, travel), and savings. Be realistic about what’s a true “need” and what “wants” might not be as appealing as total debt payoff.
How to free up cash in your budget: Small reductions in your spending might add up quickly and give you financial flexibility to increase your monthly credit card payment. Can you find places where you can cut spending (like $50 on morning coffee each month) and reallocate that money to pay down your credit card bill?
Stop using your credit cards while you're in debt payoff: You want to avoid increasing your credit utilization (which can hurt your credit score), increase your interest payments (which will grow anyway due to compounding interest on your outstanding balance), and make it even harder to rein in credit card debt. Use your budget to guide your spending so you don't accidentally add to your credit card bill. Remember, your credit card balance will keep growing if you already have a balance even if you don't use your card because of the credit card interest charges on your debt.
Choose the right strategy to reduce your credit card debt
It takes patience and consistent effort to gain control of your spending and learn debt management skills. There are really no tricks to paying off credit card debt fast; the only magic comes from managing debt deliberately.
Many people follow the debt snowball and debt avalanche methods of debt payoff. With the snowball strategy, you pay off your smallest balances first and work forward from there. The avalanche method starts by focusing on balances with the highest interest rates.
Some people opt for debt settlement, but that can cost a lot of money (that you could be putting toward your debts) and impact your credit report for years. If you need help, consider finding a nonprofit credit counseling service to develop a debt management plan.
The best plan for your financial situation is the one that works for you, but there is some debt management tips that may be useful no matter how you approach your credit card debt.
Pay more than the minimum payment each month
Keep in mind that you can always pay more than the minimum each month or even make a payment more than once a month. You’ll pay off your credit card debt faster, which means you’ll pay less in total interest.
Negotiate a better interest rate with your credit card company
Sometimes you can lower your interest rate by talking to the credit card company. If so, you could save some cash and maybe even pay down your credit card debt faster. But be prepared: the company might not agree, and it could be frustrating.
Look into a balance transfer
With a balance transfer you can pay off one credit card balance with a separate card that has a lower interest rate. It is not unusual, though, to be charged a balance transfer fee of between 3% and 5% of the amount, which would reduce the amount you save. Also, introductory rates eventually expire and are often replaced by higher standard rates.
Understand how a debt consolidation loan works
Credit card debt is revolving debt, which means that each new purchase on your credit card increases your credit card balance, and that increases the amount of interest that you owe, which in turn increases your balance. In addition, the actual interest rate on your credit card account can change over time.
A fixed-rate personal loan for credit card debt consolidation might be a better solution. The benefits include:
- A fixed rate (one that doesn’t increase) and one set regular monthly payment (one that doesn’t change month-to-month)
- One lender, which allows you to consolidate multiple debts into a single personal loan, simplifying your monthly bill paying
- A fixed repayment term that’s an installment loan, allowing you to pay it back over a defined period and letting you know when the debt will be paid off
Maybe the best part is that you could save money on interest for that higher-interest debt when you consolidate to a personal loan with a lower fixed-interest rate. In fact, 93% of surveyed debt consolidators said they saved money or time by taking out a Discover® personal loan.*
Want to see how that works? Our debt consolidation calculator will show you how much you could save in interest.
Choose a personal loan that works for you
Once you decide on a personal loan for debt consolidation, you should compare offers for personal loans just as you would for any major purchase.
You’ll want to keep these five factors in mind.
- Interest rate: Look for a rate lower than what you currently pay on your highest-rate credit card debt. Keep in mind that the interest rate may be different than the annual percentage rate (APR), which represents the total yearly cost of the loan.
- Fixed payment: It’s easy to manage because your set regular payment stays the same for the life of the loan.
- A repayment term that you choose: Selecting a longer repayment term could help lower your monthly payments. At Discover Personal Loans, for example, you can choose from multiple repayment options to fit your budget—36, 48, 60, 72, or 84 months.
- Fees: A loan with fees, even with a low interest rate, can increase the APR and make the loan more expensive. Because of this, you’ll want to steer clear of loans with added fees, like application and origination fees, or closing costs. Some personal loans also include prepayment penalties if you pay off the loan early. But with a Discover personal loan, there are no fees of any kind.
- Prepayment penalties: Make sure there’s no prepayment penalty so that you can pay off your loan anytime you like. With a Discover personal loan there is no penalty if you pay off your loan early.
Celebrate your progress
Once you start making a dent in your credit card debt, take note of how far you’ve come. It’s a big milestone, and you should be proud.
Then, keep your momentum going by sticking to your budget, paying off your credit card balance in full as often as you can, and increasing your savings.
You could experience debt relief, improve your credit health, and join over 3 million people who reached their goals with a Discover personal loan.
Want other actionable tips on how to thoughtfully manage your credit card debt?
