Credit card debt. It can become the dirty secret you withhold from your friends, family, partner, or even yourself. But the more you ignore it, the worse it could get.
If you’ve got a lot of credit card debt, you’re not alone. The Federal Reserve’s latest survey of household finances found just over 45% of all U.S. families reported revolving balances on one or more of their credit cards at the time of the survey, with the average amount that families owe being $6,270.
Nearly six in 10 people concede that it is difficult to minimize their debt, primarily because of unexpected financial emergencies. According to several studies, Americans are, on the whole, more embarrassed about credit card debt than anything else. Researchers have even found a connection between debt and depression.
You don’t have to feel bad about your high balances. Instead, take action. Follow these five steps to get out of credit card debt, and you could improve not just your credit health but also your emotional well-being.
Table of contents
Step 1: Take an honest look at what you owe
You may have heard financial experts recommend that you work to get better with money, and among the first steps is to get out of credit card debt. To do that, you have to understand how much you owe and what the interest rates are on each card. This will help you gauge what your debt costs you.
Let’s say you have a $15,000 balance on a credit card with an interest rate of 15%. You pay $359 toward that debt each month, slightly more than the minimum payment required. Your total interest charges would be $6,349 by the time you paid off your $15,000 of credit card debt. And that assumes you didn’t make any new purchases. And it would take you 35 years to be debt-free.
In the above scenario, you’d shell out $21,349 to pay off that debt, paying more than 30% over your original balance. There are definitely better ways to pay off credit card debt.
Step 2: Create a budget and stick to it
It can be daunting to make a list of everything you spend on each month. But it’s also important: Having a complete picture of what you spend will show you where you might easily cut back. Maybe you didn’t realize that your morning coffee adds up to $50 a month, or you’re paying for a subscription you don’t want after a forgotten free trial expired, or you haven’t used your gym membership in a long time. Comparing your expenses to your earnings will help you improve your spending habits.
Once you’ve done that:
- Make your budget. There are a lot of different approaches to budgeting. The trick is to start simple—create buckets for your obligatory expenses (housing, transportation, food, etc.) and your optional ones (restaurants, gym). See where you can cut back. Do you really need cable TV? Can you renegotiate your cell phone bill?
- Avoid making new purchases on your card. You want to avoid adding to your balance so that you don’t increase what you’re paying in interest. This is especially critical as you try to rein in credit card debt.
Budgeting allows you to see where you can free up extra cash, which could help you get out of credit card debt faster. You can also set up savings for an emergency so you don’t have to borrow more when unexpected expenses hit.
Step 3: Explore a variety of options to reduce credit card debt
There are really no tricks to paying off credit cards. But you can identify some concrete steps to pay down your credit card debt. Following are some ideas—you’ll need to determine which, if any, work for you:
- Increase the amount you pay each month. The upside: You’ll pay off your credit card debt faster, which means you’ll pay less in total interest. The downside? You’ll be paying more every month, and a bigger bill might feel tight in your monthly budget.
- Call the credit card company to negotiate a better interest rate, saving you some cash and possibly helping you pay down debt faster. But be prepared: Depending on your personal situation, this could be straightforward or frustrating. Still, it’s worth exploring.
- Look into a balance transfer, which is when you pay off one credit card balance with a separate card that has a lower interest rate. You’ll save on interest charges, assuming you don’t add more debt. But watch out for the details: Many balance transfer offers come with an up-front fee or an annual fee that could reduce any money you save with a lower interest rate. Additionally, those very low or 0% introductory rates eventually expire and are usually replaced by higher standard rates.
While these are simple actions, they all have one big drawback: They keep you tied to revolving debt, which means that each time you make a purchase on the credit card, you add to your balance and to the amount you pay in interest.
Step 4: Consider consolidating your debt with a personal loan
A better solution might be a fixed-rate personal loan for debt consolidation.
- Variable-rate debt gets more expensive as rates rise. But with a personal loan, you can lock in a fixed rate (one that doesn’t rise) and a fixed monthly payment (one that doesn’t change month-to-month).
- You pay one lender. Using a single personal loan to consolidate multiple debts helps you simplify your monthly bill paying.
- Because it’s an installment loan, you’ll pay it back over a specific period of time, with a set number of scheduled payments. Imagine circling the date on the calendar when you’ll have that debt paid off!
And maybe the best part: You could immediately save money on interest every month if you get a personal loan with a fixed interest rate that is lower than your credit card interest rate.
Is there a downside to personal loans? Some of them come with fees, such as application and closing fees, or prepayment penalties if you pay off the loan early.
Once you decide on a personal loan for debt consolidation, you’ll want to comparison shop for personal loans like you would for any major purchase.
Review and compare these five factors:
- Interest rate. Ideally, you want a rate that’s lower than what you’re paying currently on your highest credit card debt. Keep in mind that some lenders may offer low rates but have high fees.
- Fixed payment. A fixed rate (instead of a variable rate) means you’ll have the same payment every month. This makes monthly bill-paying easier.
- A choice in loan length (“term”), such as 36 – 84 months. That way, you can set up your personal loan to have a monthly payment amount that works with your budget.
- Fees vs. no fees. Steer clear of loans that have added costs like application, origination, or closing fees.
- Prepayment penalty. Make sure there’s no prepayment penalty so you’re able to pay off your loan any time you like, without a fee for paying it off early. Discover Personal Loans, for example, does not charge any fees as long as you make your payments on time, and it does not charge prepayment penalties.
The bottom line here? You want to gain more budget control while paying down your higher-interest credit card debt. Need more convincing? Use our debt consolidation calculator to see how much you could save in interest.
Step 5: Keep up the good work
Once you’ve put the effort into erasing your high-interest credit card debt, maintain your momentum by keeping an eye on your balances, increasing your savings, checking your credit report annually, and sticking to your budget. And treat yourself with an occasional splurge. You’ve earned it.
Want other actionable tips on how to get out of credit card debt faster?Learn More