Having credit card debt can feel isolating, but you’re not alone if you find yourself struggling to pay off a credit card balance. The average consumer had $5,733 in credit card debt in the first quarter of 2023, according to TransUnion.
The good news is that if you have credit card debt, you have a handful of options to forge a path forward, from debt consolidation to strategic repayment plans to credit counseling. Let’s take a closer look at how to get out of credit card debt.
If you have credit card debt, the first step toward relief is awareness. Take stock of your debt, including how much debt you currently have and how much your monthly payments are. This will help you create a budget that includes debt repayment.
Your budget should include room for your minimum required monthly debt payments, but if you can afford to, you can benefit from budgeting for increased debt payments. That way, you can pay down your debt faster, which will help you pay less in interest. Take a look at your budget to see where you can cut spending so you can afford to increase your monthly debt payments.
When making a plan for how you can repay your credit card debt, it can help to choose a repayment strategy that works for your unique preferences. While there are several debt repayment strategies, these are two of the of the most popular:
With the debt snowball method, you list your debts from smallest to largest and begin by repaying the smallest debt first. You make minimum payments on all other debts, but put more toward your smallest debt. Once you pay off the smallest source of credit card debt, you take the amount you were using to pay off that debt and apply it to the next-smallest debt, creating a “snowball” effect.
The idea is that the momentum gained from paying off one debt will motivate you to continue paying off your other debts. This method prioritizes early wins and creates a sense of accomplishment, making it a popular choice for those who struggle with staying motivated.
The debt avalanche method prioritizes interest rates over the size of debt balances. To make this repayment strategy work, determine which of your credit card balances has the highest interest rate. Then, focus on paying off that debt first while making minimum payments on the others. After you pay off the first debt, you move on to the debt with the next-highest interest rate.
By tackling the debt with the highest interest rate first, you can save money in the long run by minimizing higher interest charges. This method requires discipline and patience, as it may take longer to see results, but it’s the most financially efficient method for paying off debt.
If you want to save on interest while paying off your credit card debt, a 0% balance transfer credit card can help. This is a credit card that allows you to transfer current credit card balances to a different card that has an introductory interest-free period, which could be up to 15 months or more. This can help you save money on interest charges and help you pay off your existing credit card debt faster.
When you apply for the card, you provide information about the balances you want to transfer. You then make payments toward the balance on the 0% balance transfer card, ideally paying it off during the promotional period.
Keep in mind that balance transfer credit cards typically have a balance transfer fee, which is often 3% of the transferred amount. Consider whether it’s still worth it to get a balance transfer card when factoring in this fee. Additionally, the card will return to its normal rate after the promotional period, which may be more than what you were paying on your other cards before.
A debt consolidation loan is a personal loan that you use to pay off multiple sources of debt. This can simplify the repayment process, since you won’t have to worry about juggling multiple due dates. You may be able to qualify for a lower interest rate than you were paying before, which can help you save and can make it easier to pay off your debt faster. You repay a debt consolidation loan in fixed monthly installments over a set repayment term.
If you know you won’t be able to make your credit card payments because of financial hardship, it’s a good idea to reach out to your credit card issuer. Your card issuer may be willing to work with you by offering a hardship program. A hardship program may involve temporarily lower interest rates or deferred payments, depending on your credit card company. However, you typically must qualify to participate in one of these programs.
If you own a home and have built up enough equity in it, you may be able to take out a home equity loan or home equity line of credit (HELOC) to repay your debt. With both options, your home acts as collateral, so it’s essential that you’re able to repay the loan. If you default on payments, the lender can foreclose on your home.
To qualify for a home equity loan, you must have a minimum amount of equity in your home, and you can typically only borrow up to 80% of that amount. You repay the loan over a predetermined repayment term and make monthly payments (with fixed interest). Meanwhile, a HELOC is a revolving line of credit that you can borrow from as needed, up to a set limit. HELOCs usually have variable interest rates.
Another option is to borrow money from a trusted friend or family member. However, you need to ensure you’re both on the same page about repayment terms so you don’t risk damaging the relationship. Having a loan agreement in writing can help.
A credit counselor is a qualified individual who can create a personalized plan for you to handle your debt and manage your budget. Credit counselors can even negotiate a lower monthly payment with your creditors with a debt management plan. You can find nonprofit credit counseling agencies through the National Foundation for Credit Counseling.
You can consider filing for bankruptcy if you find your credit card debt to be completely unmanageable, but this should only be considered as a last resort. When you file for bankruptcy and have your debt discharged, you don’t have to repay that debt.
This may sound good, but it comes with serious consequences, like a negative impact on your credit score. If you have good credit, you could see a drop in your score of 130 to 150 points. And if you have very good credit, that dip could be more like 200 to 240 points.
A Chapter 7 bankruptcy remains on your credit reports for up to 10 years after filing, and a Chapter 13 bankruptcy typically stays on your report for seven years. This makes it challenging to get new credit or loans. And if you file for Chapter 7 bankruptcy, you’re required to sell nonexempt assets (like a new car or a vacation home) to repay as many of your debts as you can. Additionally, not all debts may be discharged through bankruptcy, so you may not even qualify.