Falling into credit card debt is incredibly easy. According to Experian, around 60% of Americans had a credit card in the third quarter of 2018, with average balances hovering around $4,300.
But when you carry a credit card balance, you’re likely paying a fortune in added charges thanks to high interest rates. Owing too much on your credit cards can also hurt your credit score by increasing your credit utilization ratio. The ratio of debt payments to income will likely be high if you have lots of credit card debt, which could make it hard to get approved for a mortgage or other loans at favorable rates.
Because there are so many downsides to carrying too much credit card debt, it’s important to make a plan for paying off credit card debt fast. This guide will walk you through the best way to pay off credit cards so you can be on your way to becoming debt-free.
In this guide:
- How to Pay Off Credit Card Debt Fast
- Other Methods for Paying Off Credit Card Debt
- How to Pay Off Credit Card Debt When You Have No Money
How to Pay Off Credit Card Debt Fast
Most people don’t like owing money, so becoming debt-free is probably already one of your long-term financial goals. But if you have a credit card balance you just can’t shake, it’s especially important to work on paying it off soon so you can start saving money on unnecessary interest charges.
In August 2018, the average interest rate on credit cards was 16.46%. That’s about 3 1/2 times the average interest you’d pay on mortgages and federal student loans during the same time period. Paying off credit cards should take precedence over trying to get other types of debt paid down because it’s more cost-effective in the long run.
Unfortunately, it can seem daunting to try to tackle the task of paying down credit card debt — especially if that debt is spread among multiple cards with varying interest rates. The good news is you have lots of different options for getting started, including balance transfer credit cards and personal loans.
We’ll explain some of those advanced methods a little later, but if you want to avoid opening any new accounts or taking out new loans and instead want to pay down your debt with cash payments, here are four steps to get started.
Step 1: Cut Your Cards
OK, you don’t actually need to get out the scissors — unless you really don’t trust yourself not to use your cards. Either way, you do need to stop charging stuff to your cards because you can’t get out of debt while you’re still accruing it.
To avoid digging a deeper hole while trying to pay off what you owe, take the cards out of your wallet, put them in a box, and store them somewhere out of sight. You should switch to using cash until you’re debt-free so you have better control over your spending.
This is also a good time to take a close look at your expenses. You may find you have recurring payments that you charge to your cards, such as services like Netflix and Spotify. If you do, ask yourself if you can go without them while you work to become debt-free. If you find you can, you’ll free up room in your budget.
If you have other automatic payments you can’t cut, you should still commit not to using your cards for any new purchases — and to paying off those recurring charges as soon as they post to your account.
Step 2: Get Organized
The next step in the debt payoff process is to figure out exactly what you owe to each credit card issuer, so you don’t miss due dates or incur fees for late payments.
Start by grabbing a notebook or opening a spreadsheet and recording all the following information:
- Each credit card you’re currently carrying a balance on
- The APR you’re paying on each card
- The outstanding balance (the amount you owe) on each card
- The minimum payment required for each credit card
Once you’ve organized this information, you’ll have a clearer idea of the total amount of debt you owe, both overall and to each credit card company. Although seeing the total may be intimidating, don’t panic — just take it one card at a time.
When you’re getting organized, set up automatic minimum payments for each credit card you have. That way, you won’t accidentally miss any payments and incur new late payment fees during the debt repayment process.
After accounting for minimum payments, now is the time to figure out how much extra you can afford to pay towards your debt each month. Hopefully, with the expenses you eliminated in step one, you’ll be able to devote a sizeable amount of additional funds above your minimum payment amounts to help pay off your credit card debt faster.
Step 3: Choose the Best Way to Pay Off Credit Card Debt
After making the minimum payments on each of your credit cards, you’ll have to decide how to allocate the extra money you’re dedicating to debt repayment each month. You don’t want to spread it around and make small payments to each card — it will take you much longer to pay off your cards that way.
There are two main strategies you can use to pay off credit card debt: the debt snowball method and the debt avalanche method. Both involve picking one particular credit card and focus on putting as much extra cash as possible toward that card’s balance.
The biggest difference between these approaches is which card you choose to start with.
The Debt Avalanche Method
The debt avalanche method involves allocating all your additional funds to the credit card with the highest APR so you can pay it off first. Once that debt has been paid in full, you start making all your extra payments to the debt with the next highest interest rate, and so on down the line.
>> Read More: How to decide which credit card to pay off first
Paying off the card with the highest interest rate first is the smart approach mathematically because it allows you to get rid of the costliest debt right off the bat — meaning you’ll save the most money in the long run.
Sometimes, however, the card with the highest interest rate will carry a higher balance than cards with lower rates. As a result, it can take you much longer to pay your balance in full, which means you won’t score any quick wins to help keep you motivated. You’ll need to be honest with yourself about your strengths and weaknesses.
If you have trouble controlling your spending, feel overwhelmed with your finances, or have a hard time staying on track to fulfill your financial goals, this method may not provide the positive feedback and reinforcement you need to stick with your debt payoff plan. If that’s the case, you may be better off with the debt snowball method instead.
The Debt Snowball Method
The debt snowball method isn’t the greatest approach if your goal is to save the most amount of money on interest charges. But if you want or need the encouragement of seeing progress earlier in the process, the debt snowball method may be better for you.
The debt snowball method involves focusing first on paying off the credit card with the lowest balance. You’ll make all your extra payments towards that debt, even if it has a lower interest rate or balance than your other cards. This strategy can help you to quickly knock out some of your debt, which can instill a sense of accomplishment necessary to stay on track.
Celebrate each win but remember to take the total amount you were contributing to that balance and roll it over to the card with the next smallest balance, and so on, until you’ve paid off all your credit card debt.
Step 4: Rinse and Repeat
Once you’ve chosen a debt repayment method and paid off your first card, you’ll know how great it feels to be one step closer to paying off your debt. Keep going until all of your cards are paid off.
Just because a card is paid off doesn’t mean you should start using it again, though. Do your best to avoid all credit card use until all of your balances are $0, and even then, you should only reintroduce them cautiously. Make sure you’re comfortable living on a budget and won’t be tempted to overspend. Until you can trust yourself, stick to cash if you need to.
That said, it isn’t a bad idea to keep your accounts open (at least the ones with no annual fee) and to use them minimally after you’ve paid down your debt. Having aged lines of credit with low utilization is an important factor in your credit score.
Other Methods for Paying Off Credit Card Debt
Although many people find it makes the most sense to simply pay off their credit cards by making extra cash payments, there are also some advanced methods you can use to help lower your overall interest rate and consolidate your credit card debt. Here are a few options.
Balance Transfer Card
Some credit cards offer 0% introductory APRs on balance transfers for a fixed number of months. Although some of these balance transfer cards charge a balance transfer fee, which can cut into your overall savings, others don’t.
Transferring the balance of one or more high-interest credit cards to a 0% card can give you breathing room to pay down your debt without the added burden of accruing more interest each month. Once you’ve transferred the balance, 100% of your payment goes to principal.
However, it’s imperative you don’t let the 0% APR expire before it’s paid in full. If you do, the interest rate on your card will jump up dramatically and you’ll be stuck paying the full credit card interest rate. So, make sure that the 0% interest doesn’t trick you into getting lazy about making big payments to wipe out your debt.
You also need to make sure you don’t start using your new card to charge purchases, nor should you resume using your old cards once they’re paid off. Your new card is a debt management tool, not an opportunity for you to get deeper into debt.
If you decide to take this approach, two balance transfer cards to check out are the Citi Simplicity Card and the BankAmericard.
Take Out a Personal Loan
Taking out a personal loan is another technique to tackle credit card debt. Although it may seem counterintuitive to borrow more when trying to pay back what you already owe, there are some big advantages to this approach.
If you can qualify for a personal loan at a lower interest rate than what you’re paying on your credit cards — and you use the funds to immediately pay off your existing balances — you should end up paying less overall interest.
Credit card consolidation loans also allow you to pool all of your credit card balances into one new loan, so you won’t have to worry about making separate payments to multiple creditors or deciding which card to pay off first.
>> Read More: Using a personal loan to pay off credit card debt
Personal loans come with fixed repayment terms and fixed monthly payments (unless you get a variable rate loan). You’ll know exactly how much you’ll have to pay each month and exactly how long it will take you to become debt-free.
Taking out a personal loan is less risky than other types of debt consolidation tactics, such as a home equity line of credit, because most personal loans are unsecured — which means you’re not risking your assets in the process. As long as your credit is reasonable, you can typically qualify for a loan at a lower rate than what your credit card issuers were charging you.
>> Read More: Credit card refinancing vs. debt consolidation
How to Pay Off Credit Card Debt When You Have No Money
Unfortunately, there are some circumstances when these approaches won’t work for you. If you have truly no money to make payments on your existing cards, personal loan, or balance transfer card, your only options may be debt settlement or bankruptcy.
Debt settlement involves negotiating a deal with your creditors. Essentially, you agree to a payment plan or a lump sum payment that’s typically less than you owe. Creditors will then agree to forgive the outstanding debt balance.
Creditors usually only agree to do it if they think you’re in danger of bankruptcy, but it is often a better approach than bankruptcy if you can find a way to make it work. Any forgiven balance may be taxed as income, too.
If you find yourself in steep credit card debt with seemingly no way out, bankruptcy should only be considered a last resort. A bankruptcy stays on your credit report for years and destroys your credit score.
Still, there are times when bankruptcy does make sense by giving you the opportunity for a fresh start. You should consult with a bankruptcy lawyer or financial advisor to find out whether bankruptcy is the right approach and which type of bankruptcy is right for you. For consumers, there are two options:
- Chapter 7: Consumers with limited income may qualify for Chapter 7 bankruptcy or liquidation bankruptcy. If you own any non-exempt assets, some of them will be sold to pay off some of what you owe, and the remaining balance of eligible debt will be forgiven.
- Chapter 13: If you make too much to qualify for Chapter 7, you can file Chapter 13. This type of bankruptcy involves restructuring what you owe and repaying some of your debt over three to five years. You aren’t at risk of losing any collateral with Chapter 13, and the rest of your eligible debt is forgiven after you complete your payment plan.
The time it takes to discharge debt varies depending on the type of bankruptcy you file. Once your bankruptcy is discharged in court, you can start working on rebuilding your credit. You might be able to qualify for a secured credit card right after declaring bankruptcy that can help you re-establish a history of responsible credit use.
Although paying off credit card debt is a lot of work, success comes with ample rewards. Once you’re debt-free, the money you were using to make payments is yours again. You can use it to accomplish other worthy financial goals — and you won’t have to worry about making payments to creditors any longer.