Ultimate Guide to Credit Card Debt

Everything you need to know about eliminating credit card debt

Credit Card Debt FAQ

What is credit card debt?
How prevalent is credit card debt?
How soon should you pay off your credit card debts?
How can you get out of credit card debt fast?
Should you declare bankruptcy?
How can you negotiate credit card debt with banks?
Should you use a debt settlement company for credit card debt?

Credit card debt interest payments can get expensive fast. If you’re not careful they can claim a significant portion of your monthly income, and create a boatload of stress.

While it’s possible to use credit cards and stay out of debt, this isn’t the reality for many Americans. When credit card debt becomes unmanageable, it affects your credit score and your peace of mind. In fact, studies have shown that worries over mounting debt can cause depression and other serious health issues.

Are mounting credit card bills invading your life and hurting your mental health? Read this in-depth guide to learn how to pay off credit card debt, fast.

What is credit card debt?

Credit card debt is a type of unsecured consumer debt accrued by failing to pay off your credit card. Most consumer credit cards have a grace period wherein there is no interest charged on the debt if the balance is paid in full. However, if you don’t pay off your balance in full, it will begin to bear interest. And the high interest rates on credit card accounts that make this one of the worst types of debt to incur.

Users are often enticed to sign up for credit accounts with promises of high balances or rewards and then encouraged to make only small minimum monthly payments. Over time, this behavior will build a growing balance of debt, and the interest owed will skyrocket. Paying down the debt can be difficult due to climbing balances, compounding interest, and growing monthly payments.

How prevalent is credit card debt?

If you think that you’re the only person who is drowning in credit card debt, think again. According to figures from the U.S. Census Bureau and the U.S. Federal Reserve, the total outstanding revolving debt in the United States was $1.045 trillion in January 2019. That’s even higher than the credit debt carried during the 2008 Recession.

An alarming Pew study found that 54% of Americans spend more than they earn every month. It’s no surprise that 48% of credit card users make only the minimum payment on their credit cards every month. The result? The average American household has a whopping $6,354 in credit card debt (source).

In the past decade alone, the amount of credit card debt held by the average American has increased by over 50%. As people in this country become more heavily indebted, many reach a breaking point and seek answers on how to pay off credit card debt.

How soon should you pay off your credit card debts?

Unless you’re sitting on other debts with higher interest rates, paying off credit card debt should be your top priority.

If you carry a high revolving balance of consumer debt, you’re spending an incredible amount of your disposable income each month on interest charges alone. This is far beyond the value of the goods and services that you originally used the credit cards to purchase. If you aren’t paying your bills on time, you’ll also incur late charges — anywhere from $10 to $40 per month.

Credit card debt also hurts your credit score. Your credit utilization — how much of your credit limit you’re using at a given time — accounts for 30% of your credit score. The more debt you accumulate, the more you’ll hurt your credit. If your credit score drops enough, it will affect the interest rates that you qualify for. That means the debt you’ve accumulated will hurt your pocketbook even more.

How can you get out of credit card debt fast?

Need to pay off your credit card debt, and fast? Here’s how to get started.

First, decide how soon you’d like to have your debt fully paid off, and figure out how much you’d have to pay each month to reach that goal. A minimum monthly payment will never get you to this milestone. Use an online calculator to determine the payment on your balance and current interest rate over the course of the next twelve months.

Once you know how much you’ll need to pay each month, make room in your budget to meet these payments. Get rid of unnecessary expenses, and find out if you can earn some extra income on the side.

Strategies for eliminating credit card debt

If you want to know how to pay off credit card debt in the most efficient manner, you have options. The method(s) that will work best for you will depend on your circumstances and individual preferences.

1. Use the “snowball” method

Make a list of all of your credit card accounts, their balances, and their interest rates. If you can transfer balances from cards with higher rates to those with lower rates, do this. Then, make minimum monthly payments on all of your cards except for the one with the highest interest rate. On that card, pay as much as you can afford every month until the card is paid off. Once this is done, repeat the process with the cards that you have left.

Why is this called the “snowball” method? When you tackle your debts with the highest interest rates first, the amount of money that you have to pay off debt will continue to increase — or snowball.

2. Transfer your balance

If your current interest rates are high, consider transferring your credit balance to a new credit card offering a 0% interest introductory period. If you’re able to pay off the debt in full within that grace period, you can sidestep interest altogether. However, you’ll have to pay a balance transfer fee (3-5%) to transfer your debt. Make sure that the fee will cost you less than what you would have paid in interest.

3. Dig into your savings

If you have savings, this might be a good time to tap into some of that money. The average return on investment in the stock market is 7%, and your credit card interest rate is likely closer to 18% (or even higher). As such, the fastest way you can reduce losses is to allocate all available money (excluding your emergency fund) for your debt.

4. Consolidate your debt

An installment loan with a low APR can be a great way to consolidate high-interest credit card debt. Simply borrow enough to pay off all your credit accounts in one fell swoop, and trade your debts for a single easy monthly payment. These debt consolidation loans are a very popular way to reduce interest expenses and establish a structured plan to get out of debt.

6. Pay it off with a home equity line of credit (HELOC)

If you’re a homeowner with equity in your home, you can leverage it to secure a loan or line of credit with very favorable rates and terms. These are called Home Equity Loans (HELs) or Home Equity Lines of Credit (HELOCs). However, you should only go this route if you’re certain that you’ll be able to pay off your HEL or HELOC on time. If you default on your payments, you risk losing your home.

Also, read the fine print, and investigate the loan’s closing costs. If the closing costs will cost you more than the interest on your credit account, steer clear of this method.

Should you declare bankruptcy?

When you’re deeply in debt and struggling to pay your monthly bills, you may be tempted to declare bankruptcy. It can get the creditors off of your back, provide some breathing room, and give you a fresh financial start. However, bankruptcy also brings some serious downsides.

First, filing for bankruptcy costs money. The filing fees cost hundreds of dollars, and this is before you factor in attorney’s fees. While Chapter 7 bankruptcy will erase most credit card debt, it’s not as simple to qualify for Chapter 7 as it was in the past.

Just over ten years ago, Congress overhauled the bankruptcy law, and there is now a “means test” required for Chapter 7 filers. If you have enough disposable income to pay debts on a Chapter 13 plan, you won’t be permitted to file for Chapter 7. Instead, you’ll have to enter a debt repayment plan through Chapter 13. A Chapter 13 bankruptcy comes with a 3 to 5-year repayment plan for debts, which are then discharged at the completion of the plan.

And either type of bankruptcy will hurt your credit report for a full decade. This could affect your ability to get a loan, insurance, an apartment, or even a job.

How to negotiate credit card debt with banks?

How can you negotiate credit card debt with banks?

In some cases, you can negotiate directly with your credit card company to set up a different payment plan or to settle your debt. This process can be complicated, but with patience and fortitude, you can get through it.

Your first step is to understand your debt and your budget. Ask each bank for a breakdown of your bill that shows the principal, interest, and other charges. Once you have it, create a monthly budget that illustrates your income and expenses. Don’t forget to include things like food, gas, and contingencies in your budget. This will let you know how much you can afford to pay each month. And being able to prove this figure gives you leverage in your negotiation.

Next, take some time to get to know your options. There are several different arrangements that may be available to you, depending on the particular bank and your circumstances. Here’s a quick rundown of your options:

Lump-sum settlement

Let’s assume that you have access to a sum of money from a family member or other source. You may be able to contact the bank and negotiate a reduced lump sum settlement of your credit balance to close out the entire account. This could also be accomplished in up to three payments.

If you reach a settlement agreement, get it in writing. You should also understand how any settlement of less than you owe will affect both your credit score and your tax liability. Tax law considers most forgiven debt as income, so the amount forgiven will need to be reported on a 1099-C form.

Why will this work? If you’re late on your payments, a credit company may worry that you’ll default on your debts altogether. Accepting a lower lump sum is a way for them to recover as much of the money you owe them as they can get.

Forbearance program

If your financial difficulties are due to temporary circumstances, consider a forbearance program. Under a forbearance program, the bank will temporarily lower or eliminate your interest rate, and will put a stop to late fee charges. The bank may also allow you to stop making payments for a certain period of time. There is no forgiveness of any debt with this program, only a short reprieve.

Debt management or settlement program

While they sound similar, there’s a subtle difference between a debt management and a debt settlement program. With a debt management program, you’ll meet with a counselor to restructure your debt, with the intention of paying the entire amount owed until the program is complete. A debt settlement program, on the other hand, will work on your behalf to negotiate lower payments or a lower lump sum settlement of your debts.

Negotiating

Now that you know what you can afford to pay, and have an idea of which debt settlement or payment plans appeal to you, you’re ready to negotiate. Don’t expect this process to be quick or easy. You’ll likely tell the same story to a long line of people until you get to someone who has the power to help.

If you are having difficulty reaching the right person, ask for the credit manager, and be sure to write down their name and telephone number before you hang up. Keep detailed notes of your conversations and always be sure to get any agreements in writing.

If the bank is playing hardball and you’re unable to make a deal for better terms or a settlement, you might need help. Consider working with a debt settlement company. These experts are trained to help reduce and eliminate your credit card debt.

Should you use a debt settlement company for credit card debt?

If you fail to pay your debts for long enough, your creditors can make your life very difficult. If you have bad credit, it will be practically impossible to consolidate or refinance your debts. Debt collectors will be knocking at your door. They can even take you to court for it. As such, it is in your best interests to make a deal to reduce your settle your credit card debt as soon as you’re able.

This is what a debt settlement company can accomplish on your behalf. These companies will do the tough work of haggling and negotiating reduced payments to your credit card companies. Whether you’re currently paying on the account or have been sent to collections, a debt settlement company will usually be able to help you to secure terms.

Debt settlement companies can end up saving you a lot of money in the long run — sometimes as much as 50% or more. Interested in investigating a debt settlement company? Compare your options side by side, along with real user reviews, in this comprehensive list of the best debt settlement companies on the market.