Debt can cost you a lot of interest, 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 can affect 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. If mounting credit card bills are invading your life, here is our in-depth guide to paying off credit card debt.
What is credit card debt?
A credit card debt is a type of unsecured consumer debt that is accessed through the use of a credit card. Most consumer credit cards have a grace period where there is no interest charged on the debt if the balance is paid in full. However, there is an option to pay a minimum monthly payment on a credit card bill, and the balance will begin to bear interest. It’s the high interest rates on credit card accounts that make these some 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, or even the promotion of the card as a longer-term loan, and then encouraged to only make a small minimum monthly payment. Many people don’t intend to get into trouble with credit cards, but it can happen subtly over time. Paying down the debt can be difficult due to climbing balances, compounding interest, and increased 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. Even those who might appear to have their financial ducks in a row could have some mounting credit woes and are looking for an escape plan. According to figures from the U.S. Census Bureau and the U.S. Federal Reserve, the total revolving debt in this country is currently at $929 billion. 38.1% of all U.S. households carry some kind of credit card debt, and the average American household has $5,700 in credit card debt.
Unfortunately, the households with the lowest net worth are carrying the highest average credit card debt, with a balance of over $10,000 per month. 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 are looking for answers on how to pay off credit card debt.
How soon should I pay off my credit card debts?
Paying off credit card debt is important for several reasons. Those households with a high revolving balance of consumer debt are spending an incredible amount of their disposable income each month just on interest charges. This is above and beyond the value of the goods and services that you originally used the credit cards to finance. If you aren’t paying your bills on time, there are also going to be late charges of anywhere from $10 to $40 per month added to the bill, as well as a notation sent to credit reporting agencies. These late payments are known as a “default” and will both increase your level of debt and have an effect on the rates that other creditors charge you for credit.
How to get out of credit card debt fast?
If you’re on a tight time schedule and want to know how to pay off credit card debt fast, there are a few things that you can do. The first thing you’ll need to do is to figure out what your monthly payment should be in order to reach that goal. A minimum monthly payment will never get you to this milestone, so you’ll need to 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 have this figured out, you’ll have to make room in your budget to meet these payments. Get rid of unnecessary expenses and determine whether or not there are ways that you can earn some extra income each month. If you can transfer your balance to a 0% credit card for next twelve months, even better. If you’ve run the numbers and can’t quite make the monthly payment, be sure to pay off the highest interest rate credit cards first.
How to pay off credit card debt? Different methods.
If you want to know how to pay off credit card debt in the most efficient manner, you have several choices. The method that will work best for you may depend on your circumstances and individual preferences.
1. Make more than minimum payments
You’ll need to break the habit of paying only the minimum monthly payment on your bill each month, which is usually just 2% to 3% of the balance. At that rate, it could take decades to pay off a credit card, and this is exactly what the credit cards companies would like for you to continue doing. If your minimum payment is $49, pay $100 or more. Find some monthly extras to sacrifice so that you can scrape together this additional payment amount. It will make a difference.
2. Use the “snowballing” method
This has nothing to do with that cold white stuff that you find up north. 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, pay the minimum monthly payment on all of your cards except for the one with the highest interest rate. On that card, you’ll want to pay as much as you possibly can every month until the card is paid off. Once this is done, repeat the process with the cards that you have left. This is called “snowballing” as you are attacking the cards with the highest rates first and, as your debt decreases, the amount of money that you have to pay off debt will continue to increase – or snowball.
3. Balance transfer.
This has been mentioned several times so far and is a useful tool if you are willing to use caution and read fine print. Many credit cards offer introductory interest rates of 0% for a certain time period. The money saved on interest by transferring balances could be applied to paying down your principal each month. That being said, be sure to read the fine print on these offers as some banks have now included stipulations about retroactive interest for moving balances after the introductory period.
If you have savings, this might be a good time to tap into some of that money for debt repayment. If you’re paying 18% or more in credit card interest, it’s unlikely that your savings are matching or coming close to that. You’re better off cutting your losses and paying off that debt. Aside from a savings account, consider whether or not you have family or close friends who might be able to help you out with a personal loan at a favorable interest rate.
5. Debt consolidation loans
A low interest rate installment loan can be a great way to consolidate high interest credit card debt into one loan with a single payment and a lower interest rate. These ‘debt consolidation loans’ are a very popular way to reduce interest expenses and establish a structured plan to get out of debt.
We wouldn’t recommend withdrawing money as a loan from a 401(k). This will damage your retirement savings, and you will be faced with penalties for taking money out of the plan before you reach retirement age.
6. Home equity lines of credit (HELOC)
For example, homeowners might have access to a home equity loan or line of credit in a significant amount. However, using this money to pay off unsecured debt has now placed your primary asset (your home) at risk. If you default on any of these payments, they are now secured by your home, and you could lose it to foreclosure. Additionally, closing costs associated with these loans are typically costly so you might not end up saving anything.
How to reduce credit card debt – Is bankruptcy an option?
When you’re deeply in debt and having difficulty paying your monthly bills, bankruptcy may sound like an appealing option. It can get the creditors off of your back, provide some breathing room, and in some cases give you a fresh financial start. As nice as this sounds, bankruptcy isn’t for everyone, and there are several things to consider before moving forward. The first is that filing for bankruptcy costs money. The filing fees are 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 and will be required 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. With either type of bankruptcy, the record will remain on your credit report for ten years, which could affect your ability to get a loan, insurance, an apartment, or even a job.
How to negotiate credit card debt with banks?
In some circumstances, it is possible to negotiate directly with your credit card company to either get a different payment arrangement or to settle your balance for a lower lump sum. This isn’t necessarily a simple process, and you should be prepared to make several phone calls to get this accomplished. Once you are ready to exercise your patience and fortitude, here are the steps to negotiate credit card debt with banks:
Understand your options.
There are several different arrangements that may be available to you, which could vary depending on the particular bank and your circumstances.
1. 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 even 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.
2. Forbearance program.
If your financial difficulties are temporary, and you believe that you’ll be able to pay down or pay off your credit card debt in the near future, a forbearance program could be a good option. Under this type of program, the bank will either lower or eliminate your interest rate and 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.
3. Workout program.
Similar to a forbearance program, the bank can reduce or eliminate your interest rate as well as stop assessing late charges and penalties. When you ask for this, you’re telling the bank that you can’t continue to meet their demands. Likewise, they’re generally going to cut your credit limit so that you can no longer use your credit card.
4. Debt management or settlement program.
While they sound similar, there’s a subtle different between a debt management and a debt settlement program. With a debt management program, you will meet with a counselor to restructure your debt and generally pay 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.
5. Know your debt and income situation.
Now that you know your options, it’s important that you understand how much you owe and what you can afford to pay. If you don’t already have it, ask each bank for a breakdown of your bill that shows the principal, interest, and other charges. Once you have this, create a monthly budget that illustrates your income and expenses. Don’t forget to include such things as food, gas, and contingencies in your budget.
6. Make some phone calls.
Now that you know what you can afford to pay, it’s time to negotiate. Don’t expect this 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 give you some assistance. If you are having difficulty reaching the right person, ask for the credit manager and then 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.
7. No deal.
If you fail to make a deal for better terms or a settlement, there are several options. You can continue to struggle with your monthly payments. If you can’t make monthly payments, at some point (usually six months) the debt will be sold to a debt collection agency who will begin trying to collect payment from you.
Bankruptcy is a last resort for many and should be considered carefully as it will have long-lasting effects on your credit rating. Many people find success using debt settlement companies to help reduce and eliminate credit card debt.
Should you use a debt settlement company for credit card debt?
While there is no debtors jailed in the United States, it’s a fallacy that you can’t be taken to court for not paying your credit card debts. If you ignore creditors for a year or more, the likelihood that they will file suit and try to attach your wages goes up. This is one of the reasons that it’s in your best interests to strike some sort of a deal to reduce or settle your credit card debt as a soon as possible.
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 are currently paying on the account or have been sent to collections, a debt settlement company will usually be able to help most consumers with better terms.
Debt settlement companies can end up saving you a lot of money in the long run, sometimes as much as 50% or more, through their negotiations. Unfortunately, there are some disreputable companies that will make false promises and claims. This is why we’ve listed the best debt settlement companies with user reviews.