Credit cards are one of the largest sources of consumer debt, with over 175 million people having at least one credit card account, according to the Consumer Financial Protection Bureau (CFPB). The CFPB estimates that between 2018 and 2020, credit card holders in the U.S. paid approximately $120 billion per year in interest and fees alone.
Credit card debt is easy to accumulate, but the high interest rates and fees can make it difficult to pay off. Thankfully, there are many useful resources that can help you learn how to manage and pay off your credit card debt efficiently so you can save money.
Here are some strategies for paying off credit card debt.
- Debt avalanche method
- Debt snowball method
- Balance transfer credit card
- Debt consolidation loan
- Home equity loan, home equity line of credit
- Debt counseling services
- Locking credit card accounts
The debt avalanche method
There are two popular methods for paying down debt quickly.
The first is the debt avalanche method, also known as the highest interest rate method. This strategy targets and pays off the debts which have the highest interest rates first. Since higher interest rates cost you the most, eliminating them first can help you save money in the long run.
For example, imagine that you have three cards: one with a 5% interest rate, one with a 10% interest rate, and one with a 15% interest rate. Regardless of how much you owe on each, you’ll pay off the 15% card first with the debt avalanche method. When that’s paid off, you pay off the 10% card next, then the 5% card, to reduce the amount of overall interest you accumulate.
The idea is that you use the money that you would’ve paid in interest on the 15% card to pay off the 10% card, and so forth. While this process can take longer and may not make you feel like you’re accomplishing much, it’ll help save you money.
The debt snowball method
The other basic strategy for paying down credit card debt is known as the debt snowball method. Instead of focusing on the highest interest rates, this method focuses on paying off your smallest debts first. Since these smaller debts will be easier to pay off than the larger ones, it allows you to make faster progress toward eliminating your debts.
Using the example above, let’s pretend that the three credit cards have balances of $1,000, $5,000, and $10,000, respectively. Regardless of their interest rates, you’ll pay the minimum balances on all three and use any extra money to pay off the $1,000 card first. Once that’s paid off, you’ll start chipping away at the $5,000 balance, and when that card is paid off, you’ll put all of your efforts toward paying off the $10,000 balance.
Keep in mind that this method focuses on reducing the total forms of debt that you owe. In some cases, you may end up paying more overall with this method. For instance, if your $1,000 balance has a 15% interest rate while the $100 card has a 5% interest rate, you’ll start accumulating more debt from the 15% card than you’d reduce with the 5% card. However, the debt snowball method can help you get motivated, since knocking out smaller debts can feel more manageable.
Balance transfer credit card
A balance transfer credit card is just that — you transfer your balance from one or more credit cards to a single credit card. Many credit card companies offer temporary low-interest or no-interest incentives for a certain period to encourage this debt consolidation. This means you can potentially pay off your debt with no interest, so long as you do so within the specified time frame.?
Credit card issuers typically charge a fee for the balance transfer, which is usually either a percentage of what you transfer, or a flat fee. The goal of using a balance transfer credit card is to leverage the reduced- or zero-interest period to pay off your debt for less, but if you don’t do so within the promotional period, you’ll have to pay off the debt at your card’s usual interest rate.
There are other downsides to this method. First, you’re not eliminating your credit card debt, nor are you eliminating your reliance on a credit card, so you risk falling into more debt. Additionally, your new credit card’s APR may actually be higher than your original card’s rate, so you risk accumulating more debt over time.
Also keep in mind that no matter the interest rate, any fees associated with the balance transfer or the new card are additional expenses that you could avoid by using a different strategy.
Debt consolidation loan
A debt consolidation loan works similarly to a balance transfer credit card. With a debt consolidation loan, you combine multiple forms of unsecured debt, like credit card balances and personal loans, into one loan with a single monthly payment.
The advantages of a debt consolidation loan include only being responsible for one payment each month, and potentially getting a lower interest rate than what you had with your credit cards or loans. It also allows you to close out your credit card to prevent you from falling back into the credit card debt cycle.?
The downsides to a debt consolidation loan are similar to other forms of debt transfer. Although you’re technically paying off your credit card or loan, you’re still burdened with the debt and must pay interest on it. The repayment term is shorter since you have a set payoff date, and you may have to pay additional expenses, like a loan origination fee for processing your loan application.?
Home equity loan or home equity line of credit (HELOC)
Two other methods of paying down credit card debt include using a home equity line of credit (HELOC) or a home equity loan. With a home equity loan, you take out a second mortgage on your home to repay your credit card debt. You can usually borrow up to 80% of the equity in your home. This loan is a single lump sum payment that generally has a fixed interest rate. Because it uses your home as collateral, you run the risk of losing your home if you can’t repay the loan.
A HELOC is a revolving line of credit — you’re still borrowing against your home, but it allows you to borrow money multiple times. One main benefit of a HELOC is that you only withdraw the amount that you need, which means you can repay all of your credit card balances to the penny.?
Additional advantages include having only a single monthly payment and a potentially lower interest rate. You’ll also only pay interest on what you use, as opposed to a home equity loan, which charges interest on the lump sum even if you don’t use all of it.
Of course, there are downsides to these methods as well. HELOCs often have variable interest rates, which means they can fluctuate over time. Most importantly, home equity loans and HELOCs are secured, which means the lender can seize your home if you don’t repay what you owe.
Debt counseling services
Remember that although you’re responsible for paying off your credit card debt, you can get help from a number of sources. Credit or debt counseling organizations exist to help you manage and pay off your debts. These services provide advice, can assist you in creating a budget or repayment plan, and often offer money management workshops to improve your financial literacy.
You can contact the Financial Counseling Association of America or the National Foundation for Credit Counseling to learn more about these services.
Locking credit card accounts
Credit card companies like Chase, Discover, and American Express now allow you to temporarily freeze or lock your card. Though the intended purpose is for lost or stolen cards, you can use this feature to temporarily prevent making new charges on your card.
If needed, you can also freeze your credit report for free. This prevents you from opening any new credit card accounts in your name. However, the freeze can be temporarily lifted to apply for new credit when you actually need to. Freezing your credit report won’t prevent you from buying insurance, applying for jobs, or renting an apartment.
You can freeze your credit report by contacting each of the major credit bureaus — TransUnion, Experian, and Equifax.