4 Ways To Pay Off Credit Card Debt

Credit card debt has become a massive problem for many American households. The market for credit cards has become very competitive, so it’s easy for consumers to qualify for new credit cards. As a result, many families find themselves struggling to pay off credit card debt.

U.S. consumers added:

• $86.2 billion in new credit card debt in 2021.
• $73.1 billion in the fourth quarter of 2021 alone. 
• $67.2 billion in new debt in the second quarter of 2022.
• $39.6 billion in the third quarter to total $925 billion in credit card debt. 

American households are carrying an average of $9,260 in credit card debt. Overall, the United States is  seeing a 15% increase in total credit card debt year over a year.

Accumulating too much credit card debt creates unnecessary financial stress and limits your ability to save for the future. Lending Tree reports that as of Jan. 9, the average credit card interest rate is 22.91%, the highest since Lending Tree began tracking it in 2019. Paying higher average percentage rates (APRs) is a drain on your wallet and consumes cash you could use for other things.

The challenge most families face is knowing how to pay off credit card debt. Several options are available if your credit card debt is getting out of control.

Option 1: Review your household budget.

Everyone should have a household budget, and that budget should include credit card payments. When planning your household budget and figuring out how to pay off credit card debt, you don’t want to plan to pay only the minimum credit card payment. Your budget should allow you to repay your credit card debt over time.

Start by targeting which credit card you will pay off first; you can apply different criteria to choose. You can start with the card with the lowest balance, which gives you an achievable goal. You also can target the credit card with the highest interest rate since paying the higher rate will cost you more over time. 

There are two approaches you can try to pay off your credit card debt:

1. The debt snowball method motivates you with psychological wins. You rank your credit cards by account balance, from the lowest to the highest, and focus on paying off the smaller debt first. As you pay the smaller debts, you “snowball” the money you were using to pay those debts to pay off the next-highest credit card and so on.
2. The debt avalanche method is designed to save you the most money. Start by ranking your credit card debt from the highest to the lowest interest rate charged. You save the most money on interest by paying off the card with the highest APR first.

Option 2: Try a balance transfer credit card.

When tackling credit card debt, your goal is to reduce the amount of money you must pay each month and reduce the overall amount you must pay. Moving your credit card debt to a balance transfer card can help.

A balance transfer card can help eliminate debt by giving you a break from interest on multiple cards. Look for a balance transfer card with a 0% APR that you can use to pay off other cards, then take advantage of the lack of interest to pay down your debt.

When shopping for a balance transfer card, look for a 0% APR and check out the other terms, such as how long the introductory rate applies and what the APR will be after the introductory rate. Most balance transfer cards offer a 0% APR for from 12-21 months, but after that, you will have to pay the new interest rate.

Option 3: Consider debt consolidation.

Debt consolidation could be the answer if you find your credit card debt rising. With debt consolidation, refinance your outstanding debt so you have one lower, manageable payment at a lower APR.

There are a variety of tools available for debt consolidation:

• You can apply for a personal loan that has a lower APR than your credit card.
• If you are a homeowner, consider refinancing your home and using the home equity to pay your credit card debt.
• If you have a reasonable interest rate on your mortgage and aren’t interested in refinancing, consider taking out a second mortgage.
• You also can apply for a home equity line of credit (HELOC) or home equity loan.

However you choose to consolidate your debt, be sure the new debt structure saves you money and fits your household budget.

Option 4: Renegotiate your debt.

If you struggle to pay your credit card bills, you might consider approaching the credit card companies and working out a payment plan. Most card companies are willing to work with customers to ensure they get paid. They may offer to lower the interest rate, waive fees, work out a payment plan or provide other options.

When settling with the credit card company, try to ensure it has a minimal impact on your credit rating. For example, it’s better to talk to your creditors early rather than start missing payments.

Be proactive about credit card debt.

Managing your debt, especially credit card debt, is vital. Debt can quickly get out of control if you don’t manage your credit card spending.

It also pays to understand the impact that debt has on your credit. When you sign for a loan, one of the criteria lenders use is your debt-to-income (DTI) ratio, which is the amount you owe against what you earn. Your DTI should be no higher than 36%, or your debt will be hard to pay off. A DTI of greater than 43% is a warning sign that your debt is becoming too high.

When you’re deciding how to pay off credit card debt, be sure your strategy fits into your monthly budget. Remember that it’s OK to transfer the debt to save money, but it’s ill-advised to take on new debt. If you take on a new loan or other debt, consider closing a credit card account to keep your debt under control. It also pays to set money aside in case of emergencies. That way, you won’t have to go into debt.

It pays to be proactive about managing your money. Help is always available from 7 17 Credit Union. Our professionals can help you with tools to manage your money. We also offer Knowledge of Financial Education tools and coaching programs to 7 17 members.

Not sure exactly how much you owe? Our easy-to-use calculator can help!