As reported by WalletHub, credit card debt was $1.30 trillion in August 2024, setting a new record. Despite surpassing the previous peak, it’s still $99 billion shy of the all-time high set in 2007.
Although the Federal Reserve recently cut interest rates, credit card rates remain high. These factors combined have led WalletHub to predict a further increase in credit card debt by $100 billion before 2024.
Key Findings from WalletHub’s Credit Card Debt Survey:
- Financial stress. Credit card debt is causing 35% of Americans to feel extremely stressed.
- Everyday charges. People who carry debt use credit cards for everyday purchases 62% of the time. As a result, every purchase accrues interest.
- Savings struggles. Nearly one-third of Americans cannot save money because of their financial obligations.
- Non-essential debt. About 20% of Americans admit that most of their debt comes from non-essential expenses.
- BNPL concerns. “Buy now, pay later” loans harm the credit reports of over half of Americans.
- Recession fears. According to 35% of Americans, their credit card debt will not be fully paid off until there is a recession.
Furthermore, high interest rates can make it difficult to pay off credit card debt — especially when it’s getting out of debt. The good news is that you can reduce credit card debt effectively and regain control over your financial future if you follow a systematic approach, are patient, and practice discipline. You can do this — and you’ll want to!
Here are practical strategies for reducing and eventually eliminating credit card debt.
1. Become familiar with your debt situation.
To tackle credit card debt, you must first understand what you owe. For this, gather your credit card statements, taking note of the following:
- Outstanding balance. The amount you owe your credit card(s) at the moment.
- Interest rate (APR). You can determine how much interest you’ll pay using the annual percentage rate.
- Minimum monthly payment. To avoid late fees, you need to pay the smallest amount possible.
Knowing your total debt lets you make informed decisions and prioritize which debts to pay off first.
2. Determine a realistic budget.
A budget is one of the most critical steps to reducing debt. Maintain a monthly budget, dividing your expenses into essentials (e.g., rent, groceries) and non-essentials (e.g., dining out, entertainment). By creating a budget, you can identify each area where you can make savings to pay off your debt faster.
An easy way to budget is to follow the 50/30/20 rule. You should allocate 50% of your income to needs, 30% to wants, and 20% to debt repayment and savings. Depending on how much debt you have, adjust these percentages to prioritize the payment of that debt.
With a budget, you can avoid overspending and see how much extra money you can devote to reducing your monthly credit card debt.
3. Don’t just pay the minimum; pay more.
It may seem like a small win to make minimum payments, but it’s a long and expensive road to financial freedom. That’s why paying more than the minimum on your credit card can make a big difference.
Suppose you have a $5,000 credit card balance with a 20% interest rate. As Experian explains, if you pay the minimum monthly payment of $150, you will pay off the debt in four years and two months. Additionally, you will pay $2,359.09 in interest charges.
However, if you increase your monthly payment to 6%, or $300, you could pay off the debt in just one year and eight months. This would also save you $1,452.28 in interest, resulting in a savings of $906.81.
4. Set a priority for paying off your debt.
You can pay down your credit card balances in a variety of ways, depending on the type of debt you have:
Debt Avalanche Method
Using the Debt Avalanche Method, you pay off the most expensive debt first and make the minimum payments on the rest. Using this approach, you can become debt-free faster and save money on interest.
- Organize your debts by interest rate, starting with the ones with the highest rates.
- Don’t forget to allocate as much extra money as possible towards the highest rate card.
- You can then move on to the next highest loan once it has been paid off.
Debt Snowball Method
As part of the Debt Snowball Method, you pay off the smallest debts first, no matter their interest rates, while making the minimum payments on all the rest. Rather than focusing on building confidence and momentum, this strategy focuses on building momentum.
- From smallest to largest, list your debts.
- Whenever possible, pay off the smallest debt.
- After it’s cleared, move on to the next smallest debt, applying the amount from the paid-off debt to the new debt.
There is no right or wrong strategy. But you should choose based on what motivates you most: saving on interest (Avalanche) or seeing debts disappear quickly (Snowball).
5. Consolidate your debt.
Using debt consolidation as a strategy can simplify your credit card debt and potentially reduce its cost. In this case, you take out a lower-rate loan or credit card to repay your existing high-interest debt.
To consolidate debt, you can use the following methods:
- Using a balance transfer credit card. The interest rates on transferred balances are temporarily low or zero on these cards. It is possible, however, that the interest rate will increase substantially once the introductory period is over. There may also be fees associated with balance transfers.
- Debt consolidation loans. Sometimes, a personal loan can be used to pay off credit card balances in a lump sum. With a loan, you can manage repayments over a longer period of time because the interest rate is usually lower than with credit cards.
- Home equity loans. For homeowners, a home equity loan can provide a lump sum of cash to consolidate debt. However, using your home as collateral can be risky since you might lose your house if you can’t repay the loan.
You should carefully consider the following before consolidating debt:
- Interest rates. Make sure you compare the interest rates on your existing credit cards with those on the new loan or credit card. To save money, make sure the new rate is significantly lower.
- Fees. It is important to be aware of any fees associated with a balance transfer or origination. In addition, they may offset the savings that can be made from a lower interest rate.
- Repayment terms. Review the repayment terms of the new credit card or loan. Although longer repayment terms may result in lower monthly payments, they may also increase the overall cost of borrowing.
When you understand the pros and cons of different debt consolidation methods, you can decide which is the best option for you.
6. Get in touch with your creditors.
Don’t hesitate to contact your creditors if you need a lower interest rate. Moreover, if you’re underwater financially, explain your situation. Generally, credit card issuers will negotiate payment terms or offer hardship programs — this is especially true if you have a good payment history.
Your issuer may offer a hardship program to provide relief if circumstances beyond your control, such as unemployment or illness, reduce your ability to make payments. However, even if you do not suffer from unemployment or illness, inflation can cause financial hardship. As reported in a NerdWallet survey, costs have increased by 20% since 2019, but median income has increased by only 12%.
Ultimately, negotiating with your issuer or accepting the terms of a hardship program could lead to lower interest rates or waived fees. Maybe these small changes will make a difference in your debt. And, even if they refuse, at least you were proactive.
7. Do not take on new debt.
To pay down credit card debt, you must stop accumulating more. To reduce temptation, you may want to cut up your credit cards or remove them from online payment options.
- For everyday purchases, use cash or debit cards instead of credit cards. According to research, people tend to spend more when using credit cards than cash. For example, people using credit cards to purchase sporting event tickets spend 64% more than those who use cash.
- Unsubscribe from retailer emails that encourage impulse purchases.
- Once you’re debt-free, avoid using your credit card for non-emergency purchases.
Basically, if you want to prevent new debt from overshadowing your repayment efforts, you need to break free from credit card dependency. These days, you can’t really cut up your credit cards, which is the advice given to people in debt years ago. But you could sure leave them at home.
8. Boost your income.
If you struggle to make ends meet, you might want to consider ways to increase your income. After all, if you earn more, you can pay off your debt much faster.
- Side hustles. You can earn extra money by freelancing, tutoring, dog walking, or driving for a ride-share service.
- Sell unwanted items. Get rid of items you don’t need by selling them on eBay, Craigslist, or Facebook Marketplace.
- Ask for a raise. Depending on your employment status, you may be able to negotiate for a raise or seek a promotion.
Even a modest increase can speed up your debt-free journey when your income goes toward debt repayment.
9. If needed, seek professional assistance.
An experienced credit counselor may be able to help you if your debt feels insurmountable. A non-profit credit counseling agency can assist you in creating a debt management plan (DMP) and negotiating with creditors on your behalf. However, make sure you choose an agency accredited by the National Foundation for Credit Counseling (NFCC).
With a DMP, you consolidate your debt into a single monthly payment with potentially lower interest rates. It may, however, have a short-term impact on your credit score.
10. Track your progress and keep yourself motivated.
Getting rid of credit card debt can be long, but staying motivated is key. As such, use a debt repayment tracker or app to celebrate your small victories.
Remember why you’re doing this-whether it’s for financial freedom, peace of mind, or future goals to remain focused.
The Bottom Line
Despite credit card debt’s overwhelming nature, you can still regain control over your finances without resorting to debt settlement. When choosing a method, you should consider your financial situation, your goals, and your personal preferences.
Remember, becoming debt-free often takes patience, commitment, and a combination of strategies.
FAQs
What’s the best strategy for paying off credit card debt?
Among the most popular methods are:
- Debt Avalanche: Pay off your highest interest rate credit card first.
- Debt Snowball: To gain momentum, pay off the card with the smallest balance first.
- Consolidation: Move your balances to a card with a lower interest rate.
It is important to consider your financial situation and your personality when choosing a strategy.
How can I reduce my credit card interest?
- Negotiate a lower interest rate: Contact your credit card provider and ask for a lower interest rate.
- Balance transfer: Switch to a card with a lower introductory APR.
- Pay off your balance in full: If you want to avoid interest charges, this is the best thing you can do.
Should I close my credit cards after paying them off?
Closing a credit card will shorten your credit history and improve your credit utilization ratio. Keep the account open and use it sparingly to maintain a good credit mix.
What can I do if I can’t afford to make my minimum payments?
If you’re having trouble making your minimum payments, contact your credit card issuer for assistance. They may be able to arrange a payment plan or offer you a hardship plan.
How does paying off credit card debt affect my credit score?
Your credit score can be improved by paying off credit card debt, particularly if you have a high credit utilization ratio. Closed accounts, however, may also negatively affect your credit score.
Image Credit: Mikhail Nilov; Pexels
