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by Maurie Backman | Updated July 21, 2021 - First published on Sept. 16, 2020
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Here's how to shed that pesky debt once and for all.
If you're carrying a balance on your credit cards, you're in good company. Lots of people have credit card debt, and the average balance in the U.S. is $6,194.
About 52% of Americans owe $2,500 or less on their credit cards. If you're looking at $5,000 or higher, you should really get motivated to knock out that debt quickly. The sooner you do, the less money you'll lose to interest.
Of course, knocking out a sizable balance is easier said than done. Here are a few steps to help you achieve that goal.
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The more expenses you charge on your credit cards, the more out of hand your debt problem is likely to get. If you're already looking at a substantial balance, do your best not to add to it. Rather, make purchases in cash in the near term while you work out a debt payoff plan.
It takes money to pay off a credit card balance, of course, so your best bet for freeing up cash is to spend less going forward. If you don't have a budget, setting one up will help. That way, you'll see exactly what you tend to spend your money on, and you may have an easier time finding ways to scale back in certain categories -- specifically, those that are non-essential, like entertainment. That freed-up money can then be used to pay off debt.
Cutting back on spending will leave you with more money to pay off debt, but if you're looking at a credit card balance of $5,000 or more, that may not be enough to get you to being debt-free quickly. On the other hand, if you boost your earnings with a second job, it'll be that much easier to knock out your debt.
That second job can be a gig you do on your own terms, or a job where you work a preset schedule and receive a paycheck. If you decide to go the first route, just be careful -- if you work as an independent contractor, you won't have taxes withheld from your wages as you earn them, so you'll need to set money aside to pay the IRS.
Imagine you owe $2,500 on a credit card with a 24% interest rate, and another $2,500 on a card that charges 20% interest. Well, what if you could knock your interest rate down to 15% across the board? With a balance transfer, that may be possible.
As the name implies, with a balance transfer, you move your existing balances onto a new credit card with a lower interest rate, which makes your debt more affordable to pay off. In fact, balance transfer cards often come with a 0% introductory period, so it pays to see if you qualify for one of these cards. That said, some balance transfer cards charge a fee to move your debt over, so be sure to read the fine print and make sure that transfer is worthwhile.
If your credit score isn't great, you may not qualify for a balance transfer, in which case you may find yourself stuck with the high interest rate on your credit cards. If that's the case, but your existing accounts are in good standing (you've made all of your minimum payments to date), it pays to contact your credit card issuers and see if you can negotiate a lower interest rate. Knocking down your rate by even a percentage point or two can help you shed that debt sooner.
If you own a home, you may be able to use it to your advantage on the road to eliminating your credit card debt. One option is to apply for a home equity loan or line of credit and use that money to pay off your debt. In going this route, you will be accruing more debt. But the interest rate on a home equity loan or line of credit will generally be much lower than what a credit card will charge.
Another option is a cash-out refinance, in which you refinance your existing home loan and borrow more than your remaining mortgage balance. You can then use that extra money to pay off your existing credit card debt. Right now, mortgage interest rates are extremely low, so a cash-out refinance could be a more affordable way to shed your credit card debt.
The longer you carry credit card debt, the more you'll pay in interest. Furthermore, a higher credit card balance could hurt your credit score, thereby making it harder for you to borrow money the next time you need to. If you're sitting on $5,000 or more of credit card debt, do your best to knock it out as quickly as possible -- for the sake of your sanity, as well as your finances.
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