How to Handle Credit Card Debt When You're in Too Deep
by Dana George | Updated July 21, 2021 - First published on April 25, 2021
When credit card debt is weighing you down, it's time to find relief.
If the typical American charged each of their credit cards to the limit, they would end up $30,365 in debt -- that's the average credit card limit in the U.S. More than $30,000 in credit card debt may not seem like a big deal to someone with secure employment who earns more than enough to pay it off, but it's all relative. If you're currently unemployed or just making ends meet, even $5,000 in credit card debt may feel overwhelming.
Here, we'll discuss real steps you can take to handle credit card debt when it becomes too much. They won't all apply to your situation, and that's okay. Pick and choose what works for you.
Choose a payoff strategy
If you have a little extra money left over each month (or can find some by trimming your budget), you can pay off your credit card debt a little faster. None of these will work overnight, but if you choose a debt payoff strategy and stick with it, you'll reduce the amount of interest you have to pay and you'll get out of debt faster. Here are three examples.
The debt snowball method requires you to put extra funds toward your debt with the smallest balance each month. Let's say you have three credit cards. Their balances are $500, $1,500, and $4,000. You would make the minimum payment on each card, but you'd tack on any extra funds you can to the card with a $500 balance. For example, if the minimum payment on that card is $10 and you can come up with an extra $25, make a monthly payment of $35 until that balance is paid in full.
Once that is paid off, you'd tackle the next largest balance. Let's say the minimum monthly payment on the $1,500 balance is $45. You would pay that, but now you'd add the money you were paying on the first card ($35). That means, instead of paying $45, you would pay $80 ($45 + $35 = $80). With this method, that card would be paid off faster than it would have been with minimum payments alone. Once you've zeroed out the balance, you'll apply the $80 you were paying to the last remaining card.
Eliminating smaller balances first can help you score quick wins and keep up your debt-paying motivation.
Debt avalanche is similar to debt snowball, but instead of paying off the card with the lowest balance first, you pay off the card with the highest interest rate. Once it's paid in full, you direct the payment you were making on that card to the card with the next highest interest rate. Paying off large sums first can help you save money on interest, so some people prefer this method of paying down debt.
Debt management plan
There are legitimate credit counseling services that negotiate your debt with your creditors. The goal is to come up with a payment plan that you can afford. You make one monthly payment to the credit counseling agency and it distributes agreed-upon amounts to each creditor. Some credit counseling services offer other services, too, like budgeting classes. Taking advantage of these may be worth your time and any fees you'll pay for the service. However, you can do the same things on your own with a little initiative.
If you have tried everything within your power to stay on top of your credit card bills and just can't do it, call your credit card companies. Explain your situation, let them know you want to pay your bill but are struggling, and ask if they can help. Often, they will lower your interest rate or forgive late fees and other charges. The trick is to stick with any agreement you make with your creditors. For example, if you promise to pay $50 a month on a bill, make sure you always make the full payment. A creditor can rescind its assistance if you fail to hold up your end of the bargain.
Important note: While each of these options involves negotiating with your creditors and can help you get out of debt with your bank account intact, entering into a payment plan will impact your credit score. That's because creditors report payment agreements to the credit reporting agencies. You must weigh whether the hit on your credit report is worth getting out of debt faster. But if your credit score is already in trouble due to credit card debt, it could be worthwhile.
Transfer credit card debt
If you have a strong credit score but still face the weight of unwanted credit card debt, consider moving your debts to a balance transfer card. Many of the best balance transfer cards offer a 0% introductory APR that usually lasts 12 to 18 months. Let's say you have a balance of $10,000 and qualify for a balance transfer credit card with a 0% promotional rate. The rate lasts 18 months, so as long as you make a monthly payment of $555 you'll have all your credit card debt paid off in 18 months without paying a penny more in interest.
Consolidate credit card debt
Taking out a debt consolidation loan is a great way to get out from under your debts. For example, say you have $10,000 in credit card debt at 17% interest. If you take out a personal loan to consolidate that debt at 6.5%, you'll save both money and time. Here's how:
|Type of Debt||Amount Owed||Interest Rate||Monthly Payment||Months to Repay||Total Interest Paid|
This scenario assumes that you'll continue to make a monthly payment of about $300 on your credit card debt. If that's the case, you would have it paid off in 46 months and spend $3,630 in interest. By consolidating the debt at a lower interest rate, you would have it paid off in about 36 months and pay only $1,036 in interest. That's an extra $2,594 to invest with a broker or build up your emergency savings account.
There's no easy way to get out of debt, and companies that promise to wipe out debt or magically improve your credit score are likely to be scams. The truth is, getting out of credit card debt is like restoring a classic car: You won't get it done overnight, and it may not be easy, but one day, you'll have the satisfaction of knowing that you did it yourself.
Top credit card wipes out interest until 2023
If you have credit card debt, transferring it to this top balance transfer card secures you a 0% intro APR into 2023! Plus, you'll pay no annual fee. Those are just a few reasons why our experts rate this card as a top pick to help get control of your debt. Read our full review for free and apply in just 2 minutes.
About the Author
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.