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For all their perks, credit cards have one big drawback. Cardholders often end up with credit card debt, which is both stressful to deal with and expensive to repay. Here's how to get out of credit card debt -- and how to avoid it in the future.
Credit card debt is the amount of money you owe on your credit cards. The amount of your credit card debt will change as you use your cards and make payments. Every time you make a purchase using a credit card, your credit card debt will increase. When you make payments, it will decrease.
This type of debt makes up a big portion of Americans' debt, with total U.S. credit card debt totaling $893 billion in the first quarter of 2020.
There are two keys to getting out of credit card debt:
Start by adding up all your essential expenses. Compare that number to your income and decide exactly how much your monthly credit card debt payment will be. Then, make sure you pay that amount each month consistently. It could take time to pay off what you owe in full -- that's normal.
For example: If you take home $1,500 per month and spend $1,200 on essentials, you'll have $300 left for debt payments.
Even if you only have $50 or less a month to put toward paying off your credit card debt, you're making progress.
There are also several tools that could potentially help you get out of credit card debt. Here's what you may want to consider depending on your situation.
A balance transfer credit card is a credit card you can use to pay off other cards. You're essentially moving your debt from one credit card to another. Why would you do that? Many balance transfer credit cards have a big benefit over traditional credit cards: They don't charge interest on debt you transfer from other cards for a set number of months. Depending on the card you choose, you could avoid credit card interest for a year or more.
You can transfer multiple credit card balances to a single balance transfer credit card. This is a good way to consolidate your credit card debt. Instead of having to juggle several credit card bills every month, you'll have just one credit card to pay off.
There are two drawbacks of balance transfer credit cards:
Learn more: A Complete Guide to Balance Transfers
Military families can get a form of government help with credit card debt. The Servicemembers Civil Relief Act (SCRA) limits the interest rate a lender can charge while you're on active duty. For debt taken out before you started active duty, lenders can only charge you 6%.
Since the average credit card interest rate is 16.43%, the SCRA makes a big difference. You could cut 10% or more off the interest rate for your credit card debt.
You need to notify creditors in writing if you qualify for the SCRA. This notice must include a copy of your military orders or another appropriate indicator of your service. You also need to send notice within 180 days of when your military service ends.
Another advantage of debt consolidation loans is the structure they provide. Your loan will have a set term, such as 48 or 60 months. After that amount of time, your debt will be paid off (if you keep up with payments). It will also have a fixed payment amount. This can make it easier to stay on track than with credit cards, which have small minimum payments and open-ended repayment timeframes.
You may be able to call your card issuers to negotiate the terms of your debt. In some cases, credit card companies are open to lowering interest rates or monthly payment amounts for cardholders.
Another option, if you have some money saved, is to propose a credit card debt settlement. With this method, you offer the card issuer one lump sum payment to settle your debt. This way, you save money overall while paying off credit card debt right away.
There are debt settlement companies that offer help negotiating with credit card companies. They also charge fees, though, so it's more affordable to negotiate on your own.
If you have too much credit card debt to realistically pay off, you can file bankruptcy. There are two chapters of bankruptcy that you could apply for:
Either type of bankruptcy will have a very negative impact on your credit score. Bankruptcy can have big life consequences, making it only a last-resort option.
If you don't pay off your credit card debt, it can cost you money and damage your credit score.
First, your credit card company will charge you interest every month. The more debt you have, the more credit card interest you'll pay.
Also, as your credit card debt increases, your credit score will suffer. This is because of a number known as your credit utilization ratio. It measures how close you are to maxing out your credit cards. If you're not too far from your credit card's limit, your credit score will be lower.
It's best to keep your credit utilization ratio to 20% or less. That means if you have a credit limit of $1,000, you should only charge up to $200 on that card to keep a healthy credit score. Americans overall use 23% of their available credit limits. And of course, those in debt often use much more.
If you miss any payments, you'll likely incur late fees. Payments that are late by 30 days or more can affect your credit score. After 60 days, your card issuer can raise your interest rate to a higher amount (that's called a penalty APR).
If you still haven't paid after 90 days, the card issuer might close your account and send the debt to a collection agency. This is known as credit card delinquency. Unfortunately, credit card delinquency isn't uncommon. About 9.1% of credit card balances were delinquent by 90 days or more in the first quarter of 2020.
Our credit card repayment calculator below can help you determine how much interest you may pay over time and when you can expect to pay off your debt.
The best way to prevent credit card debt is to pay your cards off in full every month. That's obviously easier said than done, but there are a few ways to avoid overspending:
Credit card debt is a financial challenge that many people face. The average credit card debt is $6,194, so it could take time to pay off what you owe in full. But you'll get there if you consistently pay as much as you can.
Here are some other questions we've answered:
Credit card debt is the amount of money you owe on your credit cards. The amount of your credit card debt will change as you use your cards and make payments.
There are two keys to getting out of credit card debt:
While there aren't government debt relief programs for credit card debt, members of the military can qualify for the Servicemembers Civil Relief Act (SCRA). Under the SCRA, active-duty military are entitled to interest rates no higher than 6% on debts taken out before they started active duty.
The SCRA covers all types of debt, including credit card debt. To qualify, you must notify the creditor in writing within 180 days of completing your military service.
The best way to prevent credit card debt is to pay your cards off in full every month.
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