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
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
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
MONTHS TO REPAY
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.
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