How to get out of credit card debt
What is Credit Card Debt?
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 with a credit card, your credit card debt increases. When you make payments, it will decrease.
This type of debt accounts for a large portion of Americans’ debt, with total US credit card debt totaling $893 billion in the first quarter of 2020.
How to get out of credit card debt
There are two keys to getting out of credit card debt:
- Avoid adding more. This means only using your credit cards for essential expenses, if at all.
- Repay as much as possible each month. The more you pay, the faster you can pay off your debts.
Start by adding up all your essential expenses. Compare this figure to your income and decide exactly how much you should pay monthly on credit card debt. Then make sure to pay that amount every month consistently. Repaying what you owe in full can take some time, that’s normal.
For example: if you take home $1,500 a month and spend $1,200 on essentials, you will have $300 left over to pay off your debts.
Even if you only have $50 or less a month to spend 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 might want to consider depending on your situation.
Balance transfer credit card
A balance transfer credit card is a credit card that you can use to pay other cards. You are essentially transferring your debt from one credit card to another. Why would you do that? Many balance transfer credit cards have a big advantage over traditional credit cards: they don’t charge interest on the debt you transfer from other cards for a certain 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. It’s a good way to consolidate your credit card debt. Instead of having to juggle multiple credit card bills each month, you’ll only have one credit card to pay.
Balance transfer credit cards have two disadvantages:
- They usually charge a fee, called a balance transfer fee. The amount of the fee depends on the card. Most charge 3% to 5% (with a minimum of $5) of the transferred amount. So if you transfer $100 of credit card debt to a balance transfer card, your new balance transfer card will likely charge you a $5 fee. If you transfer $1,000, you will likely pay up to $50 in fees.
- You need good credit to qualify for balance transfer cards with a 0% introductory APR. If your credit score is not 670 or higher, it is difficult to get approved.
Learn more: A Complete Guide to Balance Transfers
Military families can get some form of government assistance for credit card debt. The Servicemembers Civil Relief Act (SCRA) limits the interest rate a lender can charge while you are on active duty. For debt incurred before you entered active duty, lenders can only charge you 6%.
Since average credit card interest rate is 16.43%, the SCRA makes a big difference. You could reduce the interest rate on your credit card debt by 10% or more.
You must notify creditors in writing if you qualify for SCRA. This notice must include a copy of your military orders or other appropriate indicator of your service. You must also send a notice within 180 days of the end of your military service.
Debt consolidation loans
A debt consolidation loan is a personal loan that you can use to pay off credit card debt. Like balance transfer credit cards, debt consolidation loans have a few key benefits:
- Your loan could have a lower interest rate than your credit cards, saving you money.
- You will only have one monthly payment.
Another advantage of debt consolidation loans is the structure they offer. Your loan will have a fixed term, for example 48 or 60 months. After this period of time, your debt will be repaid (if you continue to pay). 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 repayment terms.
credit card debt negotiation
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 lower interest rates or monthly payment amounts for cardholders.
Another option, if you have saved some money, is to offer credit card debt settlement. With this method, you offer the card issuer a lump sum payment to settle your debt. This way you save money while paying off your credit card debt immediately.
There are debt settlement companies that offer help in negotiating with credit card companies. However, they also charge a fee, so it’s more affordable to trade on your own.
If you have too much credit card debt to realistically pay off, you can file for bankruptcy. There are two chapters of bankruptcy you could apply for:
- Chapter 7 Bankruptcy: This type of bankruptcy requires the sale of your property to pay off as much of your debt as possible. You can usually exempt certain goods, which means you don’t have to sell them. Once you have followed the terms of this bankruptcy, the court cancels your remaining debt, so you no longer need to pay it. You must pass a means test to qualify for Chapter 7 bankruptcy. This requires you to show that your income does not exceed your state’s median income.
- Chapter 13 Bankruptcy: This type of bankruptcy involves reorganizing your debts, possibly negotiating them for smaller amounts, and creating a three to five year payment plan. Anyone can file for Chapter 13 bankruptcy, as no test is required to qualify.
Both types of bankruptcy will have a very negative impact on your credit score. Bankruptcy can take a heavy toll on life, making it an option of last resort.
What happens if I don’t pay off my credit card debt?
If you don’t pay off your credit card debt, it can cost you money and hurt your credit score.
First, your credit card company will charge you interest every month. The more debt you have, the more interest you will pay on your credit card.
Also, as your credit card debt increases, your credit score will suffer. This is due to a number known as the credit utilization ratio. It measures how close you are to maxing out your credit cards. If you are not too far from your credit card limit, your credit score will be lower.
It’s best to keep your credit utilization ratio at 20% or less. This means that if you have a credit limit of $1,000, you should only charge up to $200 on that card to maintain a healthy credit score. Overall, Americans are using 23% of their available credit limits. And of course, people in debt often consume a lot more.
If you miss payments, you’ll likely have to pay late fees. Late payments of 30 days or more can affect your credit score. After 60 days, your card issuer may increase your interest rate to a higher amount (this is called an APR penalty).
If you still haven’t paid after 90 days, the card issuer may close your account and send the debt to a collection agency. This is called credit card delinquency. Unfortunately, credit card delinquency is not uncommon. About 9.1% of credit card balances were overdue for 90 days or more in the first quarter of 2020.
Our credit card repayment calculator below can help you determine how much interest you might pay over time and when you can expect to pay off your debt.