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Credit cards can be a huge convenience. But if you aren’t careful, they’re also an easy way to get into serious financial trouble and end up with high debts and bad credit. The best way to handle credit cards is to spend frugally and pay promptly. But for those people already struggling, the following are some ways to reduce credit card debt, from payoff strategies to debt settlement.
Key Takeaways
- Credit card debt is expensive, and having too much of it can hurt your credit score.
- Credit cards have high interest rates, so any balance left at the end of the month can grow quickly.
- To reduce your credit card debt, pay off as much of your balance as you can at the end of each billing period.
- If you have several credit cards, try to pay off the one with the highest interest rate first.
- Make sure to pay at least the minimum payments each month. One missed payment can seriously damage your credit rating.
Downsides of Credit Card Debt
There are many good reasons to carry less credit card debt or even none at all. Among them are:
Cost
Credit card interest is much higher than other forms of debt. If left unchecked, it can take a big bite out of your monthly budget.
Financial advisors generally say the average person shouldn’t pay more than 10% of their net take-home pay on credit cards or other consumer debt (not including mortgages), said Howard S. Dvorkin, CPA, founder of Consolidated Credit Counseling Services and chair of Debt.com. Spending more than that might make it harder to make ends meet.
Risk
Lewis J. Altfest, CFP, CEO of Altfest Personal Wealth Management and associate professor at Pace University, notes credit card debt often represents a risk. It can also be an early warning sign of trouble ahead.
“Too frequently, [financial planners] see abusive use of credit leading to financial difficulties,” said Altfest. “Sometimes people just get in too deep.”
Taxes
Unlike some other kinds of debt, credit card interest isn’t tax-deductible. By contrast, the interest you pay on a mortgage or student loan typically earns you a deduction.
Lower Credit Scores
One factor that bureaus consider when computing your credit score is called your credit utilization ratio. This is how much money you currently owe as a percentage of all the credit you have available to you. For example, if the limits on your credit cards total $15,000 and you owe $5,000, your credit utilization ratio is approximately 33%. A credit utilization ratio greater than 30% can negatively impact your score.
Warning
Avoid the temptation of making the minimum payments on credit cards. High interest rates can make credit card debt balloon quickly!
How to Attack Credit Card Debt
If you want to reduce your credit card debt, here are some of the steps you can take:
Pay More Than the Minimum
Suppose you owe $5,000 on a credit card and are paying 15% interest. Your credit card company might allow you to make a modest minimum payment, such as 2% of your balance or $100 monthly. But just making that minimum payment will result in years of debt and many hundreds of dollars in added interest.
Assuming you make no new purchases on the card and pay that $100 minimum each month, how long will it take to pay off the $5,000 debt? The answer is 79 months, or more than six and a half years. You will also end up paying close to $2,900 in interest. That’s a lot of money to pay to borrow $5,000.
Pay Off the Highest Interest Rate First
“Let’s say you have four credit card debts,” said Charles Hughes, CFP, founder and principal of CG Hughes Company. “Instead of making four equal payments on all of the cards, consider making the biggest payment on the card with the highest interest rate.” After you’ve paid that card off, move on to the one with the next highest rate. This technique is called the debt avalanche, and it’s typically the most financially efficient choice.
An alternate debt repayment strategy, the debt snowball, would have you start by completely paying off the smallest debt first (making only the minimum payments on the others). Then you’d methodically pay off the rest of your debts from smallest to largest. This gives the psychological benefit of reducing the number of debts you have through a series of smaller victories until only the the biggest one is left.
Important
High credit card spending can hurt your credit score—even if you use less than your credit limit.
Avoid New Debts
Put your cards away for a while and try to make your daily purchases in cash. This could also be an opportunity to do a cash-flow analysis to figure out where your money has been going, Hughes notes. You’ll probably spot unnecessary spending that you can cut back on.
Transfer Your Balances
You may be able to transfer your balances from high-interest cards to lower-interest ones. Such offers often come with a 0% introductory interest rate for six to 12 months. Enticing as that may sound, there are some caveats. For one thing, transfer offers tend to require an upfront fee of 3% to 5% of the amount you’re transferring or a flat balance transfer fee. Even so, it could be worth it, especially if you use one of the best balance transfer cards available.
Consolidate Your Debts
You might also take out a personal loan or line of credit to consolidate your credit card balances (and other debts) at a lower interest rate. With such a strategy you could conceivably convert card debt on which you’re paying 15% or more in interest to a loan with an annual percentage rate (APR) more in the range of 4% to 8%.
Just remember to bank what you save on interest rather than spending it and increasing your debt, and be sure to compare different personal loans in order to find the best one for you. You may also want to work with a debt relief or settlement company to help you reduce the amount of outstanding debt.
What Is the Best Way to Reduce Your Credit Card Debt?
The first step to reducing credit card debt is to identify and eliminate unnecessary expenses, such as entertainment or luxuries. After that, it’s important to pay off as much of your debt as possible every month. The fastest way is to pay off the highest-interest debts first while paying the minimum on every other card. Larger debts can be consolidated or transferred to your lowest-interest card, but this may incur additional expenses.
How Can I Reduce Credit Card Debt Fast?
It may be possible to reduce your credit card debt quickly with the help of a debt settlement firm. These businesses will negotiate with credit card companies on your behalf, usually for a fee. More serious cases of unmanageable debt can be discharged in bankruptcy.
How Should I Negotiate With Credit Card Companies to Reduce Debt?
The easiest way to negotiate with a credit card company is by calling their main phone number and asking for a debt settlement plan. Some credit card companies are willing to forgive a portion of your debt, provided that you agree to pay the remaining amount. This is likely to damage your credit rating, but if a borrower is in truly dire straits, the credit card company may be better off getting some of the money due rather than hounding the borrower for the full amount.
The Bottom Line
Being stuck in credit card debt can be frustrating and the cause of considerable financial stress. There are proven strategies that can help you break free from being in perpetual debt that will save money and improve your credit score. These include always paying more than the minimum payment on outstanding card balances, prioritizing the account with the highest interest rate, transferring balances to lower interest cards, and avoiding taking on new debt.
Getting unstuck isn’t always a option for those with limited incomes, but by eliminating unnecessary expenses and focusing on gradually paying down the principal, most people can make significant progress over time.
