How to Effectively Get Out From Under Credit Card Debt

Credit card debt is unfortunately a likely outcome for people who are affected by disasters as the recovery process is long, expensive, and can put a significant financial strain on a family. Our friends at LendEDU put together this great resource on real solutions for getting out of credit card debt… it is possible!

Credit card debt is a means to an end for millions of consumers each year. The ability to quickly pay for an unexpected expense, such as a car repair or a medical bill, is one of the biggest benefits of having available credit. However, without a plan to pay off credit card balances, many people find themselves drowning in high-interest credit card debt.

Over the last year, the total amount of consumer debt hit a peak. As interest accrues on revolving debt balances each month, it can seem like there is no end in sight to paying off what is owed. This is especially true when interest rates are over 20% on some credit card accounts, and only the minimum monthly payment is being made.

Fortunately, there are ways to dig yourself out of credit card debt and get back on track with your financial life through one or more of the following strategic methods.

Debt Avalanche Method

One way to get out from under the weight of credit card debt is to use the debt avalanche method. Through this plan, you pay the minimum on all credit card balances except the debt with the highest interest rate, focusing extra funds to this card. When the card is paid off, you roll the extra payment you were contributing to this debt to the next highest interest rate card, and so on until you are out of debt completely.

This method ultimately saves consumers money because they are tackling the biggest challenge in paying off credit card debt – interest charges. Reducing the balance on the highest-interest debt means less interest charges each month, which also speeds up the repayment process. The debt avalanche method can also expedite repayment if you are willing and able to stick to the plan of high-interest cards first, and you maintain the extra payments on each subsequent card. However, this strategy only works if you have a plan to not add to your revolving debt while you are paying down balances, and if you have multiple accounts to pay off in the first place.

Consolidating Credit Card Debt

Debt consolidation is another strategy you can use to get out of debt faster. With either a personal loan or a home equity loan, borrowers can take a lump-sum loan and pay off multiple, revolving debts. The loan balance is then repaid over the course of several months or several years as installment debt. Instead of managing multiple debts at one time, this method allows you to pay a single monthly payment for a fixed period, hopefully with a lower interest rate. You also have an end in sight because a debt consolidation loan repayment term has a set end date.

If you are able to obtain a personal or home equity loan, you can save a significant amount on interest charges with this method. Credit cards have an average interest rate of just above 17%, while debt consolidation loan rates may be as low as the single digits. Home equity loan rates may be even lower than personal loan rates. To make a consolidation effective, however, you need to have the self-restraint to not rack up credit card debt on your now-available credit lines. You also need to have relatively strong credit to qualify for a personal or home equity loan, and monthly cash flow high enough to cover your loan payment for an extended period.

Debt Snowball Method

Similar to the debt avalanche method, the debt snowball strategy may be a viable option for paying off your credit card debts. With this strategy, you list all your credit card balances in order of lowest to highest, and begin paying off the smallest balance first. While you focus your attention on the smallest debt, you pay the minimums on all others. Once the debt is paid, you simply take the extra you were paying on the lowest balance card and apply that to the next.

The snowball method can expedite your payoff by creating much-needed momentum. When you see one balance is paid in full, you are likely to keep going toward paying off other balances at the same rate. However, this strategy will cost you more in interest charges than the debt avalanche method. Also, you need to have the same control over adding to your credit cards as they become paid off over time if you want this to result in no credit card debt.

Using a Balance Transfer Card

Finally, using a balance transfer card may be an option for paying off debts. With a balance transfer offer, a credit card issuer offers a low or zero percent APR for a set period of time, often ranging from 12 to 18 months. You can use your available credit line from the balance transfer card to pay off higher-interest debts, potentially saving you hundreds in interest charges each month.

While a balance transfer may be the lowest cost strategy, it has some drawbacks. You typically need to open a new credit card to receive a balance transfer offer, and this can ding your credit score. Also, balance transfers often come with fees, ranging from 1 to 5% of the amount transferred. If you don’t pay off the balance during the low or zero APR period, you’ll owe interest on either the entire amount transferred or the amount you still owe. This could create a cycle of balance transfers that never ends.

The Bottom Line

Getting out from under credit card debt is possible, even if it may not feel that way day to day or month to month. Using one of the strategies above can save you money on paying off your debts, speed up the payoff process, or a combination of the two. Before selecting a method that works best for you, be sure to understand the costs, both in interest and monthly payments moving forward, and be prepared to stop adding to your credit card debts in the future.

 

By Andrew from LendEDU – a consumer education websites and personal finance resource. Check out the blog if you want to do some research in finance!

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