Get Rid of Your Credit Card Debt

Currently, the average U.S. household is carrying approximately $7,400 in credit card debt. While sometimes easy to accumulate, credit card debt can be difficult to reduce due to interest rates that are often in the high double-digits. Fortunately, by getting organized, following a budget, taking action to reduce to reduce interest rates, and establishing positive financial habits, it is possible to eliminate your credit card debt.

Steps

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Getting Organized

1. Gather your credit card bills. Collect the most recent bills for every credit card that you have. Account statements contain the basic information about your debt, interest rate, and minimum payments due for each account.
   • There are many free online tools and apps that can help you collect and organize your account information.
2. Review your credit card statements. Make a list that identifies the details of your debt. For each account list:
   • The name of the card.
   • The balance on the card.
   • The interest rate for the account.
   • The monthly minimum payment amount.
   • Any additional fees for late payment or account overages.
3. Calculate the total amount of your debt. Add up the balances you owe on each card to get the total amount of credit card debt that you currently have.

Increasing Your Credit Card Payments

1. Create a monthly budget. Once you are fully aware of your debt situation, get a clear picture of your finances by creating a budget. This will inform you exactly what your revenues and expenses are and will help you create more savings to reduce debt.
   • List all your sources of income and add them up.
   • Move on to list your necessities. These include essential needs that are due regularly like rent, utilities, car payments, food, communication, and debt repayments. Keep in mind that just because these are essential or fixed expenses does not mean that they cannot be greatly reduced to find savings.
   • List your discretionary expenses. Discretionary expenses are costs that you can change or avoid altogether such as buying new clothing or eating dinner out. The best way to get an idea of these expenses is to look at your bank or credit card statements for a month, and add up all the expenses that are not in your fixed expenses category. If you want better accuracy, take an average over several months and use this figure.
   • Subtract your total expenses from your revenue. This is how much you have left over, or alternatively, how much extra you can afford to pay down to your credit cards.
2. Reduce your expenses. Try to figure out how to decrease your expenses each month so that you can use more funds to pay down your credit cards. Target primarily variable expenses listed in your budget to find ways to save money.
   • Make meals at home instead of eating out.
   • Make coffee at home instead of buying expensive coffee drinks.
   • Delay expenses that can wait for later, like new clothes.
   • Borrow books, music, and movies from the public library instead of buying them.
   • Do not forget to look into your fixed expenses category as well. Can you move into more affordable housing? Find a roommate? Walk more to spend less on gas? Use a less extravagant plan for your cell phone (perhaps only 1GB of data a month instead of 3GB)?
3. Increase your credit card payments. Once you have lowered spending using the above tips, you should be able to free additional money each month. Apply some of that additional income to your credit cards and save some for an emergency.
   • For example, upon creation of your budget you may observe you make $1500 per month, and have $1400 a month in expenses. After implementing the savings tips (for example, you drop down to a cheaper phone plan, stop eating out, and start walking to do basic errands), you manage to find $300 in savings. You now have $400 in additional cash. Perhaps $300 can go to your credit card debt and $100 can go into emergency savings.
   • Don't forget to look at your income too. Are there ways to boost your income? Perhaps you can work more hours, look for a better job, or get a part-time job for ten extra hours a week.
4. Reassess your debt monthly. Make a list of your balances, interest, and fees every month. Check for unanticipated fees and to make sure your payments have been received and credited to your account.

Reducing Interest Rates

1. Pay off the card with the highest interest rate first. Pay your cards off one at a time, starting with the account charging you the most interest. This will reduce your debt faster because you'll be paying a lower interest rate on the remaining cards.
   • To do this, take your extra money each month, and make the minimum payment on all your cards except the highest interest rate card, then apply all the remaining money to paying down your highest interest rate credit card.
2. Ask for a lower interest rate. Call each creditor and ask if they will lower the interest rate on your account. Even a slightly lower rate can add up to a lot of savings over time. If one company agrees to lower your rate, ask other creditors to match their competitor.
   • It is possible to lower credit card interest rate just by asking. In fact, a recent survey found that when 50 credit card customers (of all credit backgrounds) called and asked to have their rates lowered, 56% successfully received lower rates, often by substantial amounts.
   • The following script was used to reduce rates, "Hi, my name is [Your Name]. I am a good customer, but I have received several offers in the mail from other credit card companies with lower APRs. I want a lower rate on my card, or I will cancel my card and switch companies."
   • Even if you have a poor credit score, do not hesitate to ask for a rate reduction. Persistence is key, and if the additional representative is not receptive, ask to speak to a supervisor. Credit card companies are eager to keep customers and are willing to negotiate rates to do so. State that you have been having difficulty making monthly payments, that a lower rate would help, and you currently have better offers from other credit card companies. At this point, ask for a rate you would consider more reasonable.
3. Consider a balance transfer credit card. Balance transfer credit cards charge low rates (sometimes 0%), on balances you transfer from other credit cards. These can be a great way to quickly reduce your interest rate, and therefore your overall payment.
   • Transfer balances only if you are able to pay off the debt during the low interest introductory period. This introductory period can last from 12-24 months, and during this point you would pay no interest. Afterwards, a higher interest rate may apply.
   • Creditors may charge fees for balance transfers. Check to see if the fee plus the new interest rate is still lower than your current rate.
   • Typically good credit is required to explore this option. It is always worth applying -- call all available banks to ask what kinds of balance transfer cards they have, and how to apply.
4. Consider a debt consolidation loan. This involves taking out an additional loan, such as a line of credit with a lower interest rate, and transferring your credit card balances to that loan. This has the added benefit of rolling all your credit card payments into one simple payment. Simply call your bank and ask for options in this regard, but be very aware of the risks.
   • Most people who consolidate their debt end up with more debt later on. Why? Because freeing up credit card space often results in more credit card usage. If you do get a debt consolidation loan, make a special point to not use your credit cards any more than absolutely necessary.
   • Be aware that although interest rates are lower, the loan terms are often longer, which means you may actually spend more in interest over time.
5. Apply savings to your credit card debt. One effective way to reduce total interest payments (although not necessarily rates), would be to apply any savings you have to your credit card debt to reduce the overall balance.
   • This can effectively save money, since the large interest being charged on credit card balances greatly exceeds the minimal interest typically obtained from a savings account.
   • Ensure that you never use emergency savings for this. Always use additional savings beyond what you would require to meet your cost-of-living expenses for several months.

Preventing Greater Debt

1. Pay the minimum balances on time. Paying at least the minimum balance on each card every month, on time, is a requirement for maintaining a good credit rating and avoiding additional late fees that will add to your debt.
   • If you can't make the minimum payments, use the tips in Parts 2 and 3, but remember that paying the minimums will not reduce debt. Instead, it helps to avoid late fees, which can add to overall debt.
2. Stop making charges. Don't make any new charges on your credit cards, especially on any higher interest accounts or accounts that are near or over your credit limit. If you have to, cut up cards so that you will not use them impulsively.
   • Not adding to debt is just as important as paying debt off. A good tip is to practice just living on cash if possible. Attempt this for one full week to start. Assume that if you cannot afford something with cash, you cannot afford it at all. If you require records and receipts, it is okay to use one credit card and pay completely each billing period.
3. Follow your budget religiously. Once you have created a budget that identifies savings to use for credit card payments, make sure you stick with it.
   • Sticking to cash is one of the best ways to avoid impulse purchases that could deter you from sticking to your budget. Your budget takes what cash you earn, and subtracts cash expenses. If you can commit to using cash only, every expense you have for the month should be covered by your incoming cash, which means there is no use for credit. If you find yourself out of cash, it means you were not sticking to your budget.
   • Cutting up credit cards, as mentioned earlier, is an excellent solution to make sure you do not use them for impulse purchases.
4. Avoid closing credit cards. While closing credit cards can be a tempting option to prevent further usage, it can cause more harm then good.
   • One large aspect of your credit score is what is known as your "credit utilization", which refers to how much of your available credit that you use. By closing cards, you reduce your available credit, and thereby increase your overall credit utilization. This can harm your credit score, and make getting future loans more challenging. A better option is simply to cut up credit cards.
   • In addition, having multiple types of credit (like mortgages, auto-loans, credit cards) improves your credit score. Therefore, by maintaining your credit cards, you are holding an additional type of credit. If you feel you cannot keep the card and not use it, cut it up.
   • You may also want to look into how to improve your credit score.

Considering Debt Counseling

1. Think about consulting professionals for help. If you feel overwhelmed, reputable debt counselors can help negotiate with credit card companies and help you to create a debt repayment plan that will work for your circumstances.
2. Look for a local non-profit debt counseling service. A not-for-profit service is more likely to be legitimate. Many for-profit debt services charge high fees and can lead to even greater debt. Ask friends or family for referrals to find a good service. Reputable non-profit debt counselors can also be found through local institutions, such as:
   • Universities
   • Military bases
   • Credit unions
   • Public housing authorities
3. Work with a reputable counselor to decide if you need additional help. Debt counselors may suggest a debt management plan or a debt settlement plan. These services can help with debt repayment but they have complicated benefits and costs. Discuss any plans in detail with a counselor to make sure you understand any fees and risks involved.
   • Be aware that these costs could potentially include a worsening of your credit score, as debt settlement typically has a negative impact on your credit score. The degree to which your score is affected depends on how many account are being settled, as well as the amounts. Make sure to discuss this with any debt counselor before proceeding, to ensure the benefits of less debt outweigh a worsened credit score.

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Sources and Citations

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