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If you have credit card debt, you are not alone. Americans have more than $ 830 billion in unpaid credit card balances, according to Experian.
Having a large credit card balance could prevent you from qualifying for a new car loan or even a mortgage. It might also be more difficult for you to get out of debt as interest accumulates, increasing the total amount owed.
Here is how to get out of credit card debt in five steps:
- Consolidate your debts with a personal loan
- Transfer your credit card balance to a new card
- Using the debt avalanche method
- Make additional payments
- Contact a credit counseling agency for help
1. Consolidate your debt with a personal loan
Credit cards generally have high interest rates – the average credit card interest rate is 16.97%. With rates this high, a large chunk of your payments goes toward principal rather than interest. To make your payments more efficient, consider consolidating your debt with a personal loan.
With a credit card consolidation loan, you get a loan from a bank, credit union, or online lender for the amount of your credit card debt. Then you use this loan to pay off your credit cards. Personal loans tend to have much lower interest rates than credit cards, so you will save money over time. Plus, debt consolidation loans have fixed monthly payments and an end date, so you will know exactly when you are paying off that debt.
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2. Transfer your credit card balance to a new card
If you have good credit, another strategy you can use is credit card balance transfer. A balance transfer occurs when you move your credit card balance to another credit card with a lower interest rate. There are many credit cards on the market that offer an introductory 0% APR for 12-18 months, giving you a year or more to pay off your balance without paying interest.
With 0% APR, your payment will go entirely to principal for the duration of the promotional period, which will help you save money. One downside to this approach, however, is that high credit usage could impact your credit until the new credit card is paid off. You should also be careful of any balance transfer fees you might have to pay, usually around 3% of the balance.
3. Use the debt avalanche method
If you have more than one credit card with a balance, a good way to pay off your debt is to use the debt flood method.
With this strategy, you list all of your debts from the one with the highest interest rate to the lowest. You continue to make minimum payments on all of your credit cards. However, all the extra money you have goes towards the credit card with the highest interest rate.
After you’ve paid off the most expensive credit card, you transfer the payment you made on it to the card with the next highest interest rate. You continue this process until all of your credit cards are paid in full.
4. Make additional payments
If you stick to the minimum required payments on your credit cards, it can take you years to pay off your debt. To really get rid of these balances, you have to pay more than the minimum required.
To find extra money to spend on payments, consider these options:
- Decrease spending : Create a budget and look for areas where you can cut back. You might be able to reduce your living expenses by adding a roommate, reducing the size of a smaller apartment, or cooking at home instead of dining out.
- Boost your income: There are only a limited number of expenses that you can cut from your budget, so increasing your income is essential. Consider working overtime, freelance work, or finding a sideline to increase your monthly income. If you put that extra income into your credit card balances, you can get rid of your debt months sooner.
- Sell unused items: You probably have unused clothes, toys, electronics, or books in your home. Turn these things into cash by selling them on sites like eBay or Poshmark. If you use the earnings to make additional payments on your credit cards, you can save money over time.
5. Contact a credit counseling agency for help.
If you are struggling with debt and can’t move forward, you can ask for help. A reputable credit counselor from a nonprofit credit counseling agency can help you budget, develop a repayment plan, and can even work with your creditors to lower your interest rates.
The United States Trustee Program has a list of credit counseling agencies that you can use to find a reputable agency.
What to do if you really have credit card debt
In some cases, your debt can be so large that it may seem impossible to pay it off. If so, there are other options to consider:
Try a debt management plan
As part of a Debt Management Plan (DMP), you will work with a credit counselor. Each month you will make a deposit to the credit counseling agency and they will assign it to your creditors for you. The credit counselor will work with your creditors to potentially lower your interest rate or fees. Typically, it will take around 48 months to pay off your debt with a DMP.
Consider debt settlement
Debt settlement is a risky process where you work with a company to settle your credit card balances. Debt settlement companies are generally for-profit organizations that charge high fees for their services. They will work with your creditors to convince them to pay less than you actually owe.
Debt settlement companies usually require you to stop paying for months, which can ruin your credit. You will also need to make a large lump sum payment to settle your debt. Finally, there is no guarantee that your creditors will agree to the debt settlement, so you could end up paying fees to no avail.
Only choose bankruptcy as a last resort
If your debt is insurmountable, declaring bankruptcy may be a good option for you. When you file for bankruptcy, the government removes your responsibility for your existing debt. Depending on the type of bankruptcy you are using, you may even be able to keep some of your assets, like your house or your car.
Bankruptcy is a serious decision. It can destroy your credit and can stay on your credit report for up to seven years – and the process can be long and expensive.
What not to do if you have credit card debt
If you are struggling with your debt, you might be tempted to pay off your debts by taking out a loan from your 401 (k) or by dipping into the equity in your home. However, both of these strategies are risky.
Take out a 401 (k) loan
If you take out a 401 (k) loan, you lose the ability to grow your money. But even worse, you have to repay the loan with after-tax dollars. And, if you quit your job or are laid off, you must repay the loan in full within 90 days of leaving.
Get a home equity loan
A home equity loan can seem like a great way to access cash at low interest rates. However, there is a catch: Home equity loans are secured and your home serves as collateral for the loan. If you fall behind on your payments, you could lose your home.
You can get out of credit card debt
While interest charges can make paying off your credit card debt more difficult, it’s not impossible. By developing a debt repayment strategy, reducing your expenses, and consulting a professional, you can find out how to get out of credit card debt and get on with your life.