Many consumers carry higher credit card balances than ever, with borrowing trends pointing to an increased reliance on credit—as well as an uptick in individual debt. TransUnion reports that the average amount of credit card debt was $6,360 per borrower at the end of 2023's fourth quarter, with a staggering total credit card balance of over $1 trillion for the first time across all consumer cards.
If you find yourself with mounting credit card debt, there are many debt repayment strategies you can use to repay your balances efficiently. Learn about common strategies to help you maximize your available funds and pay off your credit cards as quickly as possible.
Effective debt repayment strategies
There are many approaches to paying off credit card debt, but some take longer than others and can end up costing you far more. If you make only the minimum payment on your credit card each month, you might spend months or even years repaying your debt as interest accrues, depending on your balance and annual percentage rate (APR).
For example, if you carried the average balance of $6,360 on a card with a 20.99% APR and paid $500 per month, you'd pay it off in about 15 months. However, if you could only afford a $120 payment each month, it could take you over 12 years to pay off your balance.
To make the most of each payment toward your debt, consider the following debt repayment strategies.
Debt snowball method
With the debt snowball method, you make minimum payments toward all of your debts but put the bulk of your extra funds toward your smallest debts. For example, if you have $1,000, $2,000 and $3,000 balances across three credit cards, you'd make the minimum payment for all three and additional payments toward your $1,000 balance. You pay off your smallest balance first, then tackle the next smallest balance and so on.
This strategy can help you stay motivated as you pay off your credit cards since you might pay off your smallest account sooner than you would with the debt avalanche approach.
Debt avalanche method
The debt avalanche method targets your most expensive debts—or those with the highest interest rates—first. Like the debt snowball method, you make all of your minimum monthly payments, but unlike that method, you put most of your extra money toward the debt with the highest rate. If you have three credit cards with APRs of 18.99%, 23.99% and 29.99%, you'd pay off the balance with the 29.99% interest rate first. Once that's paid off, you'd move on to the next highest-rate debt.
The debt avalanche repayment strategy can reduce the amount of interest you pay over time and also ensures you're making progress on all of your balances.
Tip: With the debt avalanche method, you may find that you're able to pay off your smaller balances just by making the minimum payments toward them.
Debt consolidation
Debt consolidation is a debt repayment strategy that involves lumping or consolidating your credit card debts into one new debt. It can help you hasten the debt payoff process if you can get a lower APR than what you're currently paying, sometimes significantly.
For example, if you carried $8,500 in debt across three credit cards with APRs of 24.99%, and you paid $300 each month toward your balances—$100 per card—it would take you about four years to pay off your debt and cost you over $4,200 in interest. If you took out a three-year personal loan with an APR of 17.99% to consolidate this debt, you could pay off your debt a year sooner by adding just $7 to your total monthly payment and save over $2,000 in interest.
This method has the added benefits of giving you a single payment to make rather than multiple and can boost your credit score by significantly lowering your credit utilization ratio.
There are a few ways to consolidate your debts, with personal loans, home equity loans and balance transfer credit cards being popular options.
How to consolidate debt
Personal loans can be an effective choice for this debt repayment strategy because they offer quick funding, provide the option for long repayment terms if you need to break your monthly payments into bite-sized pieces and have APRs that are often lower than credit card rates, depending on your credit history.
How to use a personal loan to refinance credit card debt
A debt consolidation loan can be used to pay off your debts with your creditors by moving your balances to a new loan. Once approved, your new lender sends you money to repay your creditors or repays them on your behalf. Then, you typically make one monthly payment toward your new loan's principal and interest.
If you want to use a personal loan to refinance credit card debt, you'll need to apply for an amount that fully covers the total existing debt you want to consolidate. For example, if your credit card balances are $8,000, $5,000 and $2,000, you'll need a loan for at least $15,000.
To get an idea of what amounts and interest rates might be available to you, prequalify for loans with multiple lenders. Prequalification won't affect your credit. Your credit is only impacted when you formally apply for a loan, which requires a hard credit pull that typically has a small and temporary negative impact on your credit.
The goal of debt consolidation is to make your debt easier to repay, so it's important to choose a loan with a lower APR than your average credit card APR. For example, a personal loan with a 12.99% APR can reduce the amount of interest you'll pay on your debt if you have an average credit card APR of 20.99%.
The table below illustrates how your debt's interest can differ when using a personal loan versus a credit card.
If you plan to consolidate your credit card debt, apply for the best personal loan to pay off your balances efficiently and save on interest.
How to consolidate debt with a balance transfer card
In a similar fashion, you may instead be able to transfer your credit card balances to a new or existing credit card to consolidate your debt. This is known as a balance transfer, and some cards will allow you to carry your new balance interest-free for a limited time. The best balance-transfer credit cards feature 0% APR on transfers for 12 months or more, so you can pay off your balance without interest. But before opening a new card, check with your current credit cards to see if any of them offer 0% intro APR promotions on balance transfers.
Tip
Interest may still accrue on purchases made with a balance-transfer credit card during a promotional period, unless the 0% APR also applies to new purchases. Credit cards also often have balance transfer fees—usually 3% to 5% of each transfer.
Creating a budget
Debt repayment strategies are crucial for getting out of debt, but you need to create a budget to stay out of debt. A personal budget helps you make a plan for your money so you have enough for bills, essentials and savings regardless of how much you earn. This way, you can avoid carrying large balances on credit cards that you can't immediately repay.
There are many budgeting methods you can try to stay on top of your spending, including 50/30/20 budgeting, zero-based budgeting and envelope budgeting. No matter which strategy you choose, follow these steps to create a monthly budget:
- Write down your total income: Add up all income for one month, including wages from work, business earnings, interest payments, child support and any other money you receive.
- Add up your expenses: Add all bills and expenses together, like your housing bill, car loan payment, utilities and the estimated amount you spend on things like gas, entertainment and groceries.
- Subtract your expenses from your income: Subtract your total expenses from your total income to determine how much you have left. If there's no money left or your expenses are more than your income, look at all your expenses to find areas where you can cut back.
- Create goals for your leftover cash: If you have money left over in your monthly budget, think about how you can use it wisely. Perhaps you can pay a little more toward your mortgage this month or transfer it to your savings account.
Building an emergency fund
An emergency fund is a place you can keep extra cash to tap into when an unexpected expense comes along, like a car repair or hospital visit, so you don't have to use a credit card. The U.S. Department of Labor recommends saving enough to cover at least three to six months of living expenses for emergencies.
Consider holding your emergency cash in a high-yield savings account so it can grow as it earns interest and you can separate rainy-day funds from spending money.
Tip
If you get a tax refund or cash gift, place it directly into your emergency fund to jumpstart and grow your savings.
Tools and resources for debt repayment
If you find that your credit card debt feels unmanageable or your circ*mstances prevent you from making repayments, there are tools and resources available to help you. Here are a few options you can try to get support or relief with debt repayment.
Negotiate with creditors
As a consumer, you can negotiate with your credit card companies to try to reach a payoff settlement or request a lower APR. Creditors aren't obligated to accept your requests, but they might be willing to work with you on a realistic plan, especially if you experience a hardship that affects your finances, like losing your job.If you and your creditor agree on a plan, get all the details in writing before paying anything.
Credit counseling and debt management plans
Credit counseling services offer support in managing your finances and credit. A credit counselor can give you personalized tips for reducing your credit card debt based on your current situation and may offer advice for creating a budget, building an emergency fund and improving your credit. They can also help with debt management plans.
A debt management plan can help you pay off your debts with the support of a credit counselor, who negotiates your debts with your creditors and advises you on repayment. You could pay less to your creditors with successful negotiation, but debt management plans can take a few years to complete, and you might not be able to use additional credit while enrolled.
To find a reputable, certified credit counselor, visit the Financial Counseling Association of America (FCAA) and National Foundation for Credit Counseling (NFCC) databases.
File for bankruptcy
Filing for bankruptcy should be a last resort when you can not afford to pay your debts, as it has long-term impacts on your ability to borrow money, can take several months to do and is often costly. Bankruptcy may also affect your ability to get a job or apartment.
Chapter 7 bankruptcy requires you to liquidate non-exempt assets to pay creditors. Chapter 13 bankruptcy lets you keep your assets but requires you to make installment payments to creditors for up to five years. Chapter 7 bankruptcy can remain on your credit report for up to 10 years.
FAQs
What should I do if I can't meet my minimum payments?
You have several options if you can't meet your minimum payments, including contacting your creditors to try to negotiate or ask for relief,seeking free credit counseling or signing up for a debt management plan.
How does paying off debt affect my credit score?
When you pay off debt, you reduce your credit utilization, or the amount of credit you're using as a percentage of the credit available to you across your accounts. The amount of available credit you use makes up 30% of your FICO score, so reducing your debt can free up credit and, consequently, improve your score.
Meet the contributor
Amy Boyington
Amy Boyington is a contributor to Buy Side from WSJ.
