How To Pay Off Credit Card Debt: The Basics
Credit cards revolutionized the way people approach payments. It’s easier than ever to make purchases, whether they are small things like dining out or bigger splurges like tropical vacations. Unfortunately, the ease of making credit card purchases also means it’s easy to lose track of how much you’re charging, and the amount you spend could exceed what you are actually able to pay.
If you’re struggling with credit card debt, you are not alone. According to data from major credit bureau TransUnion, the average outstanding balance in the fourth quarter of 2022 was close to $6,000. Thankfully, there are a few steps that you can take to get your credit card balance under control and start saving towards a brighter financial future.
3 Steps To Pay Down Credit Card Debt
Taking just three basic steps can help you get a grip on your credit card debt and get it under control.
Use your credit cards less — starting now.
Contact your creditors to negotiate a payment plan.
Decide on your debt payment strategy.
1. Reduce Your Credit Usage
Getting caught in a loop of credit card debt can feel like an inescapable cycle: You pay off interest, have no money leftover for bills and are forced to put even more expenditures on your credit card. The first step to taking control of your credit usage is to reduce the amount of money that you continue to put on your cards. This will stop even more interest from compounding on what you owe, making your balance easier to pay off in the long term.
But that’s easier said than done — how can you stop using your credit card if you don’t have the money to pay upfront?
Create a Budget
Begin by creating a household budget that’s sustainable for the coming months. Request a copy of your past credit card statements, and categorize all of your spending by type. This will help you get a better idea of where your money is going so that you can change your financial habits moving forward.
Once you have a budget in place that covers the necessities, pay for as large a percentage of recurring needs as you can from your existing funds.
2. Contact Your Creditors
Negotiating with creditors may help you lower your balance or work out a payment plan that is more manageable. While negotiating a lower balance can have negative consequences — for example, lowering your credit score — it might be worth the hit if you simply cannot avoid using credit with your current household budget and expenses.
If you have multiple credit cards with outstanding balances, you will need to individually negotiate each balance with each creditor. Creditors are not obligated to offer you a payment plan or debt relief option, so be sure to be honest about what you can and can’t pay back.
You can find your creditor’s contact information on your recent credit card statements. Here are some steps you can take to negotiate with your creditors.
Assess Your Financial Situation
Before you begin negotiating, take a look at your budget and see what you can realistically afford to pay each month. This will help you determine what options are available to you when negotiating with your creditors.
Remember that you will not be erasing your debt completely; coming to the negotiating table with a number in mind that you can spend each month is a great place to begin.
Contact Your Creditors
Call your credit card companies and explain your situation. Let them know that you are struggling to make your payments and would like to work out a solution. Be honest and straightforward about your financial situation.
Understand Your Options
Your creditors may offer you different options, such as a payment plan or a settlement. A payment plan allows you to pay off your debt over time, while a settlement involves paying a lump sum that is less than the full amount owed.
Negotiate
If your creditors offer you a payment plan or settlement, negotiate to try to get the best possible terms. You may be able to get a lower interest rate or a lower lump sum settlement.
Consider a lump sum if you’re able to pay it; you’ll usually get a better deal, and it will help avoid the trap of falling back into debt by missing payments and seeing interest compound.
Repay Your Remaining Balance
If you decide on a payment plan, keep track of your submitted payments and be sure to keep a copy of each payment confirmation. This will help you fight back if your creditor says that you owe more than you do after you begin making payments.
If you tend to forget to make payments, consider enabling autopay features if your bank offers them, or set an alarm or reminder on your phone.
3. Decide Which Card To Pay Down First
There are two major strategies that you can use to decide which credit card you should pay down first.
Avalanche method: This strategy involves paying off the credit card with the highest interest rate first while making minimum payments on your other cards.
This can help you save money in the long run by reducing the amount of interest you pay on your debt.
Snowball method: This strategy involves paying off the credit card with the smallest balance first while making minimum payments on your other cards. Once the smallest balance card is paid off, you can move on to the next smallest balance card, and so on.
This method can provide a psychological boost by giving you quick wins as you pay off smaller debts.
Ultimately, the strategy you choose will depend on your personal goals and financial situation. If you want to save the most money on interest, the avalanche method may be best for you.
Will Paying Off a Credit Card Hurt My Credit?
Paying off a credit card does not hurt your credit. In fact, paying the card balance down can actually raise your score by lowering your total credit utilization, or the amount of money you put on your credit cards each month.
Just be sure not to close the card after paying off the balance, which will result in a lower score by decreasing the total credit available to utilize.
Final Take
Learning how to pay off credit card debt doesn’t need to be painful or complicated. Even if you only have $10 a week to put towards your debt, you’ll be paving a path for a better financial future. Additionally, creditors may be more willing to negotiate your balance or a lower interest rate after you have a series of on-time payments in place.
FAQ
What is the correct way to pay off a credit card?
If you can't pay your full balance each month, paying at least the minimum due each month is a good place to start paying off your credit cards, especially if you pair that with using them as little as possible to keep your debt from growing.
However, you'll also want to choose a payment strategy to pay off your balance faster – the avalanche method to pay off your high-interest debt first will save you money over the long-term.
How can I pay off $6,000 in debt fast?
Paying off debt quickly starts with making more than the minimum payment each month. Look at your finances and decide which expenses you can cut – for example, are you really getting enough use out of your streaming services? – then put that money toward your debt.
Gabrielle Olya and Amber Barkley contributed to the reporting for this article.
This article originally appeared on GOBankingRates.com: How To Pay Off Credit Card Debt: The Basics
