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Credit cards aren’t the only type of debt that Americans have, but they often present the biggest challenge. Since these accounts are revolving credit, the required payment changes depending on balance of each account. The more you charge, the more your creditor will expect you to pay each month.

Another big part of the challenge that credit cards bring is high interest rates. Many accounts have rates of 20% or higher. At that percentage, roughly one-half to two-thirds of every minimum payment you make goes to pay for accrued monthly interest charges. As a result, you can make payments month after month, but your balances never seem to go down.

Jump to one of these sections:

• Budgeting to reduce your balances
• Solutions to consolidate debt
• Free credit counselling
• Debt Settlement
• Bankruptcy

Minimum payment requirements will rarely lead to credit happiness

Each monthly credit card statement will list a minimum required payment that you must make to avoid late fees. However, people often assume that the payment requirement is a recommendation – that making that payment every month means you’re managing your bills effectively.

However, minimum payment schedules are not designed to get out of debt. In fact, sticking to these payments will keep you in debt as long as possible to maximize the credit card company’s profits.

This means that if you want to get credit happy, you really need to develop better strategies for paying off your balances.

The best way to manage your accounts

In an ideal world, you should pay off any charges you make throughout the month in full every billing cycle. This is the best way to use credit cards to get all the benefits without increasing the cost of purchases with interest charges. It will also help you boost your score and avoid financial hardship.

If you start and end each billing cycle with a zero balance on a credit card, interest charges never apply. Even if you have a rewards credit card with 22% APR, that rate would never apply if you manage the account correctly.

2 strategies for paying off balances that you carry over

If you start to carry balances over from one month to the next, then you need to stop charging and focus on paying off the debt. This is especially true if you’re carrying balances on multiple cards at once. You should immediately set up a debt reduction plan to knock out the balances quickly.

Strategy 1: Paying off debt by the highest APR first

The most cost-effective strategy for paying off credit card debt is to prioritize the balances by APR. You focus on paying off the balance that has the highest APR first. This helps you save money overall as you work to get out of debt. This is known as the debt avalanche method.

Here’s how it works:

1. Review your budget to temporarily cut as many unnecessary expenses as you can. This will free up as much cash as possible to pay off your balances quickly.
2. Write down each balance you owe and note the APR.
3. Prioritize the balances from highest to lowest APR.
4. Make the minimum required payment on each account except the one with the highest APR.
5. For that debt, make the largest payment possible to pay it off in big installments.
6. Once that balance is paid off, move on to the account with the next highest APR.
7. Repeat until all your balances are paid off.

Strategy 2: Start with the lowest balance first

If your highest APR debts also happen to be your biggest balances, it may be hard to gain traction to pay them off. It can be demotivating to take some much time you repay just one debt. In this case, you implement the same strategy, but you prioritize the debts for repayment from lowest to highest balance.

You still review your budget to free up as much cash flow as possible and make the minimum requirements on your other bills. However, you focus the big payment on the account with the lowest balance first.

The idea is that you knock out the lowest balances faster, which will give you extra cash flow and momentum to tackle your larger debts. You essentially get a few “quick wins” to motivate you to pay off all your balances in full.

Using other solutions to keep credit card debt manageable

Credit card debt reduction strategies work best when your balances are still relatively low – a few thousand dollars or less. If your balances get above $2,000 to 3,000, then it may be time to look for solutions that help you pay off that debt faster.

Solution 1: Using credit card balance transfers

Balance transfer credit cards allow consumers to transfer existing balances on high-APR accounts to a new account with much lower APR. If you have a good or excellent credit score, you can even qualify for 0% APR for 6-18 months after you first open the account.

This allows you to pay off your existing balances interest-free for a time. Thus, it’s much easier to get out of debt. You can focus on paying off the principal (the actual debt you owe) rather than throwing money away on accrued monthly interest charges.

A fee will apply to each balance you transfer; fees average 3-5% of the amount transferred.^[1] Once you transfer the balances, make sure to avoid making new charges on the rest of your existing accounts. This will allow you to focus all your effort on paying off the transferred balance as quickly as possible.

Credit score required to use this solution: Good to excellent (700+)

Cost: 3-5% of each balance transferred

Benefits: Allows you to pay off debt interest-free

Drawbacks: Only works for limited debt amounts; doesn’t work if you have fair or bad credit

Monthly payments: Should be as high as possible to eliminate the balance before the 0% APR period ends

Works best for: Less than $5,000-$10,000 in total credit card debt, depending on the 0% APR period you can qualify for

Time to payoff: 6-18 months, if you pay the debt in full within the 0% APR period

How it works

1. Shop online or contact financial institutions to compare balance transfer credit card offers. You want to look for:
   1. The longest 0% APR period possible
   1. Low balance transfer fees
   1. Low APR after the 0% introductory rate period ends
2. Apply for the best card you can find, given your credit score.
   1. Make sure to check the terms of the card once the credit card company approves your application
3. Begin transferring the balances you wish to move, either online or by calling the balance card’s customer service line.
4. Fees will apply to each balance you move.
5. Divide the total balance by the number of months in the introductory rate.
6. Review your budget to free up enough cash to afford those monthly payments.
7. Avoid making new charges on any cards until the transferred balance is paid in full.

Solution 2: Consolidate your debt with a personal loan

Debt consolidation loans are unsecured personal loans that you can use to pay off existing debts. Loans tend to have much lower APR than credit cards, particularly if you have a good or excellent credit score. You enjoy a low fixed interest rate, as well as fixed monthly payments that are often lower than your total credit card payments.

The cost of consolidating debt this way is usually a loan origination fee, which generally ranges from 1% to 8% of the amount your borrow.^[2] Assuming you can qualify for a low interest rate based on your credit score, this can be a low-cost solution to pay  off credit card debt. This solution works best when you can qualify for APR of 10% or less.

Another benefit of is that you can use them to consolidate more than just credit card debt. You can consolidate other personal loans, child support arrears, back taxes, and (in some cases with online lenders) student loans.

Credit score required to use this solution: Good to excellent (700+)

Cost: 1-8% of total loan amount

Benefits: Fixed monthly payments and lower APR

Drawbacks: Less effective for high debt amounts, if you owe $50,000 or more; only beneficial if the APR on the loan is significantly lower than your credit card APR.

Monthly payments: May be lower than the total monthly payments for your credit cards

Works best for: Up to $25,000-$30,000 in total debt

Time to pay off: 3-5 years, depending on the term of the loan

How it works

1. Shop online or call several lenders to compare loan options. You want to look for:
   1. Low APR
   1. Low origination fees
   1. Options that can reduce APR, such as setting up AutoPay
   1. A term that will offer monthly payments you can afford
2. Apply only for the best loan you find. In other words, don’t apply for multiple loans to get specific terms, because multiple credit inquiries can decrease your credit score.
3. Once approved, the lender will either disburse the funds into your bank account or they may disburse the funds directly to each of your creditors to pay off your existing debts.
4. This will zero out your account balances on your credit cards and any other loans you include, leaving only the consolidation loan to repay.
   1. Make sure to avoid making new charges on your credit cards until you have the consolidation loan paid off.

Getting free credit counselling when you need help

As long as you maintain a good credit score and control your balances, you should be able to manage debt on your own without a need for professional help. However, even with the best-laid plans, situations can arise that can drive up your balances, such as divorce, unemployment, or an extended illness or a natural disaster.

If you see that you’re overextended and won’t be able to easily pay off your balances on your own, then you may need professional support. Your first step should be to contact a nonprofit consumer credit counselling agency.

What is consumer credit counselling?

Credit counseling services offer professional support to consumers who are facing challenges with credit card debt. These companies are usually 501(c)3 nonprofit organizations, so they exist to help you get out of debt. That means they provide an easy way to get an unbiased professional opinion about your debt.

When you contact a credit counseling agency, they will review your debts, credit and budget with you in a free evaluation.  The goal is to see where you stand and confirm that you are past the point of being able to solve your challenges with debt on your own.

If so, the credit counselor will see if you qualify for a debt management program. This is a professionally-assisted repayment plan that you can arrange through the agency. They work with your creditors to reduce or eliminate the interest charges that apply to your debt. This makes it easier to pay down your balances faster.

As long as you have money to make minimum payments, you can usually qualify. Once all your creditors agree to the program, you make one payment to the agency and they distribute it to your creditors on your behalf.

A debt management program should not damage your credit score. In fact, many consumers often see their scores improve by successfully completing the program. That’s because it helps you build a positive payment history in addition to wiping out your balances. This is an advantage over other the solutions that we outline below, because it won’t damage your credit score.

Credit score required to use this solution: No requirement – you can qualify even if you have bad credit

Cost: Fees vary by state, but are capped nationwide at $79; average consumer pays $49

Benefits: One monthly payment that, on average, reduces your total credit card payments by up to 30-50%; also reduces or eliminates the APR applied to your debt. It also won’t damage your credit score.

Drawbacks: This will freeze any credit card accounts that you include in the program; you can’t apply for new cards while you are enrolled.

Monthly payments: May be lower than the total monthly payments for your credit cards

Works best for: $10,000 or more in credit card debt (there is no cap to the maximum amount you can include)

Time to payoff: 36-60 payments (3-5 years)

How it works

1. Contact a non-profit credit counselling agency for a free debt and budget evaluation.
2. Review your debts, credit, and budget with a certified credit counselor, usually over the phone; this consultation typically takes 30 minutes to an hour.
3. If a debt management program is your best option to get out of debt, you and the counselor will work together to find a monthly payment you can afford.
4. Then the credit counseling team will contact your creditors to reduce or eliminate interest charges applied to your balances; they will also stop future penalties and late fees.
5. Once all your creditors agree to accept adjusted payments through the credit agency, your debt management program will start.
6. You make one payment to the agency and they distribute the payment to your creditors as agreed.
7. During the program, you will not be able to use your existing cards or apply for new cards; some agencies will allow you to keep one credit card out of the program for emergencies.

Credit counseling is designed to help you pay back everything you owe in a more efficient way, so you can avoid credit score damage.

However, in some cases, you may be so overextended that you can’t reasonably expect to pay back everything you owe. In this case, you may want to consider options that allow you to get out of debt for less than you owe. These options will damage your credit score, but it may be worth it if your score is already low and you need a clean break from debt.

There are two solutions you can use:

Debt settlement?

Debt settlement allows you to get out of debt for less than you owe. You can try to settle debts on your own, which may work if you have accounts that have been charged off and sold to a third-party debt collector. However, in most cases, if you want to settle multiple debts, you enroll in a debt settlement program through a settlement company.

Credit score required to use this solution: You don’t want to use this if you have good or excellent credit

Cost: Fees apply for each debt settled, once it is settled; usually calculated by taking a small percentage (1-5%) of the original balance owed

Benefits: Protects your assets from being liquidated to pay off your during bankruptcy; allows you to get out of debt for a percentage of what you owe.

Drawbacks: Negatively affects your credit for seven years from the date of discharge

Monthly payments: Typically, lower than your total monthly payments

Debt amount: Most companies want you to have at least $10,000 in debt and some cap their program at $100,000

Time to payoff: 12-48 months, on average

How it works

1. You call a debt settlement company for a free evaluation to see if you’re a good candidate for settlement.
2. If so, the company will set up an escrow account to gather the funds they’ll need to make settlement offers on your behalf.
3. They will work out a budget with you to determine how much money you are able to set aside into the escrow account each month; in other words, you’ll still usually end up making monthly payments.
4. When you have enough funds available, the company will contact your creditors with settlement offers.
5. Once an agreement is reached, the settlement company will pay the creditor out of the funds in your escrow account and take their fees.
6. They repeat this for each debt you include in the program until you are debt-free.

Filing for bankruptcy

If you’re completely overwhelmed by credit cards and other debts, filing for bankruptcy may be the solution you need to make a clean break. With some exceptions, you can get rid of the debts that are holding you back, so it’s easier to move forward and rebuild your credit.

There are two types of personal bankruptcy filings:

Chapter 7

Chapter 7 bankruptcy is also known as liquidation bankruptcy because the court trustee liquidates your assets to repay at least some of your balances. This type of filing is often the fastest way to get out of debt, since most cases are completed in just a few months.

Not all your assets will be liquidated. Even your home and car may be exempt if they fall below a certain value. Assets like savings in your 401k are also protected, and most physical property like clothing is exempt.

Pros:

• It’s faster. You could be out of debt in as few as 90 days in some cases.
• If you don’t have assets to sell, it can be the cheapest way to get out of debt.
• It provides a way to get out of debt without making any monthly payments

Cons:

• If you have valuable assets like jewelry, antiques or art, they will likely be sold
• If your home and cars above a certain value, you can lose those, too
• The credit damage for Chapter 7 sticks around longer – 10 years from the date of discharge

Chapter 13

Chapter 13 bankruptcy is also known as wage-earners bankruptcy. That’s because the court trustee reviews your finances and sets up a repayment plan to pay back a portion of the debts that you owe. This plan can last for 3-5 years and during that time, you’ll be expected to make the payments each month.

Once you complete the repayment plan, the remaining balances on your debts are discharged.

Pros:

• It protects your assets from liquidation
• It puts the court trustee in charge of the settlement negotiation, if your creditors aren’t willing to setle with you privately
• The bankruptcy will only be listed in your credit report for 7 years instead of 10

Cons:

• You’ll still be expected to make monthly payments, for up to 3-5 years
• The trustee sets a payment that they believe you should be able to afford, and you’ll be expected to make that payment