If you struggle with credit card debt, you're not alone -- the
average American credit card balance is more than $15,000. But
there are many ways you can reduce your debt without harming your
credit score, and with a solid payment plan in hand, you'll be
debt-free in no time.
In this article:
- Understanding credit card debt
- Lower the amount of debt outstanding
- Lower the interest rate
- What to do if you're in over your head
Understanding credit card debt
The first step in getting rid of your debt is understanding how
it's made. Every month, you make your purchases. At the end of
the month, you receive your statement asking you to pay for that
month's purchases as well as any other debts you haven't paid
off. You then have 21 to 25 days (depending on your credit card)
to pay off the previous month's debt. If you don't pay it off,
you'll be charged interest, and a charge of your APR (annual
percentage rate), divided by 12, times your outstanding balance,
will be added to the debt you owe. Here's an example.
You have a credit card with a 15% APR, a $35 late fee, and a
25-day grace period. In January, you spend $500.
On Feb. 1, you receive a statement saying:
- Your outstanding balance is $500.
- Your minimum payment is $25.
From there, you have a few different options. Because your
grace period is 25 days, you have until Feb. 26 to do any of
|If You Pay ...
||Your Outstanding Balance Will Be:
||If You Paid This Amount Every Month:
- $500 in unpaid purchases
- $6.25 in interest
- $35 in late fees
|You'd probably get a debt collector
calling at your door.
- $475 in unpaid purchases
- $5.94 in interest
|Your $500 in purchases will cost $588, and
it'll take you nearly two and a half years to be
- $250 in unpaid purchases
- $3.13 in interest
|Your $500 in purchases will cost $503, and
you'll have your debt paid off in three months. Note that
it takes longer to pay off $500 than two payments $250
because of interest charges.
||You'll have paid off your balance in full,
and your $500 in purchases will remain just $500.
The key takeaways here:
- Under the terms of your credit card agreement, you can pay
anywhere between the minimum payment and the total amount owed
without violating your credit card agreement.
- If you make less than the minimum payment, you will
probably pay a late fee, and if your card has a penalty
interest rate, that higher rate might be applied to all newly
incurred balances. Making less than the minimum violates your
- If you pay more than the minimum but less than the total
amount outstanding, you will be charged interest at a rate of
your APR, divided by 12, times outstanding balance. This
interest charge is then added to your outstanding balance.
- The only way to not add to your balance is to pay off your
debt in full.
There are two ways you can lower your interest charges:
- Lower the amount of debt outstanding.
- Lower the interest rate.
We'll break down in detail how to do each of those.
Lower the amount of debt outstanding
While there are a couple tricks you can use to pay off your debts
more efficiently, and tools you can use to make it more painless,
in the end, cutting down your debt comes down to this: You need
to put more money toward getting debt-free. This means:
- Once you've established a rainy-day fund of around three
months of expenses, put all your money toward getting
Think of it this way: If you have credit card debt at an 18%
interest rate, you're getting a guaranteed 18% return on your
investment. Nothing else you can possibly invest in will give
18% returns with zero risk.
- Set up a recurring payment from your checking account to
your credit card balance on the day you get paid. You can't
spend what you don't have.
Alternatively, divert part of your paycheck to a savings
account earmarked for credit card payments.
- Look for ways to boost your income part-time, like working
online or renting out your car.
- Check out our tips on making and sticking to a budget for
Allocating more money to getting debt-free is the best way to
move the needle; that said, you can also allocate your money more
efficiently by paying off your highest-interest debt first (debt
snowball aside). Other than that, it's all about putting more in
to get more out.
Lower the interest rate
This is where things get a bit interesting. There are a number of
ways to reduce your interest rate; you should try the following
and stop at the first one that works.
1. Apply for a 0% balance transfer credit card
The easiest way to cut your interest cost is to apply for a new
0% balance transfer credit card. Such cards have an introductory
period (usually six to 18 months) where your outstanding balance
isn't charged any interest. You can shift your old credit card
debt to the new card and have some time to pay it down without
accruing interest charges. Credit card companies are eager to
steal others' business and are opening their purse strings to
debts from other lenders.
Be careful, however, of balance transfer fees. This one-time
charge, usually 3%-5% of the transfer, is added to your balance
when you shift it over. For example, if you transfer $1,000 to a
new credit card with a balance transfer fee of 3%, your
outstanding balance at the end of the month will be $10,30.
2. Shift to a lower-rate card with your same
Remember that banks are competitive and want you to keep your
accounts with them. Try to switch your debts to a lower-rate card
at the same bank by threatening (politely, of course) to leave
and take your money elsewhere. Alternatively, try to negotiate a
lower rate on your existing card.
3. Consider debt consolidation
If you have the credit for it, consider taking out a home equity
line of credit or another secured loan to pay off your (unsecured
and therefore more expensive) credit card debt. However, keep in
mind that if you fall behind on your debts, you can lose your
What to do if you're in over your head
When worst comes to worst, you do have a few options:
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Call up your lender
. Think about it from the lender's perspective: They'd rather
not have you default and lose all the money you owe them.
Instead, at the first sign of trouble, you should call up your
bank and try to work out a payment plan.
Get credit counseling.
Sign up for a free consultation with a credit counselor, who
can help you understand your options and put together a budget.
Make sure the counselor has the Department of Justice's seal of
Consider the nuclear option.
If all else fails and you just can't pay your bills, your last
resort could be declaring bankruptcy.
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