How to Get Out of Credit Card Debt: A Complete Guide

Do you get weighed down by your credit card bills? Are you worried about mounting interest rates and looking for ways to reduce this financial burden? If so, then this article provides a guide on how to get rid of credit card debt by following some simple and practical steps. 

Understand your total debt and interest rate charges:

Three quarters of Americans carry a Credit Card balance, yet many do not understand how much interest expense they are paying. Often, households are paying thousands of dollars in interest expense each year, without even knowing about it. The first step in reducing the amount you are paying in finance charges is to make a list of each credit card you own, note down what the balance is, and what the annual percentage rate (APR) or interest rate is on each card.   This information is readily available on your monthly credit card billing statement, which breaks down interest charges incurred on balances incurred from charges, balance transfers, and cash advances, which will often have different APR’s.  It will also provide you a federally mandated summary of how many years it would take to pay down your balance if you incurred no new charges, and only made the minimum payment.

Make a Budget:   

Prepare a budget or a debt pay-off plan of your monthly earnings. For this, track and cut down your monthly expenses (austerely discern your needs and wants), and add your savings or extra money within your budget to the minimum payment amount. Remember,  the money saved on paying off credit card debt will always be higher than the interest earned in the savings account. 

A budget helps determine the total that you can pay towards your credit card debt, and arrive at the monthly payments, based on your earnings, expenditures, and savings. It determines how much of your savings you can afford to contribute to the minimum monthly payments of your target debts. The higher the contributions made to the minimum payment, the more will be the savings in interest costs and the faster will be the pay off of your credit card debt!

Typically, one should try to budget money that is equal to or more than twice the total minimum due across owned cards. This strategy can help you pay off your credit card in less time. A budget will essentially help you not only to save more money towards the pay-off plan but also to estimate how fast you can get rid of the debt.

Pay-off the highest-rate card first:

If you have more than one credit card, you should adopt a tactical approach of paying off debt balances from the highest-rate cards first. Pay only the minimum amount due on low-interest rate (APR) cards and a substantial (minimum plus some extra) amount on the card bearing the highest interest rate. Continue paying off this highest-rate card every month, until the balance is paid off.  With the highest interest rate card paid off, you will have more money available every month, which you can apply to paying off the second-highest interest rate debt. Repeat the process for all your credit cards till all your debts are paid off. 

For example, if you have a $2000 balance on your credit card with a 15% APR and a minimum monthly payment of $30, if you can pay $60 or $100 instead, it would reduce your interest payment by a little and help you get out of your credit card debt faster.

Split payments in half:

As mentioned above, in order to understand how to get rid of credit card debt, it is important to know how credit card interest is calculated. Credit card interest depends on how much you owe to the card on the due date or at the end of your billing cycle. If you carry your credit card balance from one month to the next, your interest will be calculated depending on your average daily balance. Hence, making more frequent, smaller payments can help with credit card debt by reducing the amount of interest that you need to pay.

You should consider making two smaller payments per month, instead of one larger payment.  Here’s how this will help: If you are currently paying $400 in a 30-day billing cycle, then split your payment in half and make two $200 payments  (say, one on the 7th day and another on the 21st day of the billing cycle). This will reduce the average daily balance, upon which the interest amount is calculated. It also gives you the advantage of helping to plan your day-to-day expenses. 

Transfer  balance to a 0% credit card:

This strategy can benefit credit cardholders who have a strong credit score (greater than 690). Many credit card companies offer 0% APR as introductory offers for up to 18 months. By transferring the high-interest debt balance of their card to such a  credit card they can get rid of the interest burden and use the dollars saved to pay off the principal.  To fully take advantage of this strategy,  it is best to pay-off the outstanding balance during the offer period, as interest rates can skyrocket once this period is over.  But even if you can’t pay off the entire balance during this period, due try to apply all of the interest savings to paying down as much of the balance as you can.

Also, examine the terms and conditions of the card before choosing it for a balance transfer. Credit Card Issuers will typically charge a transfer fee of 3% to 5% of the transferred balance   And the introductory offer period will also vary. Try to apply for a the card with the lowest transfer fee and the longest offer period.  

Take a Debt Consolidation Loan or Home Equity Loan 

One way to get out of credit card debt is by taking a debt consolidation loan. A debt consolidation loan is a loan you borrow to pay off other loans. Basically, multiple debts (in this case, multiple credit card balances) are replaced by a single loan with more favorable terms.

One such type of loan is a home equity loan. If you own your own house and have considerable equity on it, you can consider settling your credit card debt using a home equity loan. Home equity loans are beneficial because they come with low interest rates and are payable over a longer term. However, there are a few things you need to bear in mind before taking this approach. One is that there is a possibility of losing your home if in the event of default. This is because you are providing your home as the collateral for the loan. Further, a home equity loan could eventually be more expensive than a similar debt consolidation loan, given that it attracts high charges for home appraisal and processing. 

In Conclusion

It takes patience, determination, and persistence to get rid of credit card debt. The guidelines shared in this article should make your debt reduction journey easier.  While credit cards are a convenient means to avail of short-term credit, you can make the most of them only when you have financial discipline. 

Often, people pay down their balances, or take a debt consolidation loan, but then quickly build up new debt on the same Cards!  Once you get rid of credit card debt, remember to make consistent, on-time payments to steer clear of another debt trap. 

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