Clearing credit card debt requires a methodical strategy

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Ask a Lender
June 16, 2016 | Updated September 22, 2017


Key Points

How to reduce your credit card debt

  • Tally up monthly balances, set a household budget and establish a payment schedule.
  • Use a portion of your savings or a one-time windfall to reduce high-interest debt.
  • Transfer high-interest balances to lower-interest cards.

The average credit card debt for low- to moderate-income Americans, some studies show, is more than $7,000 — so it is no surprise that many people feel overwhelmed by bills.

The good news is that it is possible for most people to pay off their high-interest cards, but it is not feasible for the average American to do so immediately. There are a number of strategies that can help consumers shed their credit card debt over time, however.

These strategies apply generally to revolving-debt balances, the kind of debt that is racked up on traditional credit cards and store cards. This excludes debts such as auto and mortgage payments.

Assess your debt

Step one is to determine your debt load. A surprising number of people haven’t tallied up the overall outstanding balances on their credit cards and have no strategy on how to attack that debt. People often decide to simply pay the minimum amount due monthly as the bills arrive. This is a poor strategy, because the high interest on the cards usually means it will take years to reduce the principal balance significantly by making only the minimum monthly payment required — and even that approach will reduce the debt balance only if the credit card is not used going forward.

Step two is to set aside a specific amount of money each month that is dedicated to paying down credit card balances. Credit counselors generally recommend against drastically cutting your spending habits — to the point where you eliminate all discretionary purchases. This is the equivalent of a starvation diet, which rarely works for a person long term. Instead, most counselors recommend a more measured approach to paying down debt.

Start with making a realistic monthly budget, setting aside a fixed amount of money that can be applied to credit card balances. This amount is going to vary from person to person, but anyone attempting to pay down the outstanding debt on credit cards has to commit to a budget and also avoid using their credit cards.

Tapping savings

Credit counselors also advise people against hoarding their savings when they also are saddled with credit card debt. You should consider using the money in a savings account to pay down the credit cards.

That’s because most borrowers are charged high interest on the cards and are making little or no money in the current low-interest rate environment on their savings accounts. By the same logic, counselors also recommend that borrowers reduce their monthly investments until they have paid down their credit card balances. In other words, if you are socking away money in an IRA or other retirement account, you should consider reducing those payments until the high-interest credit cards are paid off.

Credit counselors also recommend using one-time windfalls, such as a tax-refund check, to pay down credit cards. Another option is to transfer the balances on high-interest credit cards to another lower-interest credit card. Many companies offer a zero-interest introductory rate on balance transfers for an initial period. The interest savings from the new card can then be applied to reducing the transferred principal.

This strategy, however, comes with some risks. For one thing, you have to read the fine print carefully to ensure that you are not being charged transfer fees, which can be substantial and wipe out any potential interest savings. Transferring balances also carries other risks. Some borrowers get into trouble by again racking up debt on their existing cards after they have transferred the balances to a new, lower-interest card.

The bottom line is that it is possible to wipe out your credit card debt. You need discipline, a good budget and a willingness to keep your spending under control.

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