10 Best Tips for Reducing Credit Card Debt

10 Best Tips for Reducing Credit Card Debt

It’s no secret that many of us struggle with credit card debt.  This may be an ongoing battle, or an isolated problem due to changes in life circumstances, income, unexpected expenses, or similar.  Regardless of the cause, worries over mounting credit card debt, along with interest charges and reduced credit availability, can be great sources of stress for most people.  Reducing credit card debt is therefore an important step towards regaining a sound financial footing.

In this guide, we’ll tell you everything you need to know about how credit card debt works, and, more importantly, offer up the 10 best tips for reducing credit card debt.  While the hard work has to be done by each individual, some quality “get out of debt help” and advice is a critical part of forming a solid plan and following through to get your finances in order.  This advice is based on tips from financial experts and those who have successfully reduced or eliminated their own credit card debt.

Introduction

Credit cards are the number one form of consumer credit in the United States, with approximately 190 million adults having at least 1 credit card.  In total, there were 364 million open credit card accounts in the US as of the end of 2017, according to the American Bankers’ Association’s April 2018 report.  The same report shows that total credit lines, on average, amount to over $3.3 trillion for credit cards alone (or about equal to 16% of the US GDP for 2018).  This means consumers have tremendous access to easy-to-use credit in many cases, which is a good thing.  But, it comes at a cost.

Credit Card Debt

Obviously, credit card companies make profits off of these lines of credit (otherwise they wouldn’t offer them or be in business for very long).  Between fees charged to consumers, transaction fees charged to merchants, and interest charged on outstanding balances, credit card companies can be quite profitable.  For consumers, these fees, and more importantly, the interest charges on outstanding balances, can accumulate quickly and significantly.  Before you know it, you can be in significant debt, and feel like it’s impossible to climb out from the ever-deepening hole of credit card debt.  In fact, the average American has an outstanding credit card balance of $6,375 according to credit firm Experian.  This translates into around $1.6 trillion, or about half of the total tax revenue the US government takes in per year.  We have quite a personal credit card debt problem.

Fortunately, there are many tips for reducing credit card debt, and a lot of good “get out of debt” help and advice available.  In this guide, we’re going to walk you through the basics of credit card interest, and how and why many of us get trapped in a cycle of debt.  Then, we’ll focus on the 10 best tips for reducing credit card debt.  We’ll help with everything from small changes in habits that can add up to a major impact on your debt, to more drastic measures like debt consolidation and personal loans.  We’ll examine the pros and cons of each technique, as well as some additional advice on how to avoid falling into debt traps in the first place.

Easier said than done, we know, but worth discussing.  After all, if you do manage to successfully pay off your credit cards in full, you don’t want all your hard work to be for nothing!

Disclaimer

This article is provided for informational and educational purposes only, and should not be construed as professional financial advice.  Neither the author nor LifeGuideBlog as an entity are certified financial advisers.  Consumers should retain professional financial help before engaging debt consolidation services, taking out personal loans, or similar options mentioned in this guide.  However, many of the solutions for reducing credit card debt that we highlight are more in the realm of changing habits and budgeting, which can safely be undertaken by consumers on their own in most cases.

The Basics of How Credit Cards Work

Most adults are fully aware that credit cards aren’t magic.  In fact, they’re a form of loan, like any credit facility.  You can use your credit card to make purchases without paying money at the time of purchase, up to your total credit limit on the card.  Then, each month, you have to make a minimum payment towards your outstanding balance.  The rest of the balance remains and rolls over to the next month.  The more you pay off, the more of your credit line is available to spend, and the cycle continues.  This is a simplified version of how things work, of course – you can find a more detailed explanation from sources like Wikipedia or many finance sites such as Nerdwallet.

Like any loan product, credit cards charge you interest on the outstanding balance.  This is, like a loan, essentially the cost of borrowing money.  You are borrowing the card issuer’s money from the time you make the purchase until the time you pay it off.  And for this service, they charge interest, which is how they make money, and how they can afford to have so much capital loaned out to consumers.

The interest rate, credit limit, and other factors vary from card to card, issuer to issuer, and individual to individual.  They are often based on your credit score, income, other outstanding balances/loans, and other factors.  Generally, the higher your credit score, the better (lower) interest rate you will be able to get.  Likewise, the higher your income, the larger credit limit you will be able to secure.  While most of us can’t easily change our income, credit scores are something consumers can control and improve.  For more information on improving your credit score, check out our guide, The 10 Best Ways to Improve Your Credit Score.

A Note About Interest

While we’ll discuss interest and rates in more detail later in this guide, it’s important to note a common misconception.  Some people believe that they won’t be charged interest on their balance if they pay the entire balance off within a billing period or when the billing period ends/comes due.  While that is true with some cards, that only calculate interest monthly, the majority of cards calculate a daily rate from the outstanding balance, which is then summed together at the end of the month or billing cycle.

Many, however, offer a grace period, meaning if you pay off a purchase within that billing cycle, it is, in fact, free from interest charges.  So in fact, it is true that a lot of people can avoid interest charges by paying off their purchases within or at the end of a billing cycle.

It’s important to understand the interest terms and schedule for a given card, especially if you are someone who plans to not carry a balance month to month.  A card that charges interest monthly, rather than using the average daily balance, is much more advantageous in this case.

You might find it useful to play around with different hypothetical balances and interest rates to see how bit an impact they have on payments and debt.  We recommend checking out this calculator from American Consumer Credit Counseling, or this one from Bankrate.

Important Things to Remember About Credit Cards

For help in choosing the right credit card in the first place, check out our guide, Top Considerations for Choosing the Right Credit Card.  It’s important to look at the interest rate, fees, and related matters when choosing a credit card.  These are more important than the perks or bonus programs, especially if you tend to carry an outstanding balance.  This is because the interest charges aren’t a one-off, and your outstanding balance carries over each month.  Very quickly, you can find yourself in a heap of debt, and making the minimum monthly payments only generally will keep you there.

As we’ll discuss later, making minimum monthly payments, even if you add no new charges to a credit card balance, will often take years upon years to pay off your balance.  In the process, you’re paying interest on that balance every month, adding up to several times your original balance when all is said and done.

Credit Cards Are Not Free Money

It’s also important to remember that credit cards are not free money – they are a loan.  Unless you are going to pay off your entire outstanding balance right after you make a purchase, the convenience of using plastic for your purchases has a cost.  This is why, in a lot of countries, debit cards are far more popular than credit cards.  Debit cards deduct money you already own, from your account, and offer the convenience of paying with plastic, cash-free, without the interest charges.

Of course, if you don’t have funds in the first place, neither cash nor debit cards allow you to make a purchase, whereas credit cards do.  But this is where a lot of people get into trouble.  It’s like taking out a loan without the means or plan to pay it back.  And despite the popularity of searches like, “How to pay off credit card debt with no money”, the best advice would be not to take out the loan/use the credit card in the first place in these situations.

Credit Card Company Practices

While some reforms have been made in recent years, it is still far too easy for credit card companies to send out unsolicited credit card offers, which are designed to tempt consumers into signing up.  Most lenders would not lend someone money for a car loan, for example, without analyzing their income, expenses, and capability of paying off the loan.  But at least a lot of low-level credit limit credit cards don’t look at these factors.  It’s in the credit card company’s best interest (pardon the pun) for you to sign up for the card.

They get money when you use it for a transaction, in the form of a several percentage point merchant transaction fee.  They get money, in some cases, based on fees and terms, such as monthly account fees, overdraft fees, and similar.  And, they make a killing in interest – since they know most people don’t fully pay off their balance each month.  So, they have a great incentive to get as many people using their cards as possible, as often as possible.

In fact, they have every incentive for you to NOT pay off your credit card debt.  It’s one of the reasons why we treat tips and advice from credit card issuers regarding reducing credit card debt with a bit of skepticism.  That’s not to say they don’t care, or are inherently bad – they aren’t, in most cases.  It’s just better for them, as a business, if more people carry outstanding balances, and they get more income from the interest charged.

Why Bankruptcies and Losses Don’t Have a Large Impact on Credit Card Issuers

Of course, some people can’t end up paying off the credit card balances, and the credit card issuers lose money from debt consolidation, bankruptcies, and other related remedies.  Compared to their proceeds from the aforementioned fees and interest, however, it’s a tiny loss – the cost of doing business – and thus does not deter the widespread marketing efforts to get consumers signed up for and using more and more credit cards, regardless of their debt or ability to pay off the cards.

Think of it this way – if 10% of people pay off their balance right away, or don’t use their cards, meaning no interest income for the issuer, then 90% carry an outstanding balance.  If we use the national average and round down to $6,000 outstanding, and use an average to low 12% annual interest rate, that means the issuer is making $60 on average per month from every customer carrying a balance.  That’s in addition to merchant fees and consumer fees.  So even if 10% of those carrying an outstanding balance end up using debt consolidation or bankruptcy services, and settle for a fraction of their total outstanding balance, it doesn’t offset the massive profits.

Example

Some basic math to show as an example, assuming a credit card issuer has 10 million outstanding accounts, and forgetting merchant fees and consumer fees for a minute – just looking at interest income.

  • 10 million accounts
  • 1 million pay off their balance before interest charges, or are inactive
  • 9 million carry a balance, averaging $6,000
  • At a 12% interest rate, this means $60/account in interest the issuer earns each month
  • 9 million accounts works out to $540m in interest income per month.
  • The worst-case US state rate for personal bankruptcies is Alabama, at 550 per 100,000. This is 0.55% per year.  If we use this for bankruptcies, and assume 3x that number for debt consolidation, that’s around 2.2% of all accounts per year, or 0.18% per month.
  • If 0.18% of those 9 million accounts go bankrupt or use debt consolidation per month, and settle for 10% of their outstanding balance, that’s 16,200 accounts per month, bringing in $600 each ($9.72m total), vs. $97.2m book value. So yes, book value, they’ve lost a bit under $90m in this way (though a lot of that is a write-off and tax credit for them).  But they’ve still made $540m (less an insignificant $1m or so), meaning they’ve made a gross profit of $450m or so that month.
  • This would be problematic if no one ever signed up for a new account ever, as they’d eventually reach a break-even point and then turn to losses, but since new accounts are added all the time, there are still healthy profits to be had even in the worst-case rates of bankruptcy and debt consolidation.
  • Also, as stated, this omits merchant fees and consumer fees, which can add up to a lot as well.

Understanding Credit Card Interest and Rates

It’s useful to take a closer look at credit card interest and rates, since this is one of the main drivers of creating credit card debt for consumers.  Internet searches for topics like, “How much interest will I pay on my credit card?” are quite common.  By law, when you sign up, and then once annually, or when any changes occur, your credit card issuer is required to disclose the interest rate range to you, along with fees, terms, and other basic information.  The actual rate applied to your account each month is usually on your statement.

Rates can be fixed or variable.  With fixed rate cards, you have to be informed before a rate change.  With variable rate cards, the rates is usually tied to the “prime rate” or other market interest rates, and no notice is required if the change is due to a change in the prime rate.  This is the form that most credit card issuers use.

We should point out that there are different rates for different types of services on many cards, with balance transfers, cash advances, and similar usually being higher and different than the rate for purchases.  We’re mostly talking about purchases/outstanding balances from purchases in this guide.

Average APR and Interest Rates

The most recent data show the average US credit card interest rate is 12.77% – though this is not the average APR, or annual percentage rate, that you’ll find on most cards.  Rather, this is the average paid – meaning after deducting the consumers who pay less due to carrying no balances.  The average credit card APR is in excess of 17% as of this article’s writing.  For a weekly update on the latest average credit card APR for variable rate cards, you can check out this guide from Bankrate, which keeps data for the past 3 months available.

By comparison, most mortgages have a 3 to 6% APR, and most auto loans or personal loans are also in that general range.  As you can see, credit cards have some of the highest interest rates of any consumer lending product.

As we mentioned above, if you use a relatively low 12% APR for an example, that’s 1% per month.  On a $6,000 average outstanding balance, that’s $60 in interest charges per month, or $720 per year.  This should be a clear example of why it is so advantageous to pay off your credit card in full each month.

How Does Debt Pile Up So Fast?

Simply put, the interest charges, coupled with the structure of minimum monthly payments, allows debt to pile up very quickly.  Minimum monthly payments are usually designed to cover the interest payment, and some fraction of the principal outstanding balance.  If no additional charges are made on the card, meaning no additions to the outstanding balance, this can take years to pay off – and you’re still paying interest every month in the process.  And, in most cases, consumers don’t have the luxury of not making new purchases or charges on their card – which easily gets you into a vicious cycle of, at best, treading water, and at worst, seeing that balance increase progressively over time.

Example #1

Let’s look at an example of this.  We’ll use our hypothetical friend Sally, who makes around $1,000 in purchases per month on her card with a 12% APR.  She has a balance of $3,000 outstanding at the start of the year.  She can afford to make $1,000 a month in payments, equal to what she spends.  Here’s what happens in the course of a single year, assuming nothing changes in her income, payments, interest rate, and spending habits.  We’ve kept it in whole dollar amounts for simplicity.

Month of the YearBalanceNew PurchasesPaymentsInterest Charge
January$3,000$1,000$1,000$30
February$3,030$1,000$1,000$30
March$3,060$1,000$1,000$31
April$3,091$1,000$1,000$31
May$3,122$1,000$1,000$31
June$3,153$1,000$1,000$32
July$3,185$1,000$1,000$32
August$3,217$1,000$1,000$32
September$3,249$1,000$1,000$32
October$3,281$1,000$1,000$33
November$3,314$1,000$1,000$33
December$3,347$1,000$1,000$33
End of Year $3,380
Total+$380$12,000$12,000$380 (12.67%)

As you can see, even in this case, where Sally was being quite responsible, not spending more than she could pay off, the credit card issuer still made $380 off her, and her balance has crept upward by the same amount.  And she’s making well more than the minimum monthly payments and being a responsible card holder.

Example #2

Now let’s look at someone who is a bit less disciplined and responsible.  We’ll call him Tom.  He makes $1,000 in purchases each month on a card with a 12% APR, just like Sally.  Like Sally, he starts the year with a $3,000 outstanding balance as well.  He only puts $800 a month toward his payments.  Here’s what happens in the course of a single year, assuming nothing changes in his income, payments, interest rate, and spending habits.  We’ve kept it in whole dollar amounts for simplicity.

Month of the YearBalanceNew PurchasesPaymentsInterest Charge
January$3,000$1,000$800$32
February$3,232$1,000$800$34
March$3,466$1,000$800$37
April$3,703$1,000$800$39
May$3,942$1,000$800$41
June$4,183$1,000$800$44
July$4,427$1,000$800$46
August$4,673$1,000$800$49
September$4,922$1,000$800$51
October$5,173$1,000$800$54
November$5,427$1,000$800$56
December$5,683$1,000$800$59
End of Year$5,942
Total+$2,942$12,000$9,600 (-$2,400)$542 (18.06%)

So, Tom has paid $162 more in interest, and ends the year with a balance nearly DOUBLE where he started, up $2,942, because he didn’t pay off the amount he made in purchases each month.  At this rate, he’ll be over $10,000 in debt by the middle of the second year.

What Can Consumers Do to Prevent Credit Card Debt?

The obvious way to prevent credit card debt is to ensure you pay off your purchases entirely in each billing cycle.  If Sally had done that in our above example from the start, she would have never had a $3,000 balance to begin with, and would have ended up paying no interest each month, nor adding $380 to her outstanding balance.

Of course, for many of us, it’s not possible to pay off our purchases each month, try as we might.  One of the main reasons for using credit cards, a credit line or loan-like product, is to have access to money we can’t otherwise afford to spend from our own income or assets.  Since this is the case for the majority of Americans, we need to look not at preventing credit card debt, since it’s not entirely practical.  Instead, we need to look at reducing credit card debt, down to manageable levels, so it doesn’t spiral out of control.

Purpose and Goals of Reducing Credit Card Debt

As so much of the debt load comes from the cumulative effect, over time, of having an outstanding balance or paying less than the amount you spent that month on purchases, it should be clear that the main purpose of reducing credit card debt is to reduce the amount of money you have to spend on interest and debt payments each month.  Working towards a $0 outstanding balance, and $0 in interest fees each month, is the ultimate goal.

Every bit of reduced balance translates into reduced interest payments.  This is, after all, money you are essentially “wasting”, paying to the credit card issuer as profits for the service of using their loaned money.  The goal is to reduce this as much as possible.  This can be accomplished in several different ways, with different levels of planning, effort, and complexity, based upon your debt, spending, and income situation.

Reducing credit card debt has another purpose aside from saving you money – it can greatly improve your credit rating.  This will allow you to have greater access to lower-cost loans and forms of credit, which can, in and of themselves, help to reduce credit card debt, as we’ll discuss more below.  But first, let’s look at two more examples before we get into the tips for reducing credit card debt.

Example #3

When it comes to reducing credit card debt, and making a concerted effort to try to pay off an outstanding balance, how much you pay each month can make a huge difference in the total long-term cost to you.  This supports the goal of reducing credit card debt as much as possible, to save you the most money possible, and avoid a debt spiral.

We’ll demonstrate this by looking at two people who are doing their best to avoid adding to their outstanding balance, and making efforts to pay down their credit card each month.

Arthur has an outstanding balance of $3,000.  He has managed to keep his new purchases to $500 per month, and pays off all of that, plus an additional $200 per month.  Like our earlier examples, he has a 12% APR on this card.  How fast will he be able to pay off his credit card in full?

Month of the YearBalanceNew PurchasesPaymentsInterest Charge
January$3,000$500$700$28
February$2,828$500$700$26
March$2,654$500$700$25
April$2,479$500$700$23
May$2,302$500$700$21
June$2,123$500$700$19
July$1,942$500$700$17
August$1,759$500$700$16
September$1,575$500$700$14
October$1,389$500$700$12
November$1,201$500$700$10
December$1,011$500$700$8
End of Year$819
Total-$2,181 (-72.7%)$6,000$8,400$219 (7.30%)

As you can, in a single year, Arthur has been able to drastically reduce his outstanding balance, and paid a very low total amount of interest.  In a year and a half total, he will have paid off all his outstanding balance.  This is an example of a good practice for reducing your credit card debt.

Example #4

Bea has an outstanding balance of $3,000 as well.  She has managed to keep her new purchases to $500 per month, and pays off all of that, plus a minimum payment of 2%.

Month of the YearBalanceNew PurchasesPaymentsInterest Charge
January$3,000$500$560$29
February$2,969$500$560$29
March$2,939$500$558$29
April$2,910$500$558$29
May$2,881$500$558$29
June$2,852$500$558$28
July$2,822$500$556$28
August$2,794$500$556$27
September$2,765$500$556$27
October$2,736$500$554$27
November$2,709$500$554$27
December$2,682$500$554$26
End of Year$2,654
Total-$346 (-11.53%)$6,000$6,682$335 (11.16%)

Bea paid a relatively low amount in interest (though more than Arthur), and made less overall payments against the account ($1,318).  However, her outstanding balance will take close to 9 years to pay down fully at this rate.  This means, over the listed period and the future, Arthur will pay something like $300 in interest, total, while Bea will pay more than $2,000, for the same original outstanding amount.

The moral of this story?  Reducing credit card debt, even if it’s only by a small amount each month, can add up to drastic savings in the long run.

Tips for Reducing Credit Card Debt

Now that it should be clear how impactful reducing credit card debt can be on your overall expenses and savings, we can move on to some of our tips.  The following 10 best tips for reducing credit card debt are based on advice from financial experts, as well as individuals who have successfully paid off their credit cards in full.  They vary in terms of how easy or hard they may be, and whether or not they are things you can do on your own, or require outside services and professionals to assist.  They are listed in no particular order.

So, here are the top 10 tips for reducing credit card debt fast and (relatively) easily!

#1 – Tips for Personal Budgeting

Establishing a household budget for each month or pay cycle can be very useful in helping to hold yourself accountable for your spending.  It can also make it clear where your money is going (and reinforce the need to reduce credit card debt ASAP).  When you’re budgeting, be sure to include a line item for credit card amortization – essentially, the portion of your outstanding balance you want to pay off each month.  Based on your income and how much spending and saving you think you can manage, along with your outstanding balance, you can determine how much you can pay down each month.  Including this as part of your budget will help ensure that money is “spoken for” and put towards reducing credit card debt, rather than tempting you to spend it on other things.

Budgeting is also useful for finding areas to trim or scale back your expenses.  The visibility to where your money goes each month can make you re-evaluate some of your expenses, subscriptions, fees, services, and similar.  The money you save by making small tweaks from your budget can add up to big savings if put towards paying down credit card debt.  An extra $10 or $20 a month can make a big difference in how long it takes, and time is, quite literally, money, in the sense of interest expenses.

#2 – Consolidate Multiple Cards to a Lower Interest Card

One of the questions that many people ask is, “Can you pay a credit card with a credit card?”  While making a direct payment of a credit card bill with another credit card is generally frowned upon (and outright not possible in the case of some issuers), you can do this, in a sense.  Most credit cards allow balance transfers to other credit cards.  There may be fees or a separate interest rate than the base card rate, so you have to do your homework.  But if you have multiple cards, or even a single card with a very high interest rate, compared to what you can find from another provider, it might be worth doing the math.

Moving your balance from a card where you’re paying 16% APR, for example, to a card where you’re paying 12% APR, may not seem like a big deal, but that adds up to a lot over time.  It can go a long way towards reducing credit card debt.  Without making any changes to your purchases or amount of payment each month, you’ve chopped 25% of your interest expense off.  On a $3,000 outstanding balance, only making minimum payments each month, at 16% APR, it would take you just shy of 30 years to pay off your balance, incurring about $5,330 in interest charges.  By moving to a 12% APR card, with NO OTHER CHANGES, it cuts the payoff time to just over 20 years, with only $2,700 in interest charges – saving you nearly half the interest expense!

#3 – Pay More than the Minimum Payment Each Month

The simplest answer to, “How can I pay off my credit cards faster?” is to pay off more each month.  Regardless of how much more that is, you should always try to pay more than the minimum monthly payment.  Most cards have a minimum monthly payment of 2% to 5% of the outstanding balance, or $10 or $20 minimum if the percentage is less than that.  Even adding no new purchases in, paying the minimum can leave you paying interest for decades in many cases.

Again, on a hypothetical $3,000 loan, all things being equal, at 12% APR, adding no new purchases and paying just 2% or $10 minimum per month would take 20.7 years, and $2,700 in interest to pay off.  Paying just $15 more per month (roughly half a percent more) can reduce the payoff term to 13.2 years, with only $1,800 in interest – a savings of $900 and 7 years of time.  And finding an extra $10 or $15 per month should not be a huge undertaking for the majority of card holders, especially in comparison to the impact it can have in reducing credit card debt.

If you need more convincing as to why you should pay more than the minimum each month, check out this article from credit bureau Experian.

#4 – Prioritize Your Debts

Knowing what debt to pay off first can be critical in managing your finances.  If you have a lot of loans, or even just a few different credit cards, prioritizing our debt can be incredibly useful to saving yourself money in the long term.  In general, you should pay off the highest interest loan or credit card first.  You are incurring the largest monthly interest expense based on the APR of the card or loan.  This can also ring true with other loans such as mortgages, car loans, etc.

Now, we’re not suggesting you should stop paying your bills or anything like that.  But, for example, if you are covering all the minimum payments and have some funds left over, apply them to the highest-interest credit card or loan first.  Two loans of equal size at $3,000, one being 12% and one being 16%, will see greater benefits in savings by paying off more on the higher interest loan first.

Example #5

A $3,000 credit card balance at 12%, paying 3% of the balance each month, will result in total pay off in 12.5 years, with $1,407 in interest incurred.  Increasing this to 5% (an extra $60 per month or so) will result in total pay off in 7.4 years, with $724 in interest incurred, a savings of $683.

A $3,000 credit card balance at 16%, paying 3% of the balance each month, will result in total pay off in 13.7 years, with $2,243 in interest incurred.  Increasing this to 5% (an extra $60 per month or so) will result in total pay off in 8 years, with $1,052 in interest incurred, a savings of $1,191.

The net result is, if you pay your extra money towards the higher interest card balance first, you’ll save ($1,191 – $683) $508 over the life of the pay off, just by allocating your extra funds to the higher interest card first.

#5 – Adjust Loan Terms on Lower Interest Rate Loans

At the same time, you can look at extending the term of certain loans, in order to pay back higher interest rate loans or cards first.  This is another great technique for reducing credit card debt.  This works in a similar way as #4 above, helping you to have more money to pay off higher interest rate loans first.

A 4% car loan of $20,000 over 5 years requires $368/month to pay back, incurring $2,100 in interest over the life of the loan.  If you instead ask for an 8 year loan, your monthly payments will be $244/month ($124 less), incurring $3,400 in interest over the life of the loan.  You’ll pay $1,300 more in interest over the life of the loan, but you’ll save nearly $1,500 per year in payments.  Yes, the loan lasts 3 years longer, and you’ll be paying for 3 years longer, but 5 years or 8 years is really immaterial against significant debt in the here and now.  $124 more per month, now, to put against a high 12-16% APR credit card debt will save you a lot more than the $1,300 more in interest over the life of the car loan.

Example #6

Using the above car loan as an example, put that extra $124 per month against a $3,000 credit card balance at 16% APR, above and beyond the minimum monthly payment you were already paying (let’s say $60/month for simplicity).  Yes, you’ll end up spending $1,300 more in interest over the life of the car loan.  But, instead of taking 83 months (6.9 years) at $60/month, costing you $1,977 in interest, you’ll be able to pay off the credit card in 19 months (1.58 years) at only $406 in interest.  This saves you $1571, less the $1,300 additional car loan interest, you’ve saved $271 over time, or over 9% of your principal outstanding credit card balance.

You can also look at it in terms of a payment schedule over the 8 year period to get a sense of the impact on cash flow and expenses.

YearCar Loan 5 YearCredit Card BaselineAnnual TotalCar Loan 8 YearCredit Card Extra $124Annual Total
1$4,416$720$5,136$2,928$2,208$5,136
2$4,416$720$5,136$2,928$1,281$4,209
3$4,416$720$5,136$2,928$0$2,928
4$4,416$720$5,136$2,928$0$2,928
5$4,416$720$5,136$2,928$0$2,928
6$0$720$720$2,928$0$2,928
7$0$660$660$2,928$0$2,928
8$0$0$0$2,928$0$2,928

After the first 2 years of paying off the credit card in the rightmost example, you could put your additional monthly savings (the $60 credit card payment and the $124 extra) back towards the card loan, and pay that off early as well, saving even more money.  If you started at year 3, you’d save $922 in interest over the remaining life of the car loan, too, and pay it off almost 3 years earlier, after the 1st quarter of the 5th year!  You could be debt free by month 64 instead of month 96 on the above chart, and saved yourself about $1,200 to boot!

#6 – Lines of Credit on a Mortgage  

One option for reducing credit card debt is a line of credit on a mortgage, or a home equity loan.  Obviously this depends on the amount of your outstanding mortgage, value of your home, credit score, and other factors.  But, a home equity loan or line of credit on a mortgage, that lets you borrow at a low rate against your home’s value, is a reasonable technique.  These loans or credit lines are usually at a rate of 6% or lower, less than half of the average credit card interest rate.

You can pay off your balance all in one shot, and then pay back the loan or credit line each month.  All things being equal, the same amount of outstanding debt at 6% APR is better than 12% or 16% APR (to the tune of $60/year per $1,000 of debt).  If you’ve got $10,000 in credit card debt, an extra $600/year in your pocket, to either put to use paying back the loan faster, or just to have to spend, is nothing to sneeze at.

Having overhead room for a line of credit on a mortgage can also be a function of how much house you purchased versus your income, and what your home is worth today.  It’s always wise to try to plan ahead and leave some buffer for financial uncertainty.  For more information on this topic, check out our guide, 2018 Home Buying Guide: How Much House Can I Afford?.

#7 – Transfer Debt to an Interest-Free Card

This tip for reducing credit card debt is ideal for those who are in a short-term financial pinch, and fairly confident their situation will improve in the near future.  It can work for anyone, of course, but is best suited for that category of debtor.  Transferring some of your balance from a high-interest credit card to a promotional, 0% APR card, can drastically reduce your monthly interest expenses.  These kinds of promotions are often offered to new cardholders from many institutions, for a set period of 12, 18, or 24 months in most cases.  As ever, there is fine print, and certain terms may apply for balance transfers, so you have to do your homework.

If things check out, you can transfer some portion of your high-interest credit card balance to this 0% APR card, and either let it sit, or better yet, make payments against it for the remainder of the promotional term.  When it’s over, you either start paying monthly payments on this card as well (be sure to try to find one with a lower or equal interest rate to your main card), or transfer the funds back to your main card – or another 0% APR card somewhere else.

It’s a bit of a balancing act, akin to musical chairs in some way, but this can be a real life-saver, especially if you’re confident your ability to make payments will increase before the 0% APR term is over.

#8 – Cash in Rewards

A simple, often overlooked piece of “get out of debt” help is to cash in rewards from your credit card(s) toward your outstanding balance, as a statement credit.  While this is far less fun than using it for airline miles, a vacation or hotel stay, or something like that, it’s far more practical, and can help make a big dent in your interest expense.  Most rewards cards that aren’t specifically tied to miles or an airline offer statement credits.  And if you rarely cash in your points, this can add up to a lot.  Suddenly getting 10, 15, or 20% of your outstanding balance removed from a statement credit can save you hundreds or even thousands over the time it takes you to pay off the balance.

#9 – Personal Loan        

Personal loans have a great variety of uses.  If you have a large outstanding credit card balance, you can consider these loans to pay off credit card debt.  While credit score, collateral/assets, income, and other factors apply, all things considered, personal loans generally have a low 3-6% interest rate in most cases, less than half of what the average credit card interest rate is.  Most banks offer personal loans, and there are many reputable online sites that you can use to compare personal loans.  These include Credit Karma and LendingClub.

Much as discussed in #6 above, you can pay off your entire balance with a personal loan, and then repay the personal loan monthly.  The lower interest rate means you’ll pay a lot less, which, after all, is the goal!  This is doubly true when you use the extra monthly savings to pay back extra principal on the loan, reducing interest payments further and accelerating the time it takes to pay the loan back.

#10 – Debt Settlement Help

If none of the other tips we’ve mentioned here are practical for you, for whatever reason, or you just have way too much debt to solve with even a combination of the above tips, then it might be time to consider debt settlement.  There are many firms out there who can help you with debt settlements (and though you can do it yourself, we recommend seeking professional help).  Essentially, these services work with you and the lender to come to an agreement.  This really is the only way how to pay off credit cards for less than you owe.

Some Info on Debt Settlement

Most often, you combine debt settlement with a personal loan.  Often, as part of the settlement, you agree to pay a portion of the outstanding balance all at once, as a lump sum payment.  For this, the bank or lender agrees to waive the rest of the balance, and (usually) close the account.  If you don’t have a sufficient lump sum payment, you may need to take out a personal loan, but it’s usually for far less than you would need to pay off the entire outstanding balance.  Then, you pay back the personal loan, just as you normally would, with a lower balance and a lower interest rate than the credit card debt.

But be warned, this is not a magical option without consequences.  While paying off your debt for less than you owe sounds like a great solution, it comes with several caveats.  For one, the forgiven debt is often treated as taxable income, so you might have to pay income taxes on the forgiven balance.  More importantly, debt settlement can negatively impact your credit score, almost as much as bankruptcy can.  It should therefore be considered as a last-ditch option, just ahead of bankruptcy.  It’s not a simple or ideal technique for reducing your credit card debt, but it is effective if all other options have failed.

And remember, if you need help with personal finance, LifeGuideBlog is here for you!  Check out our guide on The 10 Best Ways to Improve Your Credit Score.  Whether you’ve gone through debt settlement or want to get better terms on a loan, improving your credit score is always a smart move.

Conclusion

In conclusion, the best technique for reducing credit card debt is to avoid incurring debt in the first place.  Since that’s really not realistic for most people, the approach the most experts recommend is a combination of the above tips.  Watching your spending, trying to pay off your purchases in the same month you make them, budgeting, and being mindful of interest rates are all important.  Developing a plan to pay off your outstanding balance, and utilizing the tips above like personal loans, transferring to lower interest rate cards or 0% APR cards, and similar are all good options.

Ultimately, you are responsible for your debt – you got into this mess, and you need to put in the work to get out of it.  If you take proactive steps using these tips for reducing your credit card debt, you’ll be well on your way to a healthier and brighter financial future.

For Further Reading…

Cut Your Debt Now!  How to Reduce Your Credit Card and Loan Balances

This helpful book, available in paperback and Kindle versions, offers 126 pages of helpful advice.  While many of the tips highlighted are covered in our guide, the book format allows author Ralph Borushek to go into much more detail.  You’ll understand all the ins-and-outs of reducing and managing your debt, and how to find lower interest credit cards than you may have now.

Get Rid of Your Debt and Avoid Bankruptcy

Author Jim Arnold presents a 68 page guide to getting rid of debt and avoiding bankruptcy.  Available in paperback and Kindle versions, Get Rid of Your Debt and Avoid Bankruptcy provides practical advice and examples on how to deal with creditors, consolidate and pay down debt, and avoid having to resort to bankruptcy.  It’s both detailed and straight to the point, accessible for even financial novices.

 

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ALSO READ: Top Considerations for Choosing the Right Credit Card

 

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