You can use the avalanche or snowball method to pay off your credit card debt, but if your debt is more than you can pay, take time to learn about the different debt-relief options available to you.
Written by Attorney Andrea Wimmer.
Updated August 28, 2020
Credit card debt can feel like a weight that becomes increasingly impossible to carry when debt collectors start to call repeatedly and credit card bills pile up. Thankfully, debt can often be managed successfully even after it gets out of control. By following the steps set forth in this article, you can begin to regain control of your personal finances and effectively manage your debt. Read on to learn how to get started paying off your debt, how to find out which cards are costing you the most money, how to manage payments, and what you can do if you can’t pay all your debt down over time.
Step 1: Be Honest with Yourself About Your Debt
Before you can resolve your debt, you’ll first need to identify all of the debts you owe. The easiest way to start is to make a list. On the list, put the name and account number for your credit card issuers, the credit card company phone number and contact information, the total debt owed, the minimum monthly payment, the due date, and the interest rates. You can find the interest rate on your credit card statement. Look for “APR” which stands for annual percentage rate. You can repeat this process for other unsecured debts you may be juggling as well, including medical debt and student loans. This information will come in handy as you construct a broad plan to tackle your debts across the board.
Calculate the total debt you owe from all your credit cards and calculate what your monthly payment would be if you paid every minimum monthly payment in one lump sum amount. If you think you can handle making this monthly payment amount, keep following the nine steps in this article and we’ll help you plan your payment system.
If you know that the total debt from your credit cards is unmanageable—maybe you have a permanent injury that makes it difficult to earn income or high student loan payments—you still have many debt relief options to explore. For instance, a debt management plan (DMP) will allow you to make a lump sum monthly payment (often at a reduced rate) to cover all your credit card payments in a streamlined way.
By contrast, a debt settlement program allows you to pay a portion of your debt in a lump sum so that you can call it even and close your account. (You may have tax consequences with a debt settlement option as part of your debt will be forgiven.) A debt settlement will work with consumer credit cards, but not student loan debt.
If your credit rating remains excellent, you might be able to get a debt consolidation loan to combine your monthly payments into one account. With debt consolidation, you can make a balance transfer from your cards with higher interest rates to a new card with a lower interest rate or take out a different line of credit that you can use to pay off your balances. You’ll end up owing less money in the long run after debt consolidation if your new line of credit has a lower interest rate than your current accounts do.
Bankruptcy can also help you manage credit card debt, medical bills, personal loan debt, collection agency debt, and other types of unsecured debt. It’s often an especially great option for people with bad credit and low income. Bankruptcy can even help with secured debt if you file a Chapter 13 bankruptcy. You will restructure your debt so that you can make minimum payments that you can afford if you file a Chapter 13 bankruptcy. If your income qualifies you for a Chapter 7 bankruptcy, you might be able to get your credit card debt completely discharged without making payments.
Before you commit to a plan of action, you’ll want to review your credit report and credit score, and then make a free appointment with a certified credit counselor employed by an accredited, nonprofit credit counseling agency.
You and your credit counselor can discuss your personal financial situation, your credit report, credit score, and your hopes for the future so you can identify which debt relief option(s) will work best for you. Make sure that the credit counseling agency you’re working with is a member of the National Foundation for Credit Counseling to ensure that you’re meeting with a reputable counselor.
Step 2: Decide in Which Order You’ll Pay Off Your Debt
Ideally, you would pay your entire credit card monthly balance each month before the payment is due. However, if you’re already behind on your payments, that’s probably wishful thinking at this point. To begin managing your debt in a new way, take time to look at the rates of interest on all your credit cards. (You can refer to the list you created earlier.) Under the laws of mathematics, your debt will get paid off faster if you pay the cards with the highest interest rates first. Credit cards usually have compounded interest, which means you’ll owe interest on your accrued interest if you don’t begin paying down your highest interest rate accounts in earnest.
How does credit card compound interest work?
Let’s say you put a $500 laptop on your credit card. To simplify things, we’ll pretend you’re getting charged 10% interest, although your credit card rate is probably double this rate. With a 10% interest rate, you’ll have to pay $550 for that laptop after one month passes if you don’t pay it off right away. And the second month you don’t pay? You’ll pay 10% on $550, not $500. You’ll pay the credit card company $550 plus 10% which equals $605. The debt will keep on accumulating as your interest gets compounded and your debt carries forward. Left untouched, you could owe the price tag of a used car for a Walmart laptop purchase. Debt from credit cards gets even more complicated because the APR isn’t charged yearly, it’s often charged daily. By making payments twice a month instead of once a month, you can lower your debt by knocking down the compound interest.
If you keep the realities of compound interest in mind, you can make a better decision regarding which debt to tackle first. Look at the total debt owed, the interest rates, due dates, and the dates you can afford to make a payment. People usually decide between using a debt “avalanche” method or debt “snowball” method to pay off credit card debt.
Avalanche method to pay off debt
In the avalanche method, you pay down your most significant debt featuring a high interest rate first. You can do this by paying more than the minimum monthly payment each month, or by making more than one payment a month on the card with the highest outstanding balance. Meanwhile, you make the minimum payment on your other cards that have lower balances. When the debt on the most significant card is knocked out, you can get to work paying off the card with the next highest outstanding balance.
Snowball method to pay off debt
The snowball method works in the opposite way. You take the card with the lowest balance and make higher than minimum payments or make payments more than once a month on that card. On the other cards, you make minimum payments. You spend more money paying off your debt using this method thanks to interest charges, but it works for many people because tackling debt this way creates momentum. Once you pay off that first card you feel like you’ve accomplished something. This gives you momentum to tackle the next debt. Paying off a large debt with the avalanche method can take years, and without momentum, many people lose hope and stop making payments. The snowball method prevents the feeling of hopelessness so you stay on track to pay off all your debt from credit cards.
Step 3: Create a Realistic Plan of How to Get Rid of Your Credit Card Debt
Plans to pay off your debt from credit cards must be realistic. It’s not enough to say you’ll make payments every month because life throws curveballs and you’ll need to anticipate that if you’re going to remain on track over the long-haul. First, get an accurate account of your monthly spending. You might be surprised at how much the “extras” total. Tally your income and expenses to confirm you can make the payments. Review your bank account. Create a budget that reflects your new payment plan and have a buffer system in place in case of emergencies. Your budget is your mission, reducing credit card debt is your goal. Monitor your budget weekly so you can spot any budget-related snags you might encounter. With checks and balances in place, managing your debt can turn, over time, into an easy weekend routine.
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Step 4: Stop Making New Charges
One of the first rules of debt reduction is to stop accumulating new debt. That means that you’ll need to stop making new charges on your credit cards. If an emergency comes up, for instance, your roof caves in, then survival will temporarily (and understandably) become more important than your credit score. But only charge in emergencies that can’t be covered by the emergency fund built into your budget or when your card can give you added protection. For instance, using a credit card on a car rental may allow you access to insurance protections in case of an accident.
Step 5: Cut Expenses or Increase Income
There are two ways you can change your personal financial situation: 1. Reduce your expenses and 2. Increase your income. The more you can pay down your debt, the faster you can get rid of that debt. (Remember the horrors of compound interest?) If you’re serious about reducing your credit card debt, make a list of every single expense for a given week. Make sure to record every convenience store and coffee shop stop. Look at your habits. Are you using that gym membership? Can you order a tall drink instead of a venti? Maybe it’s time to cut the cable and look at a Netflix or Hulu subscription.
If your expenses are already as low as they can go, consider whether there are any ways that you can increase your income. Some people pick up part-time extra side gig or freelance work to get ahead. What are your talents? If your talent is shopping, perhaps you can sell some things around the house to get some extra cash to pay for your debt. Try a side hustle aimed at selling instead of buying. You can also ask yourself if it’s time for a career move and look for higher-paying jobs. If you enjoy your job, consider making a list of your contributions and asking for a raise. You’ll never know if you don’t ask.
Step 6: Pay More Than the Minimum Monthly Payment
If you want to find out how long it’ll take to pay off your debt from credit cards, you can take a look at your most recent credit card statements. Each statement will tell you when you can expect to pay off your debt if you make only the minimum payments due. But you don’t want to make just the minimum payments if you can pay more every month. Why? Every time you can put even a small amount toward paying over the minimum amount, even if it’s only a dollar, you’re knocking down interest and your overall debt. Although the snowball and avalanche plans say you can just make minimum payments on the cards you aren’t concentrating on, it’s always best to make more than the minimum payment when you can.
Step 7: Track Your Credit Card Debt Reduction Progress
You’ll want to keep track of your reduced debt so you can maintain the momentum of paying down your debt. Goals are proven to be motivators, so when you see a goal of zero and you see your debt repayment numbers climb down to zero, it’ll be like winning a game. You can use a phone app to keep track of your debt reduction, a notebook, a computer spreadsheet, or even an old-fashioned abacus if that’s what works for you. The easier your system is, the more likely you will stick with the system.
Step 8: Consider Getting Help for Getting Rid of Credit Card Debt
Managing debt isn’t always a simple process, and you may need to get professional help. If you’re considering filing for bankruptcy, talk to a bankruptcy attorney first. Sometimes, paying off your debt before bankruptcy can hurt your case.
Even if you’re not planning to file for bankruptcy, talking to a professional can help, but be cautious of scams and imposters. As we mentioned above, talking to a credit counselor is a useful first step towards exploring debt solutions. If you decide to talk to a debt relief company about debt consolidation or other debt relief methods, be sure to check with the Better Business Bureau (BBB) and Federal Trade Commission (FTC) to check for signs of scams and debt relief fraud.
Step 9: Learn All You Can About Personal Financial Management
Taking time to learn the steps involved in personal financial management will help you make smart choices about your income and debt now and in the future. Although personal finance classes are now required to graduate high school in 21 states, a financial literacy course is a luxury most adults haven’t had. Your current debt challenges can serve as opportunities to increase your financial literacy and gain an understanding of the finer points of personal budgets, interest rates, and debt reduction. Your increased education could even help you in your career or side hustle.
You can use the avalanche or snowball method to pay off your credit card debt, but if your debt is more than you can pay, take time to learn about the different debt-relief options available to you. Explore the pros and cons of bankruptcy. You can have a free consultation with a bankruptcy attorney to discuss the details of your financial circumstances.
If you can’t afford an attorney and you’d like to file bankruptcy on your own, Upsolve has a free website app that can guide you through the bankruptcy filing process. More than half of all the adults in the United States have credit card debt, so you’re certainly not alone. Take time to learn more about debt relief and how to work toward a debt-free future with Upsolve’s learning center.