How to Get Out of Credit Card Debt | The Motley Fool (2024)

How to get out of credit card debt

There are two keys to getting out of credit card debt:

1. Stop using your credit cards. They're normally a good way to pay, but not when you're getting charged expensive interest. Stick to your debit card and cash until you've gotten your debt under control.
2. Pay off as much as possible every month. Cut spending wherever you can, and put all your extra money toward your credit card balances.

Go over your income and essential expenses to figure out how much you can pay per month. For example, if you take home $6,000 per month and spend $4,000 on necessities, that leaves $2,000. It might not be realistic to plan on using all $2,000 to pay off debt, but you could commit to putting $1,000 or $1,500 of that per month toward your credit cards.

The most important part of paying off credit card debt is changing your financial habits. It's all about cutting credit card spending and getting in the habit of paying down card balances as much as you can.

There's no substitute for doing this. There are, however, some methods that could help you save money or speed up the repayment process. Here's what you may want to consider depending on your situation.

Balance transfer credit cards with a 0% intro APR

A balance transfer credit card is a credit card you can use to pay off other cards. You're essentially moving your debt from one credit card to another. Why would you do that? The best balance transfer cards have a big advantage over traditional credit cards -- a 0% intro APR on balance transfers. For an introductory period, they don't charge interest on debt you transfer over from other credit cards.

You can transfer multiple credit card balances to a single balance transfer credit card. This is a good way to consolidate your credit card debt. Instead of having to juggle several credit card bills every month, you'll have just one credit card to pay off.

There are two things to know about balance transfer credit cards:

• They charge a balance transfer fee. Most charge 3% to 5% (with a $5 minimum) of the amount transferred. If you transfer $10,000 in credit card debt, you'd likely pay $300 to $500 in fees. They can save you much more than that on interest.
• You need good credit to qualify for balance transfer cards with a 0% intro APR. If your credit score isn't 670 or higher, it's hard to get approved.

LEARN MORE: A Complete Guide to Balance Transfers

Debt consolidation loans

A debt consolidation loan is a personal loan you can use to pay off credit card debt. Like balance transfer credit cards, debt consolidation loans have a couple of key benefits:

• Your loan could have a lower interest rate than your credit cards, which will save you money.
• You'll only have one monthly payment.

Another advantage of debt consolidation loans is the structure they provide. Your loan will have a set term, such as 48 or 60 months. After that amount of time, your debt will be paid off (if you keep up with payments).

It will also have a fixed payment amount. This can make it easier to stay on track than with credit cards, which have small minimum payments and open-ended repayment timeframes.

COMPARE OPTIONS: Best Debt Consolidation Loans

Government assistance

Military families can get a form of government help with credit card debt. The Servicemembers Civil Relief Act (SCRA) limits the interest rate a lender can charge while you're on active duty. For debt taken out before you started active duty, lenders can only charge you 6%. That's much less than what most credit cards charge.

You need to notify creditors in writing if you qualify for the SCRA. This notice must include a copy of your military orders or another appropriate indicator of your service. You also need to send notice within 180 days of when your military service ends.

Negotiating credit card debt

You may be able to call your card issuers to negotiate the terms of your debt. In some cases, credit card companies are open to lowering interest rates or monthly payment amounts for cardholders.

Another option, if you have some money saved, is to propose a credit card debt settlement. With this method, you offer the card issuer one lump-sum payment to settle your debt. However, this can negatively affect your credit score, and the card issuer will almost certainly close your credit card account. That could be a big drawback, especially if you have one of the top credit cards and want to keep it open.

Bankruptcy

If you have too much credit card debt to realistically pay off, you can file bankruptcy. There are two chapters of bankruptcy that you could apply for:

• Chapter 7 bankruptcy: This type of bankruptcy requires selling your property to pay as much of your debt as possible. You can usually exempt some possessions, which means you don't need to sell them. After you've followed the terms of this bankruptcy, the court discharges your remaining debt, so you don't need to pay it anymore. You must pass a means test, which takes into account your income and expenses, to qualify for Chapter 7 bankruptcy.
• Chapter 13 bankruptcy: This type of bankruptcy involves reorganizing your debts, potentially negotiating them to smaller amounts, and creating a three-to-five-year payment plan. Anyone can file for Chapter 13 bankruptcy, as there's no test required to qualify.

Either type of bankruptcy will cause your credit score to drop quite a bit. All your credit cards will also be canceled. Because of the consequences, bankruptcy is a last resort. It's worth considering if you're unable to keep up with your credit card payments.

What happens if I don't pay off my credit card debt?

If you don't pay off your credit card debt, it can cost you money, damage your credit score, and even lead to legal problems. Here's a detailed rundown of what can happen when you're delinquent on credit card debt:

• The credit card company will charge you interest every month. The more debt you have, the more credit card interest you pay.
• The credit card company will also charge a late fee each time you miss your payment.
• Your credit score will drop significantly. Late payments and carrying large balances are both bad for your credit score.
• When your card is 60 days past due, the card issuer can raise your card's interest rate to the penalty APR.
• Eventually, the card issuer could either sell your debt to a collection agency or sue you for it.

There's always a way out of credit card debt, so never ignore it. You can file bankruptcy in a worst-case scenario, but in most cases, it's possible to pay it off.

Dealing with a large amount of credit card debt? Check out The Ascent's guide for How to Pay Off $25,000 or More in Credit Card Debt.

Use our credit card repayment calculator below to come up with a payment plan. You can plug in your monthly payment amount or your desired payoff time frame.

How to prevent credit card debt

The best way to prevent credit card debt is to pay your cards off in full every month. That's easier said than done, but there are a few ways to avoid overspending:

• Build an emergency fund. Credit card debt is often caused by a costly surprise expense. To avoid debt in situations like these, aim to save an emergency fund with enough to cover three to six months of living expenses.
• Make a spending plan. Decide where your money will go each month. Ideally, you'll have enough to cover essential bills, savings, investing, and have some fun money left over. By planning what you'll do with your money, you know how much you can afford to spend, making it less likely you overspend with your credit cards.
• Don't charge emergency medical bills to a credit card. Unfortunately, medical emergencies can upset finances fairly quickly. Instead of charging your credit card, call your medical provider to find out if they offer low- or no-interest payment plans -- or if they'll give you a discount on your bill. You can also look into medical loans. These types of loans generally charge lower interest than credit cards.

Credit card debt is a challenge that many people face. Now that you know how to get rid of it, you can figure out the right plan of attack and start paying as much as possible toward your credit cards. It may take time, but if you keep at it, you'll be debt free.

Still have questions?

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