The 3-Step Guide To Paying Off Credit Card Debt, According to a Finance Expert
The latest news and numbers on credit card debt in the U.S. has us seeing red. The Federal Reserve Bank of New York reported that U.S. consumers' household credit card debt totaled $986 billion in the first quarter of 2023, a record high. The average American household carried nearly $8,000 in credit card debt at the end of 2022. It's no wonder it can feel incredibly overwhelming to think about how to pay off credit card debt.
Credit card debt happens. If it's happened to you, you may want to avoid thinking about it, but it's essential to come up with a plan—stat.
"The longer you wait to pay it off, the more expensive it becomes," says Kimberly Palmer, personal finance expert at NerdWallet. "Interest keeps accruing, and as rates continue to rise, your debt can grow rapidly and become the focus of your finances."
In other words?
"It can steal from your savings goal or dream vacation, for instance," Palmer says. "It gets in the way of your financial progress."
So, if you're seeing green, so to speak, as pals vacation in the tropics this summer, it's time to get out of the red. This straightforward three-step guide will help you erase debt and set you up for future financial success (and maybe a vacation or two).
How To Pay Off Credit Card Debt: Three-Step Guide
1. Review your budget & cut back on expenses.
Cutting back when you want to move forward can sting and be a source of FOMO. But remember, it's a process that involves delayed gratification—and maybe a spreadsheet.
"The best place to start is your budget," says Palmer.
You also don't necessarily have to give up everything except necessities. Take a close look at what you're currently paying for.
"Look for opportunities to save money by cutting out unnecessary purchases or expired free trials," says Palmer. "Consider which expenses you’re willing to be flexible on and make simple swaps."
For example, if you have three streaming services, you might choose the least expensive one. Or, purchase reusable napkins and rags—now, you don't have to buy paper towels.
"A series of small changes can add up," Palmer explains.
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2. Know Your Options
You aren't necessarily locked into one interest rate or paying off debts one by one. Explore other options.
"Depending on your credit, you may have options to lower your interest rate," Palmer shares. "Among those options might be a 0% intro APR balance transfer credit card that allows you to move your high-interest debt onto the card to pause interest charges for several months."
Having multiple debts on different cards can leave your head spinning or make it harder to remember to pay them. Try to streamline the process.
"If you have multiple debts, a personal loan can make them easier to manage by consolidating them into one low-interest fixed payment," says Palmer.
A financial expert can help you see what's available to you.
3. Decide on your payment strategy.
Ultimately, Palmer says it's essential to come up with a payback game plan that works for you. If you only have one credit card with a ton of debt, you'll focus on paying that back based on your budget, at least paying the minimum each month.
But if you have more—and people often do—you can generally choose from two common methods: the debt avalanche or debt snowball method.
"The debt avalanche method...tackles the highest interest rate debt first to save money on interest charges," Palmer says. "There’s also the debt snowball method...addresses the smallest debt first to pay it off faster."
Which is best? It's actually up to you.
"Choose the one that motivates you," Palmer says. "It’s important to continue to meet your minimum payments on all debts when using either strategy."
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What Are Common Mistakes People Make When Paying Off Credit Card Debt?
You may feel bad about your credit card debt. The best way to look is forward, but two missteps can keep you falling behind: continuing to spend on credit cards that you're trying to pay off or not changing spending habits.
"When there isn’t enough money to make progress on debt, you can’t continue to spend in the same way you previously did," Palmer says. "It’s critical to review your budget down to the last dollar to make any necessary adjustments and potentially free up money for paying off debt."
Related: If Your Home Has This Mortgage Rate or Lower, Hold On to It for Now, Say Mortgage Experts
Other Tips To Keep In Mind as You Pay Off Credit Card Debt
Credit cards are a common way to purchase items. But Palmer says it's important to avoid using them while trying to make significant progress paying off debt. Now what?
"Perhaps you can switch your payment method to cash or debit temporarily while you're focused on paying down the balance," Palmer says.
Savvy shopping can also help you save money on essentials.
"Be strategic when you shop by using coupons or joining a store’s loyalty program to save money on budgeted expenses," Palmer says.
Want to erase the debt faster? It'll take work (literally), but it can be worth it.
"If you want to be even more aggressive with your debt, you can also consider getting a side job to bring in more income or changing your living arrangements to save money," Palmer says.
