Credit card debt is a national issue in the United States. In fact, according to the Federal Reserve Bank Of New York, Americans’ total credit card balance was $986 billion in the first quarter of 2023 — $145 billion higher than it was in the first quarter of 2022.
If you’re one of the many people struggling with credit card debt, you know that getting out from under it isn’t easy. The good news, however, is that you do have options. What follows are some smart, simple credit card debt elimination plans that can help you make a dent in your debt — without giving up everything in your life that brings you joy.
Table of Contents
Key Points
• Americans’ total credit card balance significantly increased from the first quarter of 2022 to the first quarter of 2023.
• Understanding your total debt and interest rates is crucial for effective debt management.
• Creating a budget with categories for essential and nonessential expenses can help allocate funds for debt repayment.
• Debt repayment strategies like the snowball or avalanche methods can be tailored to individual financial situations.
• Debt consolidation through a new credit card or personal loan might offer lower interest rates, simplifying repayment.
How Do You Determine Debt Level?
First things first: In order to pay off debt, it can be helpful to know actual numbers. One way to help get concrete numbers is to gather monthly credit card statements and start to add up total debts. While sitting down and adding up those numbers might seem scary, getting all the information can be a great first step to tackling credit card debt once and for all.
When adding up the amount of debt owed, it might also be helpful to take interest into account — thanks to high interest rates, some debts may actually now be higher than the initial amount owed, even after making payments. A credit card interest calculator can help determine the cost of debt once interest is factored in.
Accounting for Living Expenses
We all know that credit card payments aren’t the only expense in life, which means part of tackling credit card debt may require assessing the other expenses life brings.
To understand exactly where your money is going each month, you may want to take stock of your current income and expenses. This simply involves going through your last three or so months of bank and credit card statements, adding up what is coming in each month on average (income) as well as what is going out each month on average.
You may also want to break down your spending into categories, then divide those categories into two buckets — essential expenses and nonessential expenses. To free up funds for debt repayment, you may need to cut back on some nonessential spending, such as dining out, streaming services, and clothing.
Recommended: Budgeting for Basic Living Expenses
Creating a Budget
After taking stock of financials like your monthly expenses, hunkering down and making a budget is the next logical step. Making a budget doesn’t have to be highly restrictive or complicated. The idea behind budgeting is simply that, rather than spend money willy nilly as expenses come up, you make sure your spending actually lines up with your priorities.
There are many different types of budgets but one simple approach you might consider is the 50-30-20 rule, which recommends putting 50% of your money toward needs (including minimum debt payments), 30% toward wants, and 20% toward savings and paying more than the minimum on debt payments.
Establishing a Plan To Tackle Debt
Once you have an idea of how much you can spend beyond the minimum on credit card repayment, you’ll want to come up with a strategy to pay off your debt. There is no one-size-fits-all plan for credit card debt elimination, so it is important to consider what type of payoff plan will work best for your specific circumstances.
One popular debt elimination plan is called the snowball method. It’s called this because much like building a snowball, you start with your smallest debt, and then roll on to the next highest debt, and so on.
So for example, if a borrower has three separate credit cards with balances of $1,000, $5,000, and $10,000, the snowball method would call for paying off the card with the $1,000 balance first by putting extra money towards that debt while paying on only the minimum balance on the cards with $5,000 and $10,000 balances.
Once the $1,000 debt is paid off, the borrower would then use the newly freed up money from the $1,000 debt payment to start making higher payments on the $5,000 debt and so on. This method is popular because paying off a small debt can help you gather momentum to keep paying off larger debts.
Another popular pay-off plan is the avalanche method. This involves paying off the balance of the credit card with the higher interest rate first. In this scenario, a borrower who has three separate credit cards with interest rates of 17%, 20%, and 22% would focus on paying down the credit card with the 22% interest rate first.
Why focus on the credit card with the highest interest rate? Cards with higher interest rates generally cost you the most over time. Thus, paying off the card with the highest interest rate first could help you save money instead of allowing it to accrue more interest while you pay off other credit cards.
Considering Consolidation
If the snowball or avalanche method doesn’t seem right for you, you may want to consider credit card consolidation. Consolidating your credit card debt involves either transferring your debt to a new credit card with, ideally, a lower interest rate, or taking out a personal loan, ideally with a lower interest rate, to pay off existing credit card debt.
Why replace one type of debt with another type of debt? Some borrowers may qualify for a lower interest rate on a personal loan than the rate they are paying on their credit card debt, which can help you save money. Consolidation also simplifies the debt repayment process. Instead of paying multiple credit card bills each month, you only have to make one payment — on the personal loan.
A personal loan also typically comes with a fixed interest rate and established repayment term. This means that the interest rate agreed to at the start of the loan stays the same throughout the length of the loan.
And unlike the revolving debt of credit cards, personal loans are known as installment loans because you pay them back in equal installments over a predetermined loan term. This means that you won’t accrue interest for an indeterminate time, as is possible with a credit card.
The Takeaway
Having a credit card elimination plan in place is key to getting rid of high-interest debt. To get started, you’ll want to assess where you currently stand, find ways to free up funds to put towards debt repayment, and choose a debt payoff method, such as the avalanche or snowball approach.
Another option is to get a debt consolidation loan. This can help simplify repayment and also help you save money on interest. If you’re curious about your options, SoFi could help. With a lower fixed interest rate on loan amounts from $5K to $100K, a SoFi debt consolidation loan could substantially lower how much you pay each month. Checking your rate won’t affect your credit score, and it takes just one minute.
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