How to Pay Down Credit Card Debt

There are many ways to pay down credit card debt from simply making larger payments to borrowing again to consolidate your debt at lower rates. While some are unequivocally better than others, the best option for you depends on your budget concerns, your credit score and what access you have to other forms of credit. Before embarking on any payment method, though, make sure to complete a comprehensive budget first, so you know how much money you can put toward your debt each month.

Credit Card Debt Payoff MethodBest If…
Balance Transfer Credit CardsYou have excellent credit
SnowballYou can make larger payments, but need ongoing motivation.
AvalancheYou can make larger payments and want to save on interest.
Personal LoanYou have good credit and want structured payments.
Home EquityYou are a homeowner with a lot of equity and good credit.
Debt Management PlanYou are having problems making payments or have fallen behind already on payments.

How a Balance Transfer Can Pay Off Your Credit Cards

The first way to consider paying off your credit card debt is moving the balances onto one card that offers 0% interest on transfers for a limited time, typically from six months to up to 21 months. This allows you to avoid paying interest and focus on eliminating the principal balance. Balance transfers are available to consumers with good credit, generally a 700 FICO score or higher. If you choose a balance transfer, avoid making additional purchases on the credit card, because those will be subject to interest. There are few drawbacks to consider:

  • If you don’t pay off the transferred balances by the end of the no-interest period, the remaining balance will then begin accruing interest.
  • You won’t know your credit line until after you’re approved. In some cases, you may not be approved for a credit line large enough to transfer all your debt.
  • Balance transfers come with a fee, between 1% and 3% of the balance, which is typically less than the interest you would otherwise pay.
  • Your credit score will fall because the approval process will require a hard pull on your credit report and the balance transfer card will likely have a high utilization rate.

To find balance transfer card offers, here is our list of this year’s best choices.

Snowball vs. Avalanche: Which Pays Down Debt Better?

If a balance transfer is not available for you, there are two common methods for paying off credit card debt by applying larger payments: the snowball method and the avalanche method. With the snowball method, you apply the bigger payments to the smallest balance while paying the minimum on the rest. After the first balance is paid off, you move on to the next smallest and repeat until all balances are paid off. With the avalanche method, you make the the biggest payment to the highest-interest rate balance while paying the minimum on the others. After paying that one off, you move on to the next highest-rate balance. You repeat again, until all balances are eliminated.

Which is better? In the multiple models we ran for paying off three credit card balances, we found it’s better to use a combination of both the snowball and avalanche methods; that allows you to pay off debt rapidly while accruing less interest overall. Here’s the best order to pay off debt, by most to least effective in general. It’s smart to pencil out the different methods for your specific scenario using online payoff and minimum payment calculators.

Pros and Con of Snowball: What the snowball method offers is momentum. Paying off the smallest balances first provide quick, easy victories, which helps you to keep going with paying of debt. The downside is that you may end up paying much more in interest, if the smallest balances are also the ones with the lowest interest rates.

Pros and Cons of Avalanche: What the avalanche method offers is savings. Getting rid of the balances with the highest rates will help you from accumulating interest at a faster pace. The drawback is that your highest-rate balance may also be your biggest balance, so it will take a lot of time to pay it off, which can be discouraging for some.

Loans that Help Pay Down Credit Cards

There are several types of loans or lines of credit that you can access to consolidate your credit card debt in order to pay it down. For instance, homeowners can choose to tap equity built up over time in their homes to pay down their credit card balances. Other consumers with no home equity but good credit scores should consider unsecured personal loans for debt elimination.

Personal loans: These loans are available for consumers across the credit spectrum, but the best interest rates go to those with higher credit scores. Rates on personal loans range from 10.3% for excellent credit (720 FICO score and above) to 32% for poor credit (639 FICO score and below), according to our analysis. These rates are still relatively high, so it makes sense to compare them to rates on your credit cards to make sure they’re lower. If your debt is largely on store credit cards, which have rates that average around 26%, a personal loan may be a smart move.

Advantages:

  • Personal loans help your credit score because they lower your utilization rate. Personal loan balances are not factored into utilization rates, like big credit card balances.
  • Unlike a credit card, which offers a minimum-payment option, a personal loan has an amortization schedule with fixed payments. This structure helps you to stay on track in paying off your debt.

Home equity: Homeowners with plenty of equity in their residences can consider a home equity line of credit (HELOC), home equity loan, or cash-out refinance to pay off debt. The rates are typically much more favorable with these options compared with credit cards, with the best rates going to consumers with higher credit scores. Other qualification requirements include sufficient income and equity in your home. The biggest downside for each is that your house backs these types of credit as collateral. If you stop making payments, you risk losing your home to foreclosure. Here are the other main considerations of each.

Home Equity Line of Credit (HELOC)

A HELOC is a revolving credit line against which you borrow by writing a check or using a credit card tied to the account. A HELOC is a second lien or mortgage on your property. The average interest rate on a $25,000 HELOC is 4.65%. But these rates can be variable, meaning they increase over time. Fixed-rate HELOCs are available but come with higher rates initially. Typically, you can borrow up to 85 percent of the appraised value of your home.

Upfront costs include application fee, title search, appraisal, lawyer fees, and points—or a percentage of the borrowed amount. Other fees can include an annual membership/participation fee and a transaction fee every time you borrow money.

Home Equity Loan

  • A home equity loan allows you to borrow a lump sum that you repay in equal monthly payments over the life of the loan. An equity loan is a second lien or mortgage on your property.
  • The average rate on a $25,000 home equity loan range from 4.75% for a five-year term to 5.41% for a 15-year term.
  • Homeowners can usually borrow up to 75% to 85% of the home’s value.
  • Closing costs for home equity loans typically total 2% to 5% of the loan amount.

Cash-out Refinance

  • A cash-out refinance is when you take money out when you refinance into a new mortgage. A refinance is a first lien or mortgage on your property.
  • Rates on cash-out refinances generally will be slightly higher, 25 to 75 basis points, than the rate on a purchase mortgage with a similar loan-to-value ratio.
  • Homeowners can typically borrow up to 85% of the home’s value.
  • Closing costs are generally 3% to 6% of the mortgage, but can be wrapped into the total mortgage amount rather than paid upfront.

Debt management plan

If you find yourself unable to make at least the minimum payment on your credit cards and are falling behind, you may want to consider a debt management plan, or a DMP. This plan, administered by a non-profit credit counselor, lowers your monthly payments to each credit card issuer to fit your budget. You are required to make one monthly payment to your credit counselor, who then distributes the funds to your creditors on your behalf. Before the plan is set up, you must have an initial session where the counselor goes over your personal finances—income, debts and other financial obligations—to set a budget and determine if a DMP is a good option. If so, the counselor negotiates with your creditors on your behalf to get reduced payments.

Overview of DMPs

  • The interest rates on your balances are usually lowered.
  • Any finance charges, late fees and over-the-limit fees you’ve incurred are reduced or waived.
  • The total balances you owe remain the same.
  • The plan lasts 36 to 60 months until your debt is paid off in full.
  • You can’t use any credit cards that are part of the DMP.

DMPs can help repair your credit score because past-due accounts are reported as on-time after plan payments begin.

DMPs come with fees that consumers should consider. The average cost for the initial session runs between $30 and $50, but some nonprofits may offer it for free. Most credit counseling agencies will collect a monthly service fee between $25 and $60 for the DMP, which is added to your monthly payment. Fees vary by agency, state and a consumer’s ability to pay.

Why Paying the Minimum Is Bad

A minimum payment is the smallest amount you can pay toward your credit card balance each month without getting penalized. Consumers consider this option because they have more money left over after making payments. But paying just the minimum means you’ll actually pay more money to your issuer in the long run because of interest. In some cases, what you pay in interest could be more than the original balance.

You have a $5,000 balance on a credit card with a 17% APR. Your minimum payment is calculated as 2.5% of your balance. If you just pay the minimum (starting at $125) and add no other charges, it will take 208 months, or more than 17 years, to pay off the debt. You also end up paying $5,717 in interest charges, more than the original balance. But if you pay $250 a month, it will take only 23 months to pay off, and you fork over just $883 in interest.

Use a payoff calculator to help you determine how long it will take to pay off your debt using different payment amounts.

Card

Balance

Pay Off In Months

Interest (APR)

Payment

Card 1

$
%
Monthly Payment
$77.32

In order to pay off your balances in full within the specified amount of time, it is recommended you make monthly payments totalling $0. You will pay a total of $0 in interest over that time.

Balance
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Why Avoid Debt Settlement

Consumers should also avoid the promises offered by for-profit debt settlement or consolidation services to settle your debt for less. These typically charge hundreds to thousands of dollars in upfront fees and thousands in servicing fees. To get your creditors to negotiate, these companies generally encourage you to stop making payments so your accounts go to collections. But this and any account reported as settled damages your credit score. Some creditors refuse to work with some debt settlement companies, so many of your debts remain outstanding. You may owe penalties and late fees on those that went into collections. The success rate for debt settlement is abysmal as well. A handful of studies found that half to two-thirds of consumers enrolled in a debt settlement plans cancelled within two years.

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