How to get rid of credit card debt

Create a budget to manage debt

Before creating a debt payoff plan, you need to know how much money you have available. And the only effective way to do this is to put together a budget. A budget is simply a plan for the money you make. To create a budget for paying off credit card debt, follow these five steps:

1. Start with your income: All budgets are based on how much money you take home. It’s important to account for all money you plan to deposit into your account, including paychecks, tips, side hustles and any other income sources.
2. List your fixed expenses: Make a list of all of your bills, subscriptions and monthly services that you pay for regularly, like rent, utilities, credit card minimum payments, car payments and insurance.
3. Estimate your variable expenses: Next, you need to estimate your variable expenses. This includes groceries, gas, restaurants, entertainment, pet food, household items and other daily expenses. The amounts may vary each month, so come up with an estimate you can aim for.
4. Create savings buckets: Savings buckets are larger, infrequent expenses that you can save for every month — birthdays, holidays, vacations, car maintenance or cell phone replacement, for example.
5. Calculate income minus expenses: After you total your expenses, you’ll want to take your income minus your total expenses to see how much is left to put toward your debt.

Budgeting tip

It’s important to keep track of your spending after you make the budget. A budgeting app synced to your financial accounts helps you see exactly how much you spend in each budget category and how much you have available at any given time. Staying accountable to your budget will help you actually hit your debt payoff goals.

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Consider debt consolidation

Paying off your credit cards doesn’t necessarily mean that you should keep each card open and pay them off one at a time. Sometimes, it makes sense to consolidate credit card debt to help lower your monthly payments and save on interest at the same time.

Debt consolidation is an unsecured personal loan that allows you to use loan funds to pay off your credit card balances — effectively consolidating your credit card debt into a single loan payment. If you have a good credit score, these loans have reasonably low interest rates.

Benefits and drawbacks of debt consolidation

Debt consolidation can help you find relief with lower monthly payments, but you are still responsible for paying off all the debt. A lower monthly payment might actually stretch out your payoff debt and end up costing you more money in interest. It’s important to run the numbers when consolidating your debt to make sure you’re saving money in the long run.

Another risk of debt consolidation is that you may still have the same spending habits that got you into credit card debt in the first place. This could lead to additional credit card debt and a higher debt load overall. It’s important to break those habits and cancel your credit cards when using debt consolidation as a debt payoff tool.

» MORE: Debt consolidation pros and cons

Alternative to debt consolidation

Debt consolidation is the process of combining multiple debts into a single loan or credit card that offers a single monthly payment — and sometimes better interest rates. You can accomplish a similar goal in a couple of different ways:

• Home equity lines of credit (HELOC) lets homeowners borrow against a portion of their home equity. A HELOC usually has a low interest rate and flexible repayment terms, and you can borrow to pay off your credit cards. A HELOC is risky because it is secured against your house, and defaulting on payments puts your home at risk.
• Balance transfer credit cards let you transfer multiple balances to a single card — usually with a promotional 0% annual percentage rate (APR) offer. You can apply for a balance transfer card and get 0% interest for the first 12 to 18 months (but there is usually a balance transfer fee). This can drastically lower your monthly payments and save a boatload in interest payments. Just make sure you can pay off your debt before the promotional APR is gone.

Negotiate with creditors

There are a few ways to negotiate your credit card debt down. It may be worth working with a debt settlement company or credit counseling agency to help you settle your credit card debt.

• Ask for a lower interest rate. If you want to pay off your debts faster, you can ask for a temporary lower interest rate on your cards. If you have been making on-time payments, your credit card company may offer a lower rate for a set period of time (such as 6 months). This can help you save on interest and pay off your principal balance faster.
• Join a hardship program. Some credit card issuers offer a hardship program if you fall on hard times and can’t make payments. You may be able to set up a lower monthly payment or have the company waive late fees and interest charges for a time. This can help you keep up with payments and avoid costly fees and interest compounding in your account.
• Negotiate debt settlement. Debt settlement is the process of paying off your credit cards in part — and having the remaining balance forgiven. Not all credit card companies will agree to this unless they don’t believe they can collect all the debt owed. This means you may need to miss payments and go into default before negotiating (but shouldn’t be required). Debt settlement can hurt your credit score, and the forgiven debt amount may be taxable as income on your tax return.

» MORE: How to remove collections from your credit report

Understand high-interest debt

High-interest debt is problematic because the interest charged adds to your overall debt balance, ballooning the amount you owe. And when you make payments toward this debt, most of your payment may go toward interest, which prolongs the time it takes to pay off the debt.

Any interest rate over 10% is considered a high rate

When paying off your credit cards, prioritizing paying off the highest-interest cards first can be a good idea. This is known as the “debt avalanche” method of debt payoff, which can help you save on interest in the long run and ultimately pay off your debts faster. The “snowball” method is an alternative approach that focuses on paying debts in order of smallest to largest.

You can also lower your rates through debt consolidation or transferring your high-interest debt to lower-interest credit cards. This can help lower your monthly payments and put more of your payments toward the principal balance of your credit cards.

» STATISTICS: Average credit card debt by age

Bottom line

Credit card debt can be overwhelming, but with the right strategies, you can regain control of your finances. First you detail your fixed and daily expenses, then you can pay off debt and plan for savings. Once you have a budget in place, you can see how much money you have left each month. If you want to drastically lower your debts, you may be able to negotiate directly with your credits for a lower total payoff amount.