More than half of credit card users carried a balance at some point in the third quarter of 2022. The average credit card debt for credit card holders varies by state, from $5,408 for the average card holder in Kentucky to $9,408 for the average card holder in Connecticut. While that is a wide range of credit card debt that may at least partially be explained by the cost of living in different states, both of those numbers are a lot of credit card debt.
Credit card debt is debt to strive to eliminate as quickly as possible. Interest rates on credit card debt average higher than 20%, meaning there is no investment class without enormous risk on which you can expect to consistently receive a return on investment that exceeds the interest rate of credit card debt. This means any credit card debt grows quickly. Additionally, it is pure debt that is not tied to an asset or quality that may increase your net worth. (Examples of debts tied to beneficial assets include a mortgage for a physical residence that could grow in value and student loans to fund the education and credentials to increase earning potential.)
Credit card debt is just debt with all the negatives and none of the positives, so get rid of it quickly. Depending on the amount of debt you have, the interest rates on your credit card(s), how quickly you anticipate being able to pay off the debt, and how many different credit cards on which you have debt, different methods of payment may work best for you.
Assess Your Current Credit Card Debt
Before you can effectively work to pay off credit card debt, you need to take stock of exactly how much debt you have on any and all credit cards. This means facing those scary balances because you cannot get out of credit card debt if you ignore them. If you have multiple credit cards, it is worth listing all the debt you have (or recording it in a spreadsheet) and the APR for each so you can compare the pertinent data like the example below:
APR stands for annual percentage rate. It is the annual rate of interest paid on debt without considering any compounding interest within that calendar year. In other words, APR measures the cost of borrowing money. If you do not pay your debt off quickly, compounding results in you paying interest on the interest. (Compounding interest works for you with investments, but against you with debt.) This is not ideal, which is why we encourage paying off credit card debt quickly.
Once you acknowledge all credit card debt and its associated APR, you are ready to create a plan to pay off your credit card debt. Even if you are well above your state’s average, do not put it off until later! That is how you end up with compound interest working against you to put you further into debt.
It probably goes without saying, but I will say it anyway: For any of these plans to work, you absolutely must avoid adding additional charges to your credit cards. If you are reading this, I assume that you have already updated your personal budget to account for both ongoing expenses and credit card debt reduction.
Option 1: Debt Avalanche
As we previously discussed, we generally recommend the debt avalanche method of debt payment when paying off multiple debts, and this is also true when focusing on just your credit card debts. The debt avalanche requires listing your debts from highest interest rate to lowest interest rate. From there, pay the minimum on all debts and then put the remainder of money allocated for debt repayment towards your credit card with the highest interest rate. Once that credit card is paid off, move to the second highest interest rate and keep progressing until you pay off the last one.
The avalanche method is the mathematically sound method of credit card debt repayment because it eliminates debts with the highest interest quickly, while your debts with lower interest grow at a much slower pace. This means you pay off your overall debt more quickly and the amount you pay is lower than if you use other methods, like the snowball method.
The avalanche method of credit card payment works well in multiple scenarios. First, if you assess your credit card debt and decide that you can pay off your credit cards quickly, it is not worth paying the fees or taking the time to pursue another method. Just get started paying off the debt! Another scenario where the debt avalanche makes sense for credit cards in particular is when you have only a small amount of debt on cards with relatively high interest rates. Eliminating those will decrease your stress, and then you can get to the credit cards with lower interest rates after the higher compounding debt is gone.
Option 2: Consolidate Debt on a Credit Card
If you have a lot of different credit cards with debt and/or an extremely high interest rate on your credit card, it may be worth consolidating your credit card debt using a balance transfer card, particularly if you determine that you can pay off your debt in a short period of time after assessing your debt. If your credit card debt repayment is more likely to occur in a moderate time period, or you simply do not feel confident with a short timeline, stick to the debt avalanche.
By short period of time, we are usually referring to less than 21 months because it is possible to find balance transfer credit cards with 0% APR for a certain duration, often between six months and 21 months. If you can find a balance transfer card with a 0% APR deal for a long enough period to pay off all your debt, then you can move all your credit card debt to one place and pay it all off without accumulating any additional interest on that debt!
This sounds too good to be true, and that is largely because the balance transfer credit card is betting that you will not successfully pay off your credit card debt within the 0% APR window. If this happens to you, most balance transfer credit cards have high APRs that kick in after the 0% APR period. Due to this high APR, if you expect to need three years to pay off your credit card debt, do not choose a balance transfer card with 0% APR for 12 months because the APR after month 12 will be astronomical.
Additionally, there may be an upfront transfer fee to move your current credit card debt to the balance transfer card. Once you map out repayment, also make sure the transfer is worth the cost. It often is since average credit card interest is upwards of 20% and transfer fees tend to be 3–5%. If you have a plan to pay off the debt within the 0% APR window, a 3–5% fee is probably much less than sticking with your existing credit cards.
In addition to the reduction of overall interest accumulated on your debt, having one place to pay off your credit card debt also just makes it easier to track rather than meeting a selection of monthly minimums while paying down one card at a time. That said, be aware of your credit utilization if you choose to consolidate your credit card debt: Do not close all your recently debt-free cards because credit utilization composes a large portion of your credit card score. (Just be sure not to use them!) On the note of credit card scores, transferring debt may make your credit score drop initially, but it will even out and become better when you pay off your debt quickly.
Option 3: Use a Loan for Alternative Consolidation
If you know you cannot pay off your credit card debt quickly enough to use a balance transfer card to its full advantage but you also worry about staying organized enough to keep track of multiple debts well enough to use the avalanche method, there is another option. For those looking for structure over a moderate or longer time period, it is possible to take out a one-time personal debt consolidation loan to pay off all your credit card debt. If you are not sure where to find personal loan options, your existing bank or credit union is a good place to start!
Does going into debt to pay off debt sound crazy? Maybe, but if you have six different credit cards with various APRs and find yourself forgetting the payment date or which account you are paying extra towards, a personal loan can provide the structure you need. This method involves taking out a loan, using those funds to pay off all credit card debts, and then paying back the one loan over a specified time period. Particularly if you determine you will need three, four, or five years to pay off your credit card debts, a loan can be a good option to get back on track. Some loans will even pay off the credit cards directly as part of the process, much like a balance transfer.
Acquiring a personal loan is only better than the balance transfer card if you will need a longer period than the 0% APR period of any balance transfer cards available to you. A personal loan has no equivalent 0% APR deal. You will be paying interest from the beginning. These interest rates can vary significantly depending on the terms of the loan, so make sure the rate is below the rates on your current credit cards.
In addition to the interest rate, some loans have origination fees. Verify that the origination fee and the interest rate on the loan combined will still have you paying less than you are with your current credit cards before taking out the loan. It needs to make sense for your situation. If it does, then it can decrease the amount of money you pay over time and provide some much-needed structure. Similar to the balance transfer card, do not suddenly close all your credit cards after paying them off because you do not want to destroy your credit history and credit utilization. In particular, take note of which card you have had the longest and keep it open.
Keep the Debt Away
Say it is six months, one year, three years, or however long you need to pay off your debt from now. You recently paid off your credit card debt and feel great. But now you want to buy that new sectional or that trip to Jamaica. Charging it to the credit card would be fine because you are now debt-free, right?
Wrong. Credit cards are only for two things:
Establishing credit or improving your credit card score (depending on your stage of life, one will apply).
More importantly, credit cards are not for paying for anything you cannot afford. If you want the couch or Jamaica trip, fine. Your solution is to open a high-yield savings account and start saving for that beautiful piece of furniture or trip of a lifetime. Now that you are not paying off credit card debt, you have room in your budget to go after happiness spending goals, but you should save enough money to purchase them in full before you make the purchase.
Then you can use a credit card to get some rewards and pay it off immediately. Suddenly, credit cards will be giving you rewards rather than you giving them interest. You keep the debt away and end up on the side of the equation where credit cards pay you.
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