How to Get Out of Credit Card Debt
Understand credit card debt so you can pay it off fast!
Top Credit Card Debt Statistics
$1,000,400,000,000 (that’s $1 trillion)
the amount of credit card debt held by U.S. consumers as of February 2017
the number of Americans with outstanding balances to pay off
the lowest interest rate you can expect on a new credit card, even with excellent credit
the average household credit card debt balance in the U.S.
What you need to know about your debt
Eliminate debt effectively
If you’re working to eliminate high interest rate credit card debt, we can help you identify the right solution for your financial needs so you can avoid the guesswork and stop the sleepless nights.
Do you need help?
Most people prefer to solve debt problems on their own, but at a certain point you may require help to get out of debt. If you’re not sure if you’ve crossed that line yet, these resources can help.
- Debt Quiz: Is It Time for Help?
- 5 Ways to Recognize a Debt Problem
- Credit Card Debt FAQ
- What to Do If You’re Unemployed with Credit Card Debt
Credit card consolidation
Consolidation is a financial process where you combine multiple debts into a single monthly payment. The primary goal is to lower the interest rate applied to your debt. This allows you to pay off debt quickly because more of each payment goes to eliminating the principal. You can get out of debt faster even though the total payment may be less each month.
- A Guide to Credit Card Consolidation
- 5 Reasons Credit Consolidation Can Fail
- How to Use a Credit Card Debt Consolidation Loan
- Using a Balance Transfer for Credit Consolidation
Understand your cards
The world of credit doesn’t have to be so confusing. Here’s a simple 60-second explanation of how credit card debt works.
Credit card debt is revolving. This means the more debt you put in by making charges, the higher your bills are coming out the other side. So, the amount you owe each month changes based on how much you charge.
Each payment you make is split into two parts: Paying off interest added and paying off actual debt. If you only make the minimum payments required, the bulk of each payment made goes to interest. As a result, it takes a long time to pay off your debt and credit card purchases can end up costing double or triple the purchase price with interest added. Plus, if you rely too much on credit, your payments can get so big that you don’t have enough money to cover all the expenses in your budget.
If you want to be financially successful, you have to keep credit card debt minimized. We can help. Call Consolidated Credit today for a free debt analysis with a certified credit counselor.
Often credit card debt problems stem from a lack of understanding about how your credit cards work. Don’t let debt become a problem just because you failed to read the fine print!
- Credit Cards 101: The Basics
- Credit Cards 201: Use Credit Strategically
- Decoding Your Credit Card Statement
- The Secrets of Secured Credit Cards
- The Right time to Give a Teen Credit
Credit cards vs. other debts
Learn how credit card debt fits in with other consumer debts. The more you understand your debt, the better you can prioritize repayment and make effective plans for debt elimination.
Reasons Why Credit Card Debt is So Tough to Eliminate
- Since credit cards create revolving debt, it means that the more you charge, the more you owe. As your balances increase, so does the amount of money you need to pay the bill.
- Minimum payments are not designed to pay off debt efficiently. You can pay month after month and never seem to make a dent in your balances.
- High APR means roughly 2/3 or more of each minimum payment you make goes to paying off interest charges instead of the actual debt you owe.
- When you get a new credit card, it often has an introductory interest rate or may have 0% APR for a period of time. That’s good at first, but once the introductory period ends your rate and monthly payments can increase significantly.
- If you miss a payment and penalty APR is applied it can double the already high interest rate you’re paying. In this case, the minimum payment may not even cover accrued interest charges for the month.
Featured Ask the Expert: How Much Credit Card Debt Is Too Much?
Hi, I’m April Lewis-Parks, Director of Education at Consolidated Credit. Today we’re answering a consumer question and the question is, “How much debt is too much?”
And really, at Consolidated Credit, we think any amount of credit card debt is too much. But ideally you should never pay more than 10% of your monthly income toward credit card debt. So, for example, if you take home $2,500 per month, then you should never $250 per month to your credit card bills.
You know, you don’t need to have credit card debt or a revolving credit card to have a high credit score. If you do charge, pay it off every month at the end of each billing cycle. And if you can’t manage that, use a card with the lowest APR and then pay it off in several billing cycles as quickly as possible.
Calculating the ideal target debt ratio
It’s important to monitor your credit card debt ratio carefully. Here is the formula:
Monthly income X 0.10 = Maximum monthly credit card payments
All your credit card bills combined should exceed no more than 10% of your income. Now consider the average household credit card balance us currently $16,748. On most credit cards the minimum payments equal out to around 2.5% of your current balance. Using that schedule and an average APR of 16%, the minimum payments would be just under $420.
If you stick to only making the minimum payments, it would take 342 months to eliminate the debt in-full. During that time, you would pay $18,718.82 in interest charges. The total cost $35,466.82. As you can see, interest charges effectively more than double the cost of this debt. It also takes 28.5 years to repay what you owe, and that’s only if you never make another charge.
Working backwards, this amount of debt is only sustainable if you make $4,200 per month or more. Otherwise, you have too much debt for your income level. Look into options for relief, such as consolidation or talk to a credit counselor.
However, even if you make $4,200 per month it may be time to find a better way to pay back what you owe. In fact, let’s say you make $5,000 per month in take-home income. That means you can afford to pay $500 per month on your credit cards. Instead of paying minimum payments, you pay $500 every month until you pay the balance off.
In this case, it would only take 35 months or just about 3 years to repay the debt. Total interest charges would be $5,588.81, reducing the total cost to $22,336.81. That’s a much better repayment plan because you can get out of debt in less than five years. However, interest charges still increase the cost of your debt significantly. Using an option like consolidation can reduce that cost, making your debt more affordable overall.
Why lower interest has such a big impact
A primary goal in seeking credit card debt relief is to lower the interest rate applied to your debt. Ideally, you want to get as close to zero as possible. In most cases, reducing interest rates to less than 10 percent can provide the benefit you want.
Taking the example above, let’s say you take out an unsecured debt consolidation loan. You keep the term at 36 months, so you pay off the debt in the same 3-year period. The monthly payments would be roughly the same, at around $502 per month. However, since you have excellent credit with the loan you could qualify for an interest rate of 5%. Instead of paying over $5,500 in interest charges, you would only pay $1,322. Thus, the total cost of repaying your debt would be $18,070 instead of $22,336.81. You saved $4,266.81 by consolidating your debt at a lower interest rate.