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How to Reduce Credit Card Debt

Written by:
Financial Literacy Specialist

Making a credit card debt reduction plan that works for your budget and goals.

Learn how to reduce credit card debt

If you owe balances to multiple credit card companies, figuring out how to reduce credit card debt can feel like an uphill battle. You diligently make payments month after month, but your balances never seem to go down. And every time an unexpected expense arises that has to go on a credit card, you dig yourself further in the hole. So, how do you reduce debt effectively when you’re already living paycheck to paycheck?

The secret to debt elimination lies in reducing or eliminating APR applied to your balances. By minimizing the interest charges that get added to your debt each billing cycle, you can focus on paying off principal; that’s the actual debt you owe. Then you simply prioritize your balances and knock out each debt one by one.

Credit card debt reduction in 4 easy steps

  1. Call your credit card companies to negotiate lower interest rates.
  2. Revisit your budget to free up as much cash flow as possible.
  3. Prioritize your credit card balances for elimination based on your budget.
  4. Focus your cash flow on eliminating one debt at a time to become debt-free.

Finding the best way to reduce credit card debt for your situation

As you decide on the best way to reduce credit card debt, there are two basic tactics you can use. The strategy we outline above stays the same no matter which path you choose. The difference is how you prioritize your credit card debts for the reduction in Step 3. We go into more detail on each step below, so you know exactly what to do at each stage to get out of debt.

Startegy 1: Start with the highest interest rate first

This is the fastest and most cost-effective method to reduce credit card debt because you focus on high APR debts first. If you owe $1,000 on a credit card with 20% APR, it costs more money each month than the same balance on a card at 15% APR. Eliminating high APR debts first reduces the total cost of getting out of debt.

Here’s how to reduce credit card debt with this method:

  1. Use a credit card debt worksheet to list out all your debts. You specifically need to note each current balance and the APR.
  2. Call each credit card company to see if they will negotiate to lower your interest rates; if so, adjust the interest rate on your worksheet accordingly
  3. Prioritize the list from highest APR to lowest.
  4. Now review your budget to cut any unnecessary expenses; this maximizes the cash flow you have available to pay off debt.
  5. Make the minimum payments on all your debts except the one with the highest APR.
  6. Then make the largest payment possible on the debt with the highest APR.
  7. Keep that up until the debt is gone, and then move on to your next highest APR debt.

As you eliminate each debt, you free up more money to pay off the next debt. This accelerates repayment until you reach zero on all your balances. This acceleration to reach the bottom is why this method is commonly referred to as the Debt Avalanche—a term coined by the financial expert Dave Ramsey.

Strategy 2: Start with the lowest balance first

If your highest APR debts are also your biggest balances, the first method of debt reduction may not work. This is especially true if you couldn’t free up any extra cash for debt elimination because your budget is tight. In this case, you may not have enough cash flow to tackle your largest debts first. Instead, you need to pay off your smallest debts first to gain the momentum you need.

All the steps above stay the same, but you prioritize your debts in Step 3 by current balance. You start with the lowest balance first, which frees up money bit by bit. Each debt you eliminate gives you more money to take out the next debt.

With crane style, you essentially start pecking away at your debts. Each debt that you knock down gives you more financial power to take out the next. By the time you get to your biggest balances, you have the monetary power you need to take them down.

This is also called the Debt Snowball method.

How long should it take to reduce debt to become debt free?

This depends on which method of debt reduction that you use. But a good rule of thumb for making a debt reduction plan is that it should never take more than five years to get out of credit card debt. That means you should be able to pay off all your credit card balances with 60 payments or less. If you can’t eliminate your debt in-full within 60 payments no matter how much you scale back your budget, then you explore options for debt relief.

Need to get out of debt faster than you can with a DIY debt reduction plan? Talk to a certified credit counselor to find a better solution.

Finding better ways to reduce debt fast

If you can’t pay off your debt in 60 payments or less, don’t panic. There are other ways to reduce debt quickly that won’t damage your credit score. The best way to reduce debt fast when traditional payment methods won’t work is through debt consolidation.

Debt consolidation works on same principal as debt reduction. You reduce or eliminate interest charges, so you can focus on quickly paying down principal. But instead of trying to pay off one debt at a time, you roll them all into one payment at the lowest interest rate possible.

There are three ways to consolidate debt:

Any of these options will consolidate your debt so you can pay it off efficiently with one monthly payment. The first two options work by taking out new financing – either a credit card or loan – that pays off your existing balances. The last option is a professionally assisted form of debt consolidation. You still owe your original creditors, but a credit counseling helps you set up a payment plan and negotiates on your behalf to minimize APR.

How long does debt reduction take after you consolidate?

This depends on which consolidation option you use and how much money you have to make monthly payments. But there are some general timelines for debt reduction that you can use as a guide:

Consolidation optionTimeframe to become debt freeLimitations
Balance transfer6-24 monthsOnly works for a limited amount of debt (usually less than $5,000)Requires good-excellent credit
Debt consolidation loan12-48 monthsRequires good credit
Debt management program36-60 months, on averageFreezes any credit cards enrolled in the program

Debt reduction tips

  • Increase your income.Although the debt reduction strategies can work with no extra money, they work faster when you add extra funds.
  • Stop charging!Any new credit card debt will only set you back as you pay off your balances. Avoid making new charges to your credit cards until you have your balances paid off.
  • Build savings into your budget. Unexpected expenses are a leading cause of credit card debt. Try to pad your budget with at least some emergency savings. If you’re living paycheck to paycheck, pay off a balance and then divert the cash that you save to an emergency savings fund.
  • Avoid solutions that put you in a weaker financial position. If you’re looking for solutions to a traditional debt reduction plan, avoid options that increase your financial risk, like a home equity loan, or that damage your credit, such as debt settlement.

Need some help comparing debt relief options to find the best way to reduce debt in your situation? We can help!