Credit Card Help

Paying off credit card debt first can help you get the best results as you avoid high-interest rates. Getting rid of this expensive debt can also be vital so you have more money to pay for basic living costs with today’s record inflation rates.

LendingTree reports that the average credit card balance was $6,569 in 2021. Additionally, approximately 53% of credit card users carry a balance that accrues interest charges.

Thankfully, you have several options to get help paying off credit card debt. For example, it’s possible to follow a self-made plan to save money on interest or use a debt relief company to discharge part of your balance.

Here is a closer look at the credit card debt reduction methods to help improve your finances and avoid money stress.

Do-it-yourself debt relief options

If you have a relatively small balance of a few thousand dollars or less, you can try these self-guided options to pay off your balances. While you don’t receive hands-on help, you avoid credit counseling fees, so you have more money to make extra debt payments.

Debt Snowball Method

The debt snowball method is potentially the most popular debt repayment plan that has helped countless people become debt-free.

Follow these steps:

  1. Make extra payments on your smallest balance first
  2. Continue making the minimum monthly payment for your other debts
  3. After paying off the first debt, shift your extra payments to the next smallest debt
  4. Repeat the process until you’re debt-free

If two debts have the same balance, choose the one with the higher interest rate APR first to save more money.

Debt Avalanche Method

The debt avalanche method can be tailor-made to pay off credit card debt since you first attack the highest interest rate.

Like the debt snowball strategy, you dedicate your extra payments to one account at a time. However, you ignore the balance amount as this approach can help you save more money.

Negotiate with Lenders

Contacting the credit card issuer can help you find some relief through a credit card hardship program.

For example, you may qualify for a reduced interest rate for several months. Your lender may also offer to settle your debt for a smaller amount if you can make a one-time lump sum payment.

Your negotiations can be the most successful if you’re a long-time customer with a history of on-time payments.

However, regardless of your relationship with the credit card company, it can be worth a call to review your options before pursuing hands-on help to get out of debt quickly.

What Are the Types of Credit Card Consolidation?

Instead of keeping the balance on your existing credit card account, you may consolidate your debt. Lender origination fees can apply but the interest savings can exceed the additional expense as you’re getting a significantly lower interest rate.

Credit Card Balance Transfers

A 0% APR balance transfer can be an effective option for paying off small credit card balances. Usually, the 0% introductory APR lasts for the first 12 to 18 months and you must transfer your balance within the first weeks of opening your account to save money.

While you pay a one-time balance transfer fee (usually 3%), you won’t pay interest on the transferred balance during the promotional period. So use this opportunity to pay off as much of the balance as possible before your remaining balance begins accruing interest again.

This option may not be the best if you need several years to repay your balance or cannot transfer your entire balance as you may need to apply for a consolidation loan next year to lock in another low rate. As a result, you undergo two hard credit checks within two years.

Personal Debt Consolidation Loan

A debt consolidation loan can have a lower interest rate than credit cards. The repayment period is usually 3-5 years.

This option can be better than balance transfers if a 0% balance transfer won’t apply to your entire balance and you only want one credit check.

Most lenders charge an origination fee, so you should include this fee with your potential loan costs to calculate your total interest savings.

Debt Management Plan (DMP)

A debt management plan (DMP) provides hands-on help to reduce your interest rate and access credit counseling. You pay off your entire balance and this strategy can have minimal negative effects on your credit history as you’re not discharging the debt.

With a DMP, the credit counselors negotiate a better interest rate on your behalf but leave the balance on your existing card. Next, you submit a monthly payment to the DMP provider that sends the appropriate amount to the lenders.

You will pay a monthly service fee but can save money overall. Additionally, you get access to credit counseling which can help you make a budget and improve your money management skills.

DMP programs have several downsides:

  • You must freeze your credit cards and cannot make new purchases
  • You will need to close your paid-off credit cards
  • Cannot apply for new unsecured loans while enrolled in a plan

Debt Settlement Program (DSP)

A debt settlement program (DSP), also known as debt relief, can make sense if you don’t have the cash reserves or income to pay off your debts within a reasonable time.

Instead of paying off your current balance at a lower APR like debt management programs, the lender agrees to discharge your debt for a smaller amount when you make a lump-sum payment.

To pursue this option, you hire a debt relief agency to negotiate with lenders and discharge some of your remaining balance. To do so, you make monthly payments into a separate savings account and stop sending payments to the lender.

The agency reaches out to the lender when they believe you save enough money to settle. You won’t pay any debt relief fees until you agree to a settlement.

While you receive partial debt forgiveness, your credit history incurs damage as you miss payments and your defaulted accounts may be sent to collections. Lenders and collection agencies can also pursue legal action to collect payment.

Debt settlement can be a good alternative to declaring bankruptcy as you’re not forced to liquidate assets if the court orders you to do so. However, you don’t have any legal protections.

You may also need at least $10,000 in qualifying debts to enroll in one of these plans.

Settlement Offers

If you’re comfortable negotiating your own debt, you can try to reach a settlement with your credit card issuers.

The results are similar to debt relief programs as the lender discharges some of your balance. But, as a reward for doing it yourself, you avoid the average 35% debt settlement fee that debt relief agencies charge.

This option can make sense if you can afford the lump-sum payment to satisfy the settlement offer.

While you don’t have to pay back as much debt or interest, the lender will report that the debt has been settled. Unfortunately, this negative remark remains on your credit report for up to seven years. As a result, it can make it challenging to qualify for new credit until it drops off your credit history.

Government Credit & Debt Relief Programs

Unfortunately, debt relief scams are more common than you might think. Thankfully, there are several safeguards.

Credit Card Debt Relief Act of 2010

The Credit Card Debt Relief Act of 2010 requires for-profit relief companies to observe these guidelines:

  • Cannot charge fees until you agree to a debt settlement offer
  • Place your debt relief plan monthly payments into a dedicated savings account
  • Provide disclosures to provide transparency to consumers
  • Follow telemarketing rules to avoid unnecessary spam phone calls

You may also try looking for nonprofit credit agencies to avoid unnecessary fees.

For example, you can get a free credit consultation to help you determine if debt management or debt settlement can be beneficial.

Uniform Debt-Management Services Act

The Uniform Debt-Management Services Act (UDMSA) is a 2005 law that helps regulate credit counselors and debt management agencies.

For example, there can be specific rules for for-profit and nonprofit agencies to protect consumers from abusive practices and excessive fees.

States have also adopted these national standards to provide a common set of rules to help lenders, consumers, and third-party debt management agencies negotiate debt settlement and interest rate reductions.

Nonprofit credit counseling and grants

Nonprofit credit counselors can provide free consultations to help you pick the best debt payoff strategy. Additional fees can apply if you enroll in a debt repayment plan, but you can get reduced or waived fees if you’re experiencing financial hardship.

The National Foundation for Credit Counseling (NFCC) can help you find a licensed counselor to help negotiate your debt and craft a debt repayment plan.

Bad ideas for credit card debt relief

While there are several avenues you can explore to pay off your credit cards, some options can have more negative consequences than you desire.

Cashing out retirement savings and investments

Tapping your 401(k), IRA, or long-term savings helps you out of a cash crunch now. However, you’re only delaying the financial problem and may need to delay retirement if you cannot replenish the withdrawn balance in time.

In addition, early retirement plan distributions are subject to a 10% early withdrawal penalty and can be taxable. You’re also missing out on potential investment gains that help you effortlessly increase your nest egg value.

Borrow against your home

Homeowners might use a cash-out refinance or a home equity line of credit (HELOC) to consolidate high-interest debt at a lower interest rate.

This isn’t a bad option if you have a reliable income and can repay the balance within a few years. Your interest rate can be lower than an unsecured debt consolidation loan and you can have a longer repayment term.

However, avoid this approach if you can only afford the interest payments or go deeper into debt by maxing out your paid-off credit cards again.

Unfortunately, if you don’t satisfy the payment requirements, the lender can foreclose on your home since it’s the collateral. As a result, you still have your original credit card debt and you also need to find a new place to live.

Borrow against a life insurance policy

If you have a permanent life insurance policy, it grows in cash value that you can potentially borrow before you die and collect your death benefit.

You will need to repay the loan amount to collect your total death benefit. Not making the proper payments can also jeopardize your coverage and cancel your policy.

As these policies typically have high monthly premiums, early redemptions may not be worth as much as your total contributions.  

Borrow money from family and friends

A family loan can be an easy and cheap way to borrow money without hurting your credit score. However, your relationship can be permanently damaged if you don’t repay the loan or need an extension.

If you pursue this option, make sure the minimum monthly payment, interest rate, and repayment term are clear and understood by you and the borrower.

You may also only decide to borrow a tiny amount of money of $500 or less at a time so you’re more likely to repay the loan quickly. However, this practice may not be enough if you have several thousand dollars in credit card debt.

Bottom Line

Paying off your credit card debt is a remarkable accomplishment. Any of the above methods can help you achieve this noble goal.

Practicing good money behaviors is just as essential to avoid going back into debt unnecessarily or when the next financial emergency strikes.