How to get out of credit card debt in 5 simple steps
Credit card debt is on the rise in the U.S., but you can regain control.
Contributing Writer at Tally
March 10, 2020
Americans owe $930 billion in credit card debt, as of the end of 2019. Spread that out over the nearly 129 million households across the U.S., and the average household carries $7,210 in credit card debt.
While the minimum payment on that $7,000 in credit card debt may not cripple your finances, you are throwing money away in interest charges each month. You can eliminate this seemingly endless money pit by getting out of credit card debt now.
Below are five easy-to-follow steps to get out of credit card debt.
1. Stop creating more credit card debt
The first step to getting out of credit card debt is to stop creating more credit card debt. While it may sound elementary, training yourself to reach for cash or your debit card instead of your credit card can be tougher than you may expect.
If you feel you can’t fight the urge to swipe those credit cards, put them in a locked box or drawer and give the key to someone you trust. Explain your goal of becoming debt-free to that person so they know not to give in to your attempts to get access to your credit cards.
One thing you don’t want to do is cut off your access to credit cards by closing your accounts. While this may seem logical on the surface, closing credit card accounts reduces your available credit and can lower the average credit age on your credit report, which may lower your credit score.
2. Reduce your high interest rates
Next in your goal of eliminating credit card debt is to reduce the APR on those high-interest credit cards. You can do this in several ways.
Ask for a lower credit card interest rate
The most straightforward way to reduce credit card interest is to simply ask for a lower interest rate. Call the customer service phone number on the back of your credit card and tell the representative you’d like to speak about getting a lower interest rate. Make sure to highlight how long you’ve been a loyal customer and how you’ve never missed a monthly payment.
Some credit card companies will entertain the idea of a rate reduction, especially those with variable rates. However, some companies won’t negotiate APR, so you may hit a brick wall early in the process.
If you’re working with a financial planner or credit counselor, getting them in on this process may help you be successful in lowering your APR.
Transfer to a lower rate
Many credit cards attempt to earn your business by offering 0% interest on balance transfers for a set number of months, typically 12-18 months. You can reduce your credit card interest rate by taking advantage of these offers and transferring your credit card balances onto one of these 0% balance transfer credit cards.
Keep in mind that you will need good credit to qualify for these cards. You also must consider the one-time fee they will charge to make your transfer. This balance transfer fee generally runs in the 3-4% range, so do the math to make sure the promotional rate is worthwhile to make the transfer.
For example, if you transfer $1,000 to a 0% APR card that has a 3% transfer fee, you would pay a $30 fee to transfer. Compare that fee to the interest you would pay during the 0% APR period to determine if it’s beneficial.
You can calculate roughly how much interest you will pay per year by multiplying your balance by your credit card’s APR. For example, if you owe $1,000 on a card with a 19.9% APR, you would pay $199 per year in interest. The 0% card could save you $169 over a 12-month period.
Get a lower rate with Tally
Tally can also help you lower your interest rates with its line of credit. The Tally line of credit gives you access to funds that you can use to pay off your credit cards.
When you apply for the line of credit and receive your approval, we will compare its interest rate to your credit card APR to determine if it will save you money. If the Tally line of credit makes financial sense, we apply it to your higher-interest credit cards while you pay the lower interest rate on the line of credit. You can then put the savings toward your remaining credit card debt to help you pay off your balances quicker.
Lower interest is only the beginning of the help the Tally line of credit offers you. Tally is more forgiving of credit blemishes than some other lenders, approving FICO scores as low as 660, below the national average.
Take a debt consolidation loan
A debt consolidation loan is a quick way to lower your credit card interest, as it rolls credit card debt into one lower-interest personal loan. Not only does this lower the interest you pay, but it also streamlines your repayment process by reducing the number of payments you make each month.
Many banks offer these personal loans, but some companies specialize in credit card consolidation loans. Tally can help with an available low-interest line of credit to help you pay down your credit card debt quicker.
Keep in mind that debt consolidation loans generally require a good credit score to get approved. As you consider debt consolidation options, pay close attention to the interest rate and other fees to ensure a debt consolidation loan is worthwhile.
3. Create a cash surplus
If you’re going to pay off your debt as quickly as possible, you’ll want to have the extra money to make larger payments. Kick off this process by creating a budget that outlines all your expenses each month and comparing the total expenses to your take-home income to see how much cash is left over.
If you have extra money, you’re off to a great start. If you run a zero budget, meaning you have $0 left after your expenses, or spend more than you earn, you’ll need to either trim expenses by cutting unnecessary items or increase your income by working overtime or taking on a side gig.
4. Choose your debt-repayment strategy
With your credit card interest rates as low as you can get them, it’s time to pick the debt-repayment strategy that best suits you. There are several strategies to choose from, but it’s up to you to determine which is the better fit for your personality and financial situation.
Debt avalanche method
The debt avalanche method focuses on paying off your highest-interest debts first. It works by rolling all available funds toward paying the highest-interest credit card. Once that card is paid off, you roll your extra funds to the credit card with the next-highest interest rate. Continue this process until you’re debt-free.
The debt avalanche is ideal because it’ll save you the most money on interest. The only downside is it may take a while to see your first $0 balance.
Debt snowball method
The debt snowball method is similar to the debt avalanche method, but it starts from the credit card with the lowest balance and works upward from there.
Using this method will likely result in you paying more interest since you’ll be leaving your highest-balance cards to accrue interest charges while focusing on the lower-balance cards. However, paying off those lower-balance credit cards early on can give you the motivation you need to stay on the path of becoming debt-free.
A personalized plan
You can also opt for a personalized plan that can be adjusted based on how much you’re able to put toward your debt each month.
This is something you can plan out yourself, but smart technology can make the process easier. Tally Advisor, for example, is like a robo-advisor for debt. It keeps an eye on your credit card balances, due dates, interest rates and more, then creates a tailored credit card repayment plan to get you out of debt quicker.
One benefit of this system is that it adapts to your financial behavior based on your spending habits and schedule. You set your timeline to pay off your debt, and Tally lets you know what you need to do to reach your goal.
5. Automate your way to being debt-free
Once you have your preferred debt-repayment method set, take the guesswork out of the entire process by setting up automatic payments to your credit card companies. This not only eliminates the stress of remembering monthly payments, but it also helps you avoid late fees and additional interest charges.
If your credit cards don’t offer automated payments or you’d rather not give the credit card company monthly access to your bank account, you can use third-party automated payment systems, such as Tally's mobile credit card manager, instead. Using an app like Tally streamlines your multiple credit and store card payments into one payment each month so you never fall behind on what’s due.
Returning to responsible credit card usage
Always remember to keep your credit cards in check by never spending beyond your means and never carrying a month-to-month balance on a credit card that’s charging you interest.
Once you’ve eliminated your credit card debt, you can start reaping the benefits of responsible credit card use.