How to Get Out of Credit Card Debt

Debt Solutions Feb 06, 2022

Consumer debt almost seems to be a rite of passage for the majority of Americans these days and it's nothing new. Personal finance isn't taught in school, so most of us have had to just figure it out as we go along, but this approach has caused many people to get in over their heads with credit card debt, personal loans, and other forms of unsecured debt.

If you are currently struggling with credit card debt, then you are not alone and there is nothing to be ashamed of. What you can do is learn how it was caused and make a plan to get out of it.

There are many ways to get in debt and only a few to get out, but some debt payoff solutions are faster than others, and some will cost you more than others as well. When it comes down to it, your options for dealing with credit card debt depend on multiple factors and the most important ones are your income, credit score, whether you own a home with equity, and debt-to-income ratio.

Paying down your credit card debt the old fashioned way

One way you can get rid of your debt is to chip away at it each month by paying more than the minimum payment. This method takes discipline and time because you have to stop spending money with your credit cards, and it could take years of payments depending on how much money you make each month and how much debt you have.

Avalanche Method

This strategy works by paying minimum payments on all of your cards and putting whatever extra you can each month toward paying off the highest interest card, until you have paid that one off. Once you pay off the highest interest card you move to the next highest card, and so on and so forth.

Snowball Method

This strategy works by making minimum payments on all your cards and putting all of the extra cash you have toward paying off the smallest debt first, then moving on to the second smallest. You keep this up until all of the cards are paid off.

Credit card debt solutions

You can find many options for getting rid of debt, but they depend on your financial situation and everyone’s financial situation is different.

Debt consolidation

The typical meaning of debt consolidation is the practice of combining your debts into a single payment that is preferably a lower interest rate allowing you to pay down the principal a little each month and eventually paying it all off. This loan is also referred to as a Personal Loan. If you have enough income and a decent credit score, you could be eligible for a debt consolidation loan.

Credit Card Balance Transfer

Opening a new credit card and transferring the existing balance from an old one is what a credit card balance transfer means. These new credit cards come with an introductory and temporary low, or zero, interest rate on the transferred balance, but any new purchases will usually have the standard card rate applied to them, meaning that you shouldn’t use this card for new purchases unless absolutely necessary, otherwise it will defeat the purpose of getting the new card. The other factor to consider is that most Balance Transfers will charge you a fee of 3-5% of the balance you are transferring over. You are then paying a fee to get zero interest for a year, but if you are disciplined in paying it down the principal balance and do not use it for new purchases, then this could be a good option for you.

Home Equity Line of Credit (HELOC)

A Home equity line of credit or home equity loan are good options if you are a homeowner with equity in your house. Equity is the amount of money you would have if you subtracted your mortgage from your current property value. Once you have a specific line of credit open with a lender, you can withdraw cash and will only pay interest on the money you utilize on the line of credit. So if you received a $50,000 line of credit and pulled out $20,000 for a kitchen renovation, then your available credit would be $30,000 and you’d have to pay interest on $20,000 until it was paid back, at which point, your credit line would be back to $50,000. A Home Equity Line of Credit would not affect your existing home mortgage and could be done even if you had your home completely paid off.

Cash Out Mortgage Refinance

Unlike a Home Equity Line of Credit, a Cash Out Mortgage Refinance is a full refinancing of your mortgage to whatever the current mortgage rate and you would receive a check for the amount of cash you want to pull from your available equity. This cash is essentially added onto your existing mortgage balance and incorporated into the new mortgage loan. So if your home is worth $300,000 and the principal balance of the mortgage was $150,000, you could refinance your mortgage at $200,000 and receive a check for $50,000 to use however you please.

Many people use the equity in their homes because mortgage rates are so much lower than credit card rates and it allows them to pay off their credit cards free and clear. Beyond paying off debt, most folks use Cash Out Refinances for home renovation projects or to make a large purchase like a boat or RV. Whether that is a good decision is up to the individual.