How to Pay Off Credit Card Debt
Updated January 1, 1 . AmFam Team
If you’re carrying credit card debt, you’re not alone. Millennials in the U.S. have an average of $4,712 each in credit card debt. When used the right way, credit cards can be a useful financial tool. But when debt starts to pile up, people often find it harder to pursue their dreams, like owning a home or starting a business. Successfully paying off credit card debt takes hands-on planning and commitment. Read our tips on how to get started down the right path.
What Is the Best Way to Pay Off Credit Card Debt?
Tackling your credit card debt takes persistence, patience and time. Rome wasn’t built in a day, so your debt won’t be erased overnight. But taking small steps can lead to a big payoff in the end.
Find a payment strategy
Setting up a concrete goal (“I want to be debt-free by this time next year”) will help keep you, and your debt, in check. There are lots of ways to go about eliminating your credit card debt.
Pay more than the minimum. Credit card issuers set a monthly minimum payment, usually based on a percent of your total balance. While it can be tempting to pay only this amount, these odds are stacked in the bank’s favor. Banks make money on the interest they charge you to carry that balance each month, so your $5 cup of coffee costs much more in the long term. Paying even just a little more than the minimum will help you get closer to debt-free.
Try the snowball method.; This strategy gives you quick short-term victories. The Snowball Method (Opens in a new tab) prioritizes paying your loans by their amount — smallest to largest. You pay the minimum on all of your debt, focusing your efforts on the loan with the smallest amount. When you’ve paid that one off, you focus on the next smallest loan. Like a snowball rolling down a hill, you’ll make bigger and bigger payments over time until your debt is gone.
The avalanche approach. Another way to tackle debt is the avalanche approach (Opens in a new tab). Rather than paying off your smallest debt first, you’ll focus on the card with the highest interest rate. Crunching the numbers, this strategy is more likely to help you pay off debts more quickly and save the most money on interest charges.
Automate payments. Make sure you don’t accidentally miss a monthly payment to avoid extra late fees. You can set up automatic payments through your bank account, and check out our student loan payment tracker.
Increase your income
There are two basic ways to get out of debt: paying off loans and increasing your income. But be careful not to spend that extra money to create more debt. Put it toward paying off your balances, and you’ll be in good shape.
Side hustle. Use your skills to freelance outside of your regular work hours to bring in extra income. You’ll be in good company — an estimated 57.3 million Americans are freelancing (Opens in a new tab) (36% of the total workforce).
Get training. Looking to break into a new line of work? Find out what skills you’ll need to do the job, and seek out training to help you up your game.
Take a look at your career path. How do you see your life unfolding in a year? In five years? Take a look at your professional career to see if it’s a good fit for your dreams. If not, it might be time to make a change. Finding the right job doesn’t happen overnight, but it’s well worth the effort.
Consider debt consolidation
When you have good credit but a lot of different credit cards to handle, consider consolidating your debt into one (preferably lower-interest) account. That way, you only have to focus on paying off one credit card.
Seek help
If the amount you owe each month is more than you can possibly make, it might be time to look for help. Consider debt relief options such as debt settlement or a debt management plan. Typically, you’d work with a credit counseling agency to negotiate with your creditors.
Start Improving and Building Your Credit
If you're just starting out in life and big goals like owning a new car, renting a nice place or owning a cozy home, one thing is certain: you'll need to build credit. A good credit score will help you save money, get lower interest rates, and give you a better chance for loan approvals. Check out our tips for improving your credit score.
Credit card debt can be a lot to handle. By starting small and taking daily actions to save and pay back debt, you’ll be one step closer to improving your credit and getting out of credit card debt. Keeping your financial identity protected is one good way to make sure you dreams stay on track. Take a look at our Credit Theft Protection and Monitoring coverage, and protect what matters most.
This article is for informational purposes only and based on information that is widely available. This information does not, and is not intended to, constitute legal or financial advice. You should contact a professional for advice specific to your situation.
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Every situation is different, so it’s important to do the right research and choose the best option for you. Luckily, we’ve done some of the breakdown for you to help you decide whether to pay off your student loan entirely or buy a house.
Can Student Loans Affect Buying a House?
Typically, student loan debt doesn’t prevent you from getting a mortgage. The biggest thing to note is that student loan debt does influence your debt-to-income ratio, which is a factor lenders consider before giving you a loan. It can also affect the interest rate you pay on your mortgage.
Buying a house with defaulted student loans
If you’ve defaulted on your student loans, it’ll be more difficult — but not impossible — for you to get a mortgage. Because defaulting negatively affects your credit score, lenders will be less likely to want to give you a loan or will charge a much higher interest rate on a loan.
Getting a home loan with student loan deferment
If you’ve deferred your student loans, this usually won’t affect your chances of getting a mortgage. Just be sure to consider how the future estimated payments will factor your debt-to-income ratio. Some types of mortgages may reject applicants with deferred loans, so do your research on the different types of mortgages before shopping.
Should You Pay Off Student Loans Before Buying a House?
Buying a house is expensive, there’s no doubt about that. It can seem smart to hold off on house shopping while you still have student loan debt, and it can be even more difficult to save for a house if you’ve got a high debt-to-income ratio. But if you have enough income to handle the payments for both, you may want to consider investing in your first home.
Signs You Should Pay Off Student Loans
When considering whether to pay student loans or save for a house, there are a few factors that can help you decide if paying off your student loans should be a priority.
Your debt-to-income ratio is too high
If the amount of money you bring in monthly or yearly is almost the same as the amount of money you pay out in debts — like student and car loans or credit cards — it may be best to pay down your debt before buying a house.
You’ve defaulted on your loans
Defaulting on your loans has a severe negative impact on your credit score, which tells lenders that you’re a bigger risk to take on. Work on improving your credit score before shopping for a mortgage.
You’re struggling to make payments
If you feel like you’re living paycheck to paycheck or struggling to make payments on your loan every month, it’s best to hold off on saving for a house. Need help keeping track of your student loan payments? Try our student loan payment tracker to get organized.
You haven’t saved for a down payment or emergency fund
Before you start picking out which houses you want to tour, you should take a look at your savings. If you don’t have enough for a 5 to 10 percent down payment or enough as an emergency fund for home expenses — like a broken dishwasher or damaged roof — take more time to put money away for your first home.
