Credit card debt is an unwelcome burden in many households. There are multiple ways to reduce or get rid of credit card debt. Some methods take more time and effort than others. And some methods are risky or not a good option for most people.
Before you take steps to get out of credit card debt, be sure to understand what each method entails and the likelihood it will succeed in your situation. Here are some of the more common ways to reduce your credit card debt as well as some of the methods most heavily advertised.
(For more articles on getting out of credit card debt, see our Managing Credit Card Debt area.)
One of the best methods of reducing your debt is to take a hard look at your finances, create a budget that calls for reduced spending (and perhaps increasing your income), and then systematically paying down your debt over time. For many people, this is an effective way to get control of credit card debt, but it does take time, patience, and discipline. If your debt it too high compared to your income, however, this method may not work.
Visit Nolo's Budgeting area for tips on how to get your finances under control.
Debt stacking is a variation of the above method. In debt stacking, you pay off credit card debt in a specific order and stack the payments as the debts are paid off. You pay off the smallest balance first, then add that monthly payment to the monthly payment for your next largest balance and so on until all are paid off.
Example. Jack has three credit cards. Card A has a balance of $5,000 with a $100 minimum payment. Card B has a balance of $20,000 with a $400 minimum payment. Card C has a balance of $25,000 with a $500 minimum payment. Jack has an extra $500 in his budget to devote to paying off his credit cards. Following the debt stacking principle, Jack pays $600 per month on Card A until it's paid off, while only paying the minimums on the other two cards. Once Card A is paid off, Jack adds that $600 to his payment on Card B, increasing his payment on Card B to $1,100 per month. He continues to pay the minimum on Card C. Once Card B is paid off, he adds that $1,100 to his minimum on Card C and begins paying $1,600 on Card C.
A debt management plan (DMP) is an agreed-upon repayment plan between you and your credit card company. The plans are proposed based on your income and expenses, as well as the balances and interest rates on your credit card.
Usually, the DMP is facilitated by a third party, such as a for-profit debt management company or a nonprofit credit counseling company. The credit counselor reviews your income and what you spend on other necessities every month and comes up with a single monthly payment based on your ability to pay. You make that monthly payment to the debt management company, which takes out a fee and pays the rest to your credit card companies in the agreed amount.
These plans can reduce your monthly payments by reducing interest rates and sometimes balances. The debt management company disburses all the funds, so you make one easy payment instead of trying to juggle multiple payments in varying amounts to multiple credit card companies.
Example. Jack owes $50,000 to three different credit card companies, all with different high interest rates. He contacts XYZ Credit Counseling Co. His monthly take home pay is $5,000, and his monthly expenses (not including his credit card payments) are $3,500 when he budgets carefully. His monthly minimum credit card payments total $1500; XYZ calculated that it would take Jack seven years to pay back the debt at that payment. XYZ negotiates with the credit card companies to reduce these interest rates and puts Jack into a DMP with a $1,500 and a five-year payoff time, saving him two years of payments and several thousand dollars of interest.
Beware of scams. Unfortunately, some for-profit debt management companies charge hefty fees and do little to work out agreements with your creditors. Your best bet is to use a nonprofit credit counseling company and make sure you understand the fee arrangement. To learn how to choose a good company and to avoid scams, see Nolo's article on Debt Management Plans.
In some circumstances, you may be able to negotiate a reduced interest rate or settle the debt for less than the amount owed. Credit card companies typically will not negotiate with you on your balances, however, unless you are in significant default - if you're paying your bill on time, you aren't a risk. The credit card company might accept your offer to settle if it determined that the settlement would yield more than what it would receive if it had to sue you.
Also, your best bet is to offer a lump-sum payment at a reduced rate -- companies are more willing to take less if they can get it up front. This means that negotiating works best if you are already behind in payments and have a small chunk of cash on hand.
(To learn more about negotiating with your credit card issuer, see Nolo's articles on negotiating with creditors.)
Debt settlement companies advertise heavily on the Internet, radio, television, and billboards. These companies urge you to stop paying your debts so that you can save up a lump sum of cash and offer it to your credit card company as payment in full on the debt. So if you owe $10,000 on your credit card, you would offer the credit card company $7,000 to call the debt even. These companies often charge hefty monthly fees which you pay while you are saving up the lump sum for your credit card debt.
Debt settlement can be disastrous. If you stop making your credit card payments in order to save up enough for a settlement offer, the credit card company can still sue you for default, even if it knows you plan to settle. And some people end up paying thousands of dollars in fees to the debt settlement company, and never settle any debts with their creditors. Additionally, if you do settle, you face tax liability for the amount forgiven.
To learn more about the pros and cons of debt settlement, and how to avoid scams, see Nolo's article Credit Card Debt Settlement.
is a process by which you can reduce, eliminate and/or restructure your
debt through the federal court system. Bankruptcy is more complex than
these other options, but it can offer the most definitive debt relief.
It's particularly useful if, given your current income and debt burden,
it's just not possible for you to pay down your credit card debt. For
more information about bankruptcy, visit our Bankruptcy topic area.