How to Eliminate Credit Card Debt

However formidable it might currently appear to you, credit card debt can be defeated. Lots of people have done it before, and many are doing it right now. Here’s how to eliminate your credit card debt and be one of them. 

The Snowball Method

OK, so let’s say you have three credit cards, with balances of $12,000, $4,800 and $3,200. The minimum payment on the $12,000 balance is $200 monthly, the $4,800 balance has a minimum payment of $50.00 and $3,200 balance has a $30.00 minimum. 

Now let’s say your budget affords you the ability to apply $1500 in total each month to these three balances. Most people would divide that amount evenly between all three accounts, paying $500 monthly on each one. 

That may not be the best way to tackle the problem.

Instead, make the minimum payments on the two higher balances and use the remaining cash to pay down the lowest balance. This would give you $1,250 monthly to pay off the $3,200 enabling you to dispatch it in roughly three months, rather than just over six. 

Now you can attack the $4,650 left over from the $4,800 balance with $1300 a month, which would kill it in roughly four months, rather than the nine it would have taken to dispatch the $4,800 at $500 monthly. 

This then gives you the whole $1500 with which to attack the remaining $10,600 of the $12,000 balance, so you’ll get rid of it seven months later. 

Now granted, these figures are rounded, but the principle is sound nonetheless. You’ll eliminate all of that credit card debt in roughly 14 months, rather than 24.

Consolidation Loans

Another way is to combine all of those balances onto a single card at a zero percent APR for 12 to 21 months. All things being equal (and again, we’re rounding), you’d shift $20,000 to the new card and attack it with your $1,500 monthly. This means you’d need right around 13 months to pay it off. 

However, if the card only allows you a 12-month window within which to accomplish this, you could find yourself on the hook for an interest rate approaching 25 percent. Moreover, some card issuers will apply that rate retroactively to the entire original amount — from the date of the transfer. 

This means you could be looking at a year’s worth of accumulated interest on $20,000 at 25 percent, even though you’ve paid most of the debt off. It’s critical to do the math to ensure you have an adequate window within which to satisfy the obligation if you decide to pursue this strategy,

Personal loans and home equity loans can also be used to consolidate credit card debt. The advantages of these include lower interest rates. However, you’ll need a higher credit score for the personal loan and the home equity stratagem puts your house at risk if you can’t repay the loans. 

Debt Management

A credit counselor will take over payment of your debts, after negotiating more favorable repayment terms with your card issuers. This can shorten the amount of time it will take to pay off your balances, but it won’t be as quickly or as inexpensively as the methods above. 

You’ll pay more interest than you would with credit card debt consolidation loans and you’ll surrender control of your finances to a third party. On the other hand, your credit score won’t matter; all you have to do is sign up. 

Debt Settlement

This approach is similar to debt management, in that you’ll have a counselor negotiating on your behalf and paying off your accounts. However, this individual will be pushing for forgiveness of part of the principal amount as well as fee and interest forgiveness. 

You’ll stop paying your creditors altogether under a settlement plan and instead deposit the money into an escrow account from which your agent will draw to pay off the settlement agreements as they are reached. The timing will vary depending upon how quickly you can build up the payoff fund and the amount of debt you have. 

Your credit score isn’t really an issue as regards to qualifying here either.

Bankruptcy Protection

If all of the above fails, you can file for protection in bankruptcy court. The requirements you’ll have to meet will vary depending upon the type of filing you pursue, but this is a surefire way to eliminate credit card debt. 

However, it will also decimate your credit score for up to ten years. 

These are the five most common ways to eliminate credit card debt. While each has its own efficacy, there are considerations to which attention should be paid when making your choice.