Credit Card Debt: The Best Debt Repayment Methods

Owning a credit card and using it to build credit and to rack up rewards like cash back and travel bonuses can be a wonderful thing. We often need credit cards to rent a car, stay in hotels, or do countless other things that afford us freedom and enjoyment in our lives. But problems arise when we don’t pay our credit cards off in full every month and end up carrying a balance from month-to-month — the revolving debt we incur can add up in a hurry.

And adding up, it has been. The total amount of credit card debt Americans hold recently hit a new record — $1 trillion, according to the Federal Reserve. Today, 191 million Americans have credit cards, and the average amount of debt carried by people with balances is $7,279 per person, according to Lending Tree. Complicating matters, the average APR (annual percentage rate, the credit card interest rate) hit 23.98% in 2023, the highest in decades.

Combined, that makes a big dent in the average monthly budget. If you have a 20% APR on a $10,000 credit card balance, for example, you’d be paying $2,000 a year in credit card interest — more than $166 per month — just to carry your balance. A payment of that size is doing nothing to bring down that $10,000 debt. If you don’t focus on paying down more of your debt, at a faster clip, you could be stuck paying interest… forever.

So how do you get out from under the debt you’ve accumulated?

Start With The Basics: What’s Coming In? What’s Going Out? Where’s It Going?

First take a look at what you have to work with in terms of income. Whether it’s coming from a paycheck, your dividend-paying investments, Social Security, rental income or other sources, make a list of what you have coming in on the regular.

Then turn to your monthly outflow starting with your fixed expenses. List your housing, utilities, groceries, healthcare, childcare, transportation and anything else that’s largely non-negotiable. Add on your variable expenses — how much do you spend on cell phone, internet, subscriptions, eating out, travel, clothing, gifts and other things each month. Finally, list all your debts, including credit cards, loans (car, student, personal), or medical bills — include the interest rate for each loan, the minimum monthly payment, and the due dates. It’s best to stack them from highest interest rates to the lowest. (We’ll come back to why in a moment.)

Subtract what’s going out from what’s coming in and — if the number is negative, that’s the amount you’re adding to your debt each month. The goal is to turn that around and make that number a positive, so you can make progress repaying what you owe. “The biggest challenge I hear from our clients is that it seemed impossible when they started their debt-free journey,” says Thomas Nitzsche, Senior Director of Media for Money Management International, a nonprofit credit counseling agency. “But by committing to a plan and sticking to it, they were able to find success.”

Find The Money

If you’re spending more than you make, what’s the best way to turn that around? Now that you have a map of where your money is being used, go line by line and see where you might be able to cut back. Some costs (subscriptions, wireless) may be able to be canceled or renegotiated. Others (take-out, entertainment) may be able to be trimmed.

Try to come up with a sum you think you can devote to putting toward those credit card and other debts on a monthly basis. If you need some help with this, the FinanceFixx coaching program developed by financial expert Jean Chatzky can help. It uses automation and behavioral finance to get you to your goals faster and more consistently.

Get to Work — Choose Your Method for Repayment

Once you know how much you can devote to paying down your balance, it’s time to pick a debt repayment method. Two of the most popular include:

Debt Avalanche: This method will get you out of debt fastest and cheapest. It involves paying off the debt with the highest interest rate first. Doing this reduces how much total interest you’ll pay over the course of your debt repayment, since you put all your focus on the debt that’s costing you the most to service each month. You’ll start by making the minimum payments on all your debt, then put any extra cash towards the debt with the highest interest. Do this until the debt is paid in full, then move on to the next debt with the next highest interest. Keep this up until all your debt is paid off.

Debt Snowball: This method focuses on repaying the smallest debts first. The thinking here is that if you can check some smaller debts off your to-do list earlier on in the process, you’ll be more inspired to keep going. With this method, you’ll make minimum payments on all your debt and then put any you have leftover towards the debt with the lowest amount. Once a debt is fully paid off, you’ll move all your payments to the debt with the next-lowest amount. Continue this until all your debt is paid in full.

“I’m a big fan of the debt avalanche (method) because you minimize your total lifetime interest costs,” says Justin Pritchard, a fee-only financial adviser and founder of Approach Financial. “The debt snowball is great for building momentum and it feels good—so use that if you’re lacking motivation.”

Balance Transfers and Other Options

Finally, if you have a good credit score you may want to consider a balance transfer. A balance transfer lets you move credit card debt from one card to another. The goal is that the card receiving the balance would have a lower interest rate — ideally 0% — and you’d pay off the balance before that no-interest period ends (which is usually anywhere from six to 18 months, but you need to read the fine print to make sure.) The goal is that you fully pay off your debt balance before you lose that low interest rate, allowing you to get out of debt faster — that’s because each payment you make will go directly to chip away at your balance, not towards interest. You can also call your credit card issuer and ask for a reduced APR. If you’re a customer in good standing, many credit card issuers will lower your interest rate a few points just for asking, Nitzsche says.