How to Pay Off Credit Card Debt

The average American family is carrying a lot of debt, with balances continuing to rise. A big factor in this debt is credit card debt. It may be tempting to blame consumer debt from credit cards and loans on reckless spending, but it’s important to understand the reasons behind debt accrual.

In a recent study, the Federal Reserve Bank of New York looked at the current status of consumer debt in the United States, making the case that household debt has risen and so has delinquency rates – especially among younger people. Before we get into how to pay off credit card debt, let’s look at

The Causes of Household Debt

The level of household debt in the U.S. has risen steeply in the last few years. According to the Household Debt and Credit Report from the Federal Reserve Bank of New York, credit card balances have reached $1.13 trillion outstanding, which is a $50 billion (4.6%) increase when looking at the fourth quarter of 2023

The average credit card debt in 2022 was $6,120, according to the most recent Federal Reserve data. Consumers are footing a big bill for racking up debt, with revolving credit card debt (meaning the balance that carries over into the next month). American households pay an average of $1,000 each in credit card interest every year according to the Consumer Financial Protection Bureau.

Below you’ll see the massive increase in credit card debt from quarter to quarter and year to year, reported by newyorkfed.org.

Why Consumers Compile Credit Card Debt

Although household income is outpacing most costs, there’s one spending category that’s growing at an even faster rate, and that’s medical costs. They have risen almost 33% since 2009, and while that’s only three percentage points higher than the rise in income, increasing medical expenses are likely to hit vulnerable consumers especially hard.

For those consumers with insurance requiring high deductibles, or those who have no insurance at all, that rise in costs will no doubt have a financial impact.

Additionally, the cost of parenthood is a factor of consumer debt, with 37% of survey respondents admitting they delayed or are delaying having their first child for that very reason.

If you look at the required unpaid parental leave alone, which NerdWallet calculates as costing an average of $8,516 before tax, it’s no wonder that first-time parents may find themselves relying on credit cards to survive. Then add the cost of medical bills, childcare, clothing, diapers, and everything else new parents are faced with during pregnancy and after their child is born, and you can see why 80% of parents with children under 18 surveyed said they have credit card debt, compared to just 58% of people who don’t have under-18s. You can learn how much it costs to have a baby in one of our previous posts.

Methods to Pay Off Credit Card Debt

Debt Snowball Method

With a name like “debt snowball” you might be thinking this is a way to get into debt, but it’s the opposite. The debt snowball method is a popular accelerated strategy for paying off credit card debt. First, you make a list all your debts and order them from smallest to largest (regardless of interest rate). Then, commit to making minimum payments on the card with the smallest balance first, while allocating any extra funds towards paying off that card’s total balance. Once that credit card’s balance is paid off, roll the amount you were paying on it into the next smallest credit card debt, creating a "snowball" effect. As you continue this process, the momentum builds, and you'll find yourself paying off debts faster and gaining motivation from creating your own debt relief.

Debt Avalanche Method

Here’s another winter themed debt payoff method (must be because there’s nothing warm and comforting about debt). Similar to the debt snowball method, this method also focuses on paying off your balances one at a time. Remember with the snowball method, interest rates weren’t factored in when deciding which credit card balances to pay off first. With the debt avalanche method, you target your balances with the highest interest rate first. You may not see quick wins early off in the process, making it less motivating for you, but you may save more money overall.

A Debt Consolidation Loan

A debt consolidation loan is a financial tool designed to help individuals manage and pay off multiple debts more efficiently, particularly credit card debt. This process involves taking out a new personal installment loan that combines your debt into a single monthly payment with a potentially lower interest rate than your credit cards’ interest rate, but can depend on various factors like your credit score. If you have bad credit, it might be in your best interest to improve your credit score.

Debt consolidation can make paying your bills easier since you won’t need to worry about as many bills and due dates. By consolidating high-interest credit card debt into a single loan with a lower interest rate, borrowers may save money and pay off their debt faster. However, it's essential to carefully consider the terms of the consolidation loan, including interest rates, fees, and repayment terms.

Create a Budget

Working from a budget every month is incredibly helpful for combatting debt. Budgeting gives you greater visibility of where your money goes and helps you avoid missing payments. We have some tips about creating a budget. It starts with calculating your income and tracking your spending. When creating a budget, it’s helpful to bucket spending into categories like food, housing, entertainment and transportation. The 50/30/20 budget rule might be right for you. This budget rule involves allocating 50% of your income to needs, 30% to wants, and 20% to savings. You can also check out these apps that help your budget better and turn your smartphone into your strongest financial ally.

By taking steps to minimize bad debt and being savvy in terms of good debt, consumers might not need to use debt as a survival tool.

Credit Card Debt FAQs

Is the snowball or avalanche method better?

Deciding on whether the debt snowball method or debt avalanche method is better depends on your own personal financial situation. An advantage to the snowball method is that it can be more motivating by eliminating smaller debt quickly. A big advantage to the avalanche method is that it can save you more money in the long run.

What is the disadvantages of debt snowball?

The main disadvantage to the debt snowball method is that it ignores interest rates. It’s a method that looks at low hanging fruit and designed for quick wins. This means potentially paying more over time.

How long will it take to pay off $30,000 in debt?

How long it will take to pay off any amount of debt depends on several factors, including your monthly payment amount, interest rate, and repayment strategy. A borrower could pay off their loan in one payment or it might take them decades to pay off a debt of any amount. It all depends on their own personal situation.