Let’s face it: It’s way easier to get into credit card debt than get out of it. And once the debt starts accumulating, it can quickly become overwhelming and difficult to pay off credit cards and become totally debt-free. But debt doesn’t have to be a bottomless pit. With a little planning, many people have successfully paid off thousands—or even tens of thousands—of dollars of credit card debt, improving their creditworthiness in the process. Here are some of the strategies they’ve used.
Making a strategic plan to pay off credit card debt could make it easier to follow through. You might even save extra money or improve your credit score in the process.
Your best option will depend on a variety of factors—like creditworthiness, overall financial situation, and whether you’re in credit card debt due to a temporary setback or long-term overspending. But no matter what your circumstances, there’s a way to pay off credit cards and earn financial freedom.
The debt avalanche method involves prioritizing paying off credit cards with the highest interest rate. Make a list of all your credit cards, their current balances, and their interest rates. Keep making minimum payments on all your cards, but allocate the remaining budget toward the one with the highest interest rate. Paying off this card first—and then focusing on the card with the next highest rate—can limit how much interest you wind up paying overall.
With the debt snowball method, you pay off your smallest debts first and then move on to bigger ones. To start, make a list of all your credit cards and their current balances. Pay the most you can toward the card with the least debt, and the minimum balance on the others. Once one card is paid off, move on to the card with the next lowest balance. While you might wind up paying more interest, the snowball method can help you build and maintain momentum as you pay off credit cards.
Generally speaking, personal loans carry lower interest rates than credit cards— the average interest rate on a 24-month personal loan is 9.65%, and the average interest rate for credit cards is 16.28%. That being said, using a personal loan to pay off credit cards could be a good way to consolidate your debt, save you money on interest rates, and get you out of debt sooner. It also may be easier to stick to a loan’s fixed repayment plan, and moving debt from a credit card to a loan could improve your credit score.1
Some credit cards have promotional, 0% interest rates for debts that you transfer to the card. While you may have to pay a balance transfer fee, you’ll be able to pay down the transferred balances faster, as they won’t accrue interest during the promotional period.
But if you’re tired of playing the credit card balance shuffle, try a balance transfer loan instead and save yourself from the cycle of constantly moving balances from one credit card to the next.
If you’re having trouble paying off credit cards using the options above, credit counseling organizations may be able to help you set up a debt management plan (DMP). The counselor may be able to negotiate lower interest rates and monthly payments on your behalf and get you on a plan to pay off your debts within three to five years. Make sure to know all the rules that come with debt management plans: In some cases, you may need to close and stop using all your credit cards while on a DMP.
If you’re overwhelmed by debts and don’t see a way out, you might be able to get your eligible unsecured debts discharged by filing for Chapter 7 bankruptcy. For some people, a Chapter 13 bankruptcy might be a better option, as it allows you to keep more personal property and get on a court-mandated repayment plan with your creditors.
Keep in mind that bankruptcy is a major decision with a huge impact on your creditworthiness. A bankruptcy could appear on your credit report for up to 10 years, and while you can recover overtime, many consumers struggle to access loan products in the first few years after filing.
If you want to pay off credit cards with a loan, you’ll want to be sure you can qualify for the amount you want at the lowest rate.
Add up your current outstanding balances to figure out how much you’ll need to borrow to pay off the debt. Make sure to include any potential origination fees in your calculations, as many lenders take this fee out of your loan amount. For example, if you take out a $6,000 loan with a 3% origination fee, you’ll receive $5,820. In this case, if you need $6,000 to pay off your credit cards, you’ll want to borrow $6,200.
You can find personal loans from banks, credit unions, and online lenders. Compare your loan offerings to figure out which one might work best for you. Many online lenders, like LendingClub, let you check your loan offers without a formal application or affecting your credit score.
Once you’ve compared lenders and loan offers, you’ll need to complete the application. Most applications require you to list your desired loan amount and upload documents to verify your income and identity, so having that information handy can speed up the process.
Many personal loan lenders send the money directly to your bank account. Once the funds are in your account, use them to pay off your credit cards.
Depending on the lender, there may be more seamless solutions. With LendingClub’s balance transfer loan, you can add your creditors and have some or all of the funds sent directly to those accounts.
Ideally, you will avoid taking on additional credit card debt while paying off your personal loan. Creating a budget (and then sticking to it) could be helpful to manage your cashflow, particularly if you have a habit of overspending. In some cases, it may make sense to close or stop carrying credit cards.
While using a personal loan for credit card debt is only one option, it does offer several benefits.
Many personal loan lenders offer quick loan online applications, and you can often get prequalified and review your offers with only a soft credit check—the type that doesn’t hurt your credit score.
In contrast, you won’t know your credit limit or if you’re approved for a balance transfer card or new credit card until after you submit an application and agree to a hard inquiry, which can cause a dip in your credit score.
Personal loans often have a fixed interest rate, and you may be able to pick your repayment period before accepting a loan. In most cases, personal loan interest rates are lower than credit card interest rates, which can save you money and lead to paying down debt sooner. Plus, you can budget with confidence, knowing that the monthly payment will never change.
If you have multiple credit cards, the combined minimum payments could wind up being a major monthly expense. However, a personal loan can also function as a debt consolidation loan, and you can use the funds to pay off multiple credit card accounts. Depending on the interest rate and repayment term, you could wind up with a lower monthly payment, which will free up money in your budget for other expenses.
Your credit card’s balance relative to its credit limit can be an important factor in determining your credit scores, and the lower your credit utilization rate the better. While your outstanding debt on a loan is also a scoring factor, it’s generally not as important as the revolving credit utilization rate. As a result, paying down credit card balances with a personal loan could improve your credit score.1
It depends on your creditworthiness, the amount of debt, and how you came to be in debt in the first place. If you’re able to qualify for a low-rate personal loan or a balance transfer credit card, it can help reduce your overall payment and make budgeting more manageable.
If you’re in credit card debt due to overspending, a balance transfer card won’t be helpful because it doesn’t address the underlying issue. You might wind up transferring balances, freeing up your credit limits, and then digging yourself deeper into debt.
Yes, as long as you can afford your day-to-day necessities. This is because, generally speaking, you won’t pay any interest on your purchases if you pay off your credit cards in full each month. If you aren’t able to pay the full amount, make a plan for paying off the debt quickly to avoid accruing interest fees.
You can tackle your credit card debt in many ways, and for some people, using a combination of several strategies works best. A personal loan or even an emergency loan may help you consolidate your debt into a lower interest payment and fixed monthly rate, saving you money and time in the long run. At LendingClub, you can check your rates without impacting your credit score.