Tackle Your Credit Card Debt With These 4 Smart Moves

2012 credit card debt per borrower

Many people who are trying to get out of credit card debt don’t know where to begin – especially if they owe money on multiple credit cards. In the past few years since the financial crisis of 2008, more Americans have been focusing on paying down their credit card debt. According to a recent report from the credit bureau TransUnion, the average amount of credit card debt per borrower was $5,122 during the 4th quarter of 2012, which was down 1.58% from the previous year.  

Don’t let debt keep you down. Take a look at these debt reduction moves and start using the one that’s best for you.

Pay off the highest-interest credit card first.

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Take a look at all of your credit card APRs. Chances are, some of your credit cards have higher interest rates than others. The higher interest cards are costing you the most money, so it usually makes sense to pay them off first. 

For example, if you have two credit cards, one with a $2,000 balance at 19% APR and a second card with a $3,000 balance at 12% APR, you should make minimum payments on the $3,000 balance while paying extra money toward the 19% APR card. 

If you have multiple credit cards and you want to decide which credit card to pay off first, tools like the Credit Card Optimizer can help you discover the best distribution of your credit card debt. This free tool lets you compare multiple credit card balances and decide how to pay off your debt as fast as possible while saving as much money as possible. 

Advantages: Paying off the highest interest cards first can save you the most money on credit card interest. 

Disadvantages: Some people might feel discouraged if their total amount of debt doesn’t seem to be decreasing fast enough – but in the long run, this is still the way to save the most money while paying off credit card debt. 

Do a balance transfer.

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If you don’t have enough cash to pay off your credit card debt, you can save some money on interest by doing a balance transfer. With a balance transfer, you transfer your credit card debt to a different credit card with a lower interest rate. You can either transfer debt to a credit card that you already hold, or you can apply for a new credit card account. Some credit cards offer special introductory 0% interest rate on balance transfers, as long as you promise to pay off the full amount within a certain amount of time (often 6-18 months, according to this article from Discover Card). 

Advantages: Balance transfers can help you save money on credit card interest payments. 

Disadvantages: Balance transfers don’t get you out of debt, they just move the debt around. You still need to practice good budgeting and good financial habits to actually make changes in your spending and saving patterns. If you apply for too many credit card balance transfers, your credit score could take a hit. Balance transfers can also hurt your credit score if you transfer so much money onto one credit card that it puts your credit utilization ratio above a certain level. Another potential drawback of balance transfers is balance transfer fees – depending on the credit card, balance transfer fees can cost 3-5% of the total balance transferred. So if you transfer $5,000 of credit card debt and the fee is 4%, that would be an extra $200 added to the credit card balance.  

Consolidate debts into one monthly payment.

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Instead of chipping away at multiple credit cards, another solution is debt consolidation. With debt consolidation, you take out a personal loan to pay off your credit card debts, and then you make one monthly payment on your personal loan – often at a lower interest rate than you were paying on your credit cards. For example, Wells Fargo offers debt consolidation with fixed-rate unsecured personal loans for people with good credit who have high interest debt totaling $3,000 - $100,000.   

Advantages: With debt consolidation, you'll often be able to get a lower monthly payment and will have more financial flexibility to save or spend each month. Or you can choose a debt consolidation plan that will get you out of debt faster, in exchange for a higher monthly payment.   

Disadvantages: Debt consolidation does not get you “out of debt,” but it hopefully puts you in better position to pay off your debt while saving money on interest. If you choose a debt consolidation loan with a lower monthly payment, it might take you longer to get out of debt than if you had just kept paying off credit cards, but it's up to you - you have the option to pay extra money toward your credit card debt each month, as long as there are no prepayment penalties. Wells Fargo does not charge prepayment penalties on personal loans, but check the fine print before signing on any loan from any creditor, to make sure you can avoid prepayment penalties. 

Pay off the lowest-balance credit cards first.

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Most financial planners recommend paying off the highest interest credit cards first, but some people need extra momentum to feel like they are making progress on getting out of credit card debt. Another approach is to pay off the lowest balances first – this plan is recommended by personal finance expert Dave Ramsey, who calls it the "Debt Snowball" Plan. Sometimes it's easier to stay motivated if you pay off some small debts first so you feel empowered and inspired to keep paying off the rest of your credit card debt. 

Advantages: You might feel more motivated to keep paying off debt if you can see those balances disappearing with each passing month. 

Disadvantages: You will pay more money in credit card interest than you would have by focusing on the higher interest cards first. 

Paying off credit card debt can be costly, stressful and time-consuming, but no matter how much credit card debt you have, there are numerous options and potential solutions to help you save money and make more manageable payments. Credit card debt doesn’t have to dominate your life. You can find financial stability and peace of mind by consolidating your debts, doing a balance transfer to pay off debt faster, or just making extra payments every month until the credit card debt is gone. 

Research your options for paying off credit card debt and make sure you are aware of any drawbacks and costs – whether it’s paying higher interest, taking a hit to your credit score, or staying in debt longer than you would like.