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Reduce Credit Card Debt in 5 Easy Steps

Learn how to reduce credit card debt on your own so you can pay it off quickly, avoid credit damage and save money on interest charges.

Organize your cards so you can reduce credit card debtLet’s be honest – most people would prefer to solve challenges with debt on their own. You don’t have to share your finances with anyone, worry about judgement or put your fate in someone else’s hands. That’s why DIY strategies to reduce credit card debt like the ones we describe below are so useful. With some basic instruction, you can handle the issues on your own and move forward confidence.

Still, it’s important to note that these debt reduction strategies won’t solve every debt problem in just any situation. Once you read this page and understand what you need to do, run some calculations. See how long it will take to repay what you owe and how much it will cost. If those numbers don’t make you happy, consider alternative options for debt relief.

The best way to reduce credit card debt

Step 1: First call your creditors to negotiate lower interest rates

This is the all-important first step that most people skip. People often never call their creditors to even ask for lower rates. As a result, it makes it harder to eliminate the debt and leads to higher costs.

Always keep in mind that lower interest rates make it easier to pay off debt. A lower rate means less of each monthly payment you make gets eaten up by accrued interest charges. Thus, you can pay off the principal (original debt owed) much faster.

To do this step effectively:

  1. Check the current interest rate on each credit card you use
  2. Jot down relevant facts about your credit:
    1. Length of time you’ve been a customer for each account
    2. How long you’ve gone without missing a payment
    3. How much your credit score has improved since you opened the account
  3. Check current credit card interest rates to know national average rates for each type of credit card you hold.

Now call the customer service department for each credit card and request a rate reduction. You may be passed up the chain to a supervisor that can authorize a new rate. Click here to find tips to help you negotiate effectively.

Step 2: Prioritize your debts

Now that your rates are as low as possible, organize all the debts you need to pay off, moving from highest APR to lowest. You want to pay off your highest APR debts first because the cost more money. So, if you pay them off first you save money on total interest charges.

Step 3: Streamline your budget to maximize cash flow

Next you need to get as much cash flow as possible for your debt reduction plan. See how much free cash flow you have in your budget – that’s all the cash you have left after you pay bills and necessary expenses. Then see if you have any unnecessary expenses you can cut temporarily while you reduce your debt. Remember, you will put these expenses back once you’re done eliminating debt. Think of it like a diet you stick to while you lose all that extra financial weight.

The more cash flow you have available to reduce debt, the faster this goes. Faster also means fewer interest charges applied to your debt, so it saves you money, too. It’s worth losing a few discretionary expenses for a short time to these high interest rate debts paid off fast.

Step 4: Pay as much as possible one debt, then minimums on the others

Now you can start knocking out your debts. At this point, you might think you should put a little extra money to all your debts at once. However, this isn’t cost efficient. You wind up with a bunch of $25.00 minimum charges to pay off all at once.

It’s more effective to focus on one debt at a time. You make the minimum required payment on all your credit card debts except the card with the highest APR. You use all the extra cash flow you generated to make the largest payment possible on that one debt. Then you continue to do that each month your balance on that card hits $0.

Step 5: Knock your debts out, one by one

Once you eliminate the first debt, move on to the debt with the next highest APR. Pay it off in chunks, then continue down the line until you zero out ever balance you owe. With each debt that you eliminate, you free up more cash to use towards paying off the next debt.

You can also start putting unnecessary expenses that you cut from your budget back in. This will help you avoid burning out on budgeting, which can lead to more overspending. Experts also recommend that once you pay off your credit cards, some of the funds you used on those bills should divert to savings. So, if you save $500 per month on credit card bills, set up a $250 recurring monthly transfer to savings. That way, you can generate a robust emergency fund, which prevents you from relying too heavily on credit cards.

The next best way to reduce credit card debt

The method described above is considered the best because it’s the most cost effective overall. However, that doesn’t mean it’s the best method in every financial situation. If you have large amounts of debt to eliminate with limited cash flow, the steps described above may not work. This is especially true if your biggest balances are on your highest APR credit cards. It’s easy to get exhausted by a lack of progress, and you may stop altogether.

For example, let’s say your biggest balance is $7,000 on a reward credit card at 22% APR. You only have $500 in extra cash you can put towards that debt. Even with fixed $500 payments, it would take 17 months to pay this debt off in-full. It’s almost a year and a half before you clear off that first balance – so, it’s not exactly easy to stay motivated.

However, let’s say you have two credit cards that each have a $1,000 balance. If you put $500 to those, you could finish paying each off in three months (with interest charges).  This would clear out two bills, giving you extra motivation and extra cash. Now, instead of $500, you’d have $550 because you don’t have to pay two $25 minimum payment charges.

So, in this case, it’s better to start with your lowest credit card balances, rather than your highest APR debts. You knock out the “low hanging fruit,” which frees up more cash to tackle your largest debts. The steps are the same as the five steps listed above; however, at Step 2 you arrange your debts starting with the lowest balance and ending with the highest.

Is debt reduction even the best choice?

Whenever you eliminate debt, you have two main concerns that relate closely:

  1. Is this the fastest way to repay what I owe?
  2. Is this the most cost-effective way to reduce my debt?

If there’s a faster, cheaper way to pay off what you owe, then you should do it. In many cases, this method of rolling up your sleeves and tightening your belt may not be the most efficient. It might be easier and cheaper to do it another way.

So, before you waste months (or years) of your life paying off your debt the hard way, make sure there’s not an easier way first. Look into credit card consolidation or call a credit counseling agency. Even though these agencies administer one type of solution – debt management programs – as nonprofit organizations they’re required to review all your options. They’re supposed to tell you what’s the best way to pay off what you owe.

Compare all the available solutions. See what will take the least time, give you the least hassle and save as much money as possible. Whatever solution that ends up being is the best solution to use in your unique financial circumstances.