How to Cut Your Credit Card Debt in the New Year

 

When you make a resolution to get out of credit card debt, give yourself a pat on the back for prioritizing your financial health in the new year. Now comes the hard part — keeping that resolution.

To increase your chances of success, you’re going to need to break down your goal into smaller steps. By compartmentalizing your approach to credit card debt and starting with something that’s easier to accomplish, your overall resolution can seem less daunting. Here’s a step-by-step approach to getting control of your credit card debt:

Step 1: Change your charging patterns

You can’t climb out of debt if you keep digging deeper. When you’re in a financial hole, it may feel like $50 or $100 more won’t make a difference, but it can. Stop using your credit cards and move any existing autopayments to your bank account.

Step 2: Know what you owe (and the interest on it)

List your monthly expenses and the total amounts due on your credit cards, along with their interest rates. Then, pull a copy of your credit report from one of the three credit bureaus — TransUnion, Experian and Equifax — and assess exactly what’s on there. If you find any discrepancies or errors, dispute them immediately. If this part of the process is overwhelming, consider consulting a nonprofit credit counselor to assess your debt situation.

Step 3: Prioritize your credit card debts

If you have multiple cards, work on paying off the card with the highest APR first so you’re not racking up as much debt from interest. American households that carry the average $6,885 in credit card debt will owe $1,292 a year in interest on an APR of 18.76%, according to a study from NerdWallet.  

Step 4: Explore your repayment options

If you’re comfortable paying down your debt, feel free to skip this step. But, if you’re having difficulty paying your bills, contact your credit card companies to let them know, and try to negotiate or modify a payment plan. If you’re having trouble meeting even minimum payments, you may need to restructure your debt through consolidation, which can lower your interest rates and give you some room to breathe. Debt consolidation only works if you have a smart payment plan in place. Take advantage of zero or low interest rates while you can, without creating more debt for yourself.

  • Explore 0% balance-transfer cards. Using these cards, you can roll all your credit card debt onto one new card, enabling you to pay off your debt interest-free for a promotional period. This option is the best if you have a plan to repay the debt within the 0% APR time frame. Most cards come with a balance-transfer fee, ranging from 0% to 5%, so look for no-fee cards. These cards typically don’t come with rewards, but they may be the best method to help you get a grip on your credit card debt. These cards typically require borrowers to have good credit to qualify.  
  • Consider a personal loan. You can also roll your credit card debt up into a personal loan, with a lower interest rate, which can ensure more affordable monthly payments. Estimate your interest rate and monthly payment by using a personal loan payment calculator. If you have a lower credit score, a credit union or online lender that caters to those with lower credit scores may be your best bet.

Approach each step as a mini-goal that you can handle before moving on to the next. By this time next year, you’ll have kept your resolution (and will be ready for the next financial goal).

Anna Helhoski is a staff writer at NerdWallet, a personal finance website. Email: anna@nerdwallet.com. Twitter: @AnnaHelhoski.