How to Pay Down Credit Card Debt

To pay down your credit card debt, you first need to choose the debt strategy that works best for you. Consider a balance transfer credit card or try the snowball method.

There are many ways to pay down credit card debt from simply making larger payments to consolidating your debt at lower rates. While some methods are better than others, the best option for you depends on:

Balance transfer credit cards

If you're a consumer with good credit seeking to save the most money on interest — and if you have the discipline to pay down debt in time — a balance transfer may be the way to go. Through a balance transfer, you can move your balances onto one card that offers 0% interest on transfers for a limited time, typically from six months to up to 21 months. This allows you to avoid paying interest and focus on eliminating the principal balance.

While balance transfers can save you a lot of money on interest, there are a few downsides. First, you'll need to have good credit to be approved (generally a 700 FICO score or higher), so not all consumers will have this option available to them. Consumers with high balances on several cards may also have a hard time being approved for a balance transfer card. Finally, the hard pull on your credit report that comes with applying for a credit card will temporarily reduce your credit score, which is something to be aware of.

You have several options when it comes to finding the best balance transfer credit cards. Here are a few of our favorites:

Snowball method

If you're a consumer who is able to make larger payments but need ongoing motivation to follow through, the snowball method can be a great option. With the snowball method, you apply the larger payments to the smallest balance first, while paying the minimum on the rest.

After the first balance is paid off, you move on to the next smallest and repeat until all balances are paid off. This method offers consumers momentum, as paying off the smallest balances first provides quick, easy victories and encourages you to keep progressing. The downside to this method, however, is that you may end up paying much more interest than you would with another method (the avalanche method, for example), if your lowest balances also have the lowest interest rates.

Avalanche method

For consumers who are able to make larger payments and are looking to save on interest, the avalanche method may be your best option. With the avalanche method, you make the largest payment to the highest-interest rate balance while paying the minimum on the others. After paying that one off, you move on to the next highest-rate balance. You repeat again, until all balances are eliminated.

This is the more strategic method if you're looking to save money on interest rates. Getting rid of the balances with the highest rates will avoid accumulating interest at a faster pace. The downside with this method is that your progress may seem slower if your balance with the highest interest rates is also your biggest balance, which can be discouraging for some consumers.

Personal loan

Taking out a personal loan is a solid strategy if you have good credit and are looking for structured payments. A personal loan is money you borrow from a bank or other lender that you pay off at a fixed monthly rate over the course of several years. There are different types of loans or lines of credit that you can access to consolidate your credit card debt in order to pay it down.

Unsecured personal loans (also known as debt consolidation loans) can be a good choice for managing your debt. These loans are available for consumers across the credit spectrum, but the best interest rates go to those with higher credit scores. Rates on personal loans average around 9.41%, according to Experian, but rates will be higher or lower depending on your credit score and financial situation. Personal loan rates can still be relatively high, so it makes sense to compare them to your credit card APR rates to make sure they’re lower. If your debt is largely on store credit cards, which have especially high rates, a personal loan may be a smart move.

If you cannot be approved for an unsecured loan, a secured personal loan may be an option. These loans are secured by collateral, which could include things like your house or car. This provides a strong incentive for borrowers to pay back the loan on time to avoid losing their property. Secured loans tend to have lower interest rates than unsecured loans and will accept consumers with lower credit scores. The downside, however, is that it often takes longer to be approved for a secured personal loan and you'll be required to pay off your debt in a shorter amount of time than with an unsecured personal loan.

Home equity

Homeowners with plenty of equity in their residences may also consider a home equity line of credit (HELOC), home equity loan or cash-out refinance to pay off debt.

The rates on these types of loans are typically much more favorable than credit cards, with the best rates going to consumers with higher credit scores. Another advantage is that you can borrow a much larger amount than usual of the appraised value of your home (up to 80% for most cash-out loans and up to 85% for other types of loans).

You'll need to have sufficient income and equity in your home to qualify, and there is one serious drawback: Your house is your collateral.

Here are some other considerations:

Home Equity Line of Credit (HELOC)

For homeowners who want the flexibility of borrowing against a large line of credit without making changes to their current mortgage, a Home Equity Line of Credit (HELOC) can be a great choice. A HELOC is a revolving credit line against which you borrow by writing a check or using a credit card tied to the account. A HELOC is a second lien or mortgage on your property.

A HELOC can be better than a home equity loan or a cash-out refinance if you need to cover unexpected debts or if you need a financial cushion for unstable income. This is a good choice for those who require access to funds as needed and who want to make the lowest possible payment during their draw period. You may also get a lower interest rate than a personal loan or credit card.

A significant disadvantage of this method is that HELOC rates can be variable, meaning they can increase over time. Fixed-rate HELOCs are available but come with higher rates initially, which can be another downside to this option. You'll also have to figure closing costs into the cost of this option. Upfront costs include application fee, title search, appraisal, lawyer fees, and points — or a percentage of the borrowed amount. Plus, you may have to pay additional fees, including an annual membership/participation fee and a transaction fee every time you borrow money.

Home equity loan

A home equity loan can be a good option if you have a higher credit score, prefer to take out a single loan with a fixed interest rate and payment and don't want to make changes to your first mortgage. A home equity loan allows you to borrow a lump sum that you repay in equal monthly payments over the life of the loan. An equity loan is a second lien or mortgage on your property.

Home equity loans generally offer lower interest rates than credit cards or personal loans. Additionally, your interest payments may be tax-deductible if the funds are used for home improvements.

However, home equity loan interest rates tend to be higher than those of a HELOC or first mortgage. Closing costs for home equity loans typically total 2% to 5% of the loan amount, which is quite high, and you could lose your home if you default on your loan.

Cash-out refinance

A cash-out refinance can be the best option for homeowners with lower credit scores looking to make the lowest possible payment and who prefer a fixed monthly payment and interest rate.

A cash-out refinance is when you take out a new loan for a higher amount than you owe on your existing mortgage, therefore refinancing your mortgage. You pocket the difference between the two loans in cash. Cash-out refinance loans can either be a fixed-rate mortgage or an adjustable rate mortgage.

Your new loan will likely have different terms than the original mortgage loan and a new payment amortization schedule, which will cover your new debt. This can be of great advantage, as it can result in a potentially lower interest rate.

While a lower interest rate may help you pay down your debt faster, extending your mortgage means you'll end up paying more interest overall. Another drawback of this method is that closing costs can be expensive, though they will be similar to those of your original mortgage.

Debt management plan

If you find yourself unable to make at least the minimum payment on your credit cards and are falling behind, you may want to consider a debt management plan, or a DMP. This plan, administered by a non-profit credit counselor, lowers your monthly payments to each credit card issuer to fit your budget. You are required to make one monthly payment to your credit counselor, who then distributes the funds to your creditors on your behalf.

Before the plan is set up, you must have an initial session where the counselor goes over your personal finances — income, debts and other financial obligations — to set a budget and determine if a DMP is a good option. If so, the counselor negotiates with your creditors on your behalf to get reduced payments. You have many options when it comes to choosing a DMP, for example the American Express debt management program can be a good option for some consumers.

DMPs can be an excellent option for those looking for hands-on assistance, as you'll have personalized, professional advice from an advocate who is negotiating with your creditors on your behalf. This can result in lower interest rates and waived fees. However, you will no longer have access to the credit cards involved in your DMP which can be a problem for some consumers. It's also worth noting that DMPs can only cover some types of debts, like credit card debt, but do not usually include things like student loans or secured debts.

Use a payoff calculator to help you determine how long it will take to pay off your debt using different payment amounts.

Debt settlements: Why you should avoid them

For-profit debt settlement or consolidation services claim to settle your debt for less money. However, these services typically charge hundreds to thousands of dollars in upfront fees and thousands in servicing fees. To get your creditors to negotiate, these companies generally encourage you to stop making payments so your accounts go to collections. But this and any account reported as settled damages your credit score. Some creditors refuse to work with some debt settlement companies, so many of your debts remain outstanding. You may owe penalties and late fees on those that went into collections. The success rate for debt settlement is abysmal as well.

How does credit card debt affect your credit score?

Credit card debt can have a serious negative impact on your credit score. In fact, the amount of credit card debt you have is one of the largest factors influencing your credit score — the more debt you accrue the worse the impact on your credit score.

In addition, carrying a lot of debt can also result in a high credit utilization rate, which also can have a serious negative impact on your score.

Next steps

If you're ready to start tackling your debt, follow these steps to successful debt repayment.

FAQs about how to pay down credit card debt