Credit Card Debt: How To Avoid It And How To Pay Off Credit Cards

It’s no secret that credit card debt can hurt your finances. After all, the average credit card APR in 2023 was a record 22.8%, according to the Consumer Financial Protection Bureau. Carrying a debt balance at that interest rate can quickly become an overwhelming financial burden, limiting your ability to save, invest, and ultimately pay your bills. However, there are ways to get out of credit card debt and avoid it in the first place.

How Much Credit Card Debt Do Americans Carry?

As of Q1 2024, Americans’ outstanding credit card balance totaled $1.12 trillion, a 13.1% increase from a year ago. Meanwhile, the average balance per person is $6,501, up 10% year-over-year.

Why is Americans’ credit card debt growing? Among other things, because wages aren’t keeping up with inflation, interest rates are rising, and may struggle to manage their money.

What Leads To Credit Card Debt?

That said, you can limit your credit card debt by understanding its underlying causes:

• Living beyond your means: If your expenses exceed your income, you’re more likely to use your credit card to pay the bills.
• Not understanding interest rates: Interest compounds your credit card debt. The higher the interest rate, the more exponentially your balance will grow.
• Only making the minimum payment: Though it avoids late fees, only making the minimum payment each month won’t keep your balance from accruing interest. Consequently, it could still grow, especially if you have more than one credit card.

How To Pay Off Credit Card Debt In 7 Steps

Now that you know what drives credit card debt, here are some tips for getting rid of it:

1. Embrace A Payment Strategy

Paying off large credit card balances can be daunting. To make the task more manageable, adopt a payment strategy.

For example, you could try the debt snowball method, which involves making the minimum payment on all your credit cards and funneling anything extra toward your smallest outstanding balance. Once that’s paid off, you move to the next smallest balance and so on until you reach a net balance of zero. By tackling the smallest debt first, you can build momentum that can motivate you to keeping going. Over time, your “snowball” of payments will absorb all your debt.

Alternatively, you could use the debt avalanche method, which involves paying off your credit cards in order of highest interest rate. This is the most cost-efficient way to eliminate your debt because it minimizes your total interest costs. However, you’ll need to be extra motivated to stick to the plan since it takes longer to see clear milestones. But once you pay off the highest-interest debt, the rest will follow increasingly quickly, like an avalanche.

2. Automate Your Credit Card Payments

Automate your credit card payments to avoid missed or late payments. You can do this by setting up autopay with your credit card company, letting it automatically draw on funds from your bank account to make regular payments. Just confirm a payment amount and frequency.

Automating your finances saves you time and stress from trying to keep up with payments and helps you stay disciplined in keeping your credit card balances paid off.

3. Look Into A Consolidation Plan

If you have many credit cards with varying balances, minimum payments, and interest rates, consider bringing it all under one roof via credit card consolidation or debt consolidation.

For example, you could take out a personal loan to pay off your outstanding credit card debt, leaving you with a single loan and creditor to work with. Alternatively, you could transfer all your credit card balances to one new card. By consolidating the debt, you can simplify payments and potentially improve your overall interest rate and loan terms. 

4. Negotiate With Your Creditors

Consider negotiating with creditors to lower or eliminate your credit card debt. This is called debt settlement and can be done on your own or with the help of a debt settlement company.

Either way, you’ll need to show that you are financially strained and unable to pay off the debt, in which case the lender may be more willing to restructure it, for example by lowering the balance or interest rate. After all, most lenders would rather get some of their money back than none at all.

5. Create A Debt Management Plan

A debt management plan is a structured repayment program designed to help you pay off unsecured debt without getting a new loan.

Typically, debt management plans are offered by credit counseling agencies. They can assess your financial situation, negotiate loan terms with creditors on your behalf, and help you determine the best path forward.

That said, ensure you properly vet credit counseling agencies by checking their accreditation with the National Foundation for Credit Counseling and past user reviews and ratings. If the company is promising quick results or requiring an upfront payment, it's probably a scam.

6. Evaluate Your Personal Finances

Just because you’ve fallen behind on credit card debt doesn’t mean you can’t change course.

Take a close look at your personal budget to identify areas where you can cut costs and put that savings toward paying down your debt. You can also explore ways to increase your income — such as asking for a promotion at work or starting a side hustle — to pay off credit cards faster.

7. Opt For Bankruptcy As A Last Resort

If all else fails, consider declaring bankruptcy. This means legally acknowledging your inability to repay outstanding debt for a chance at fresh start.

Though the bankruptcy process can be long and complex and permanently hurt your credit, it may be better than enduring a growing debt burden with no end in sight. Some forms of bankruptcy require you to liquidate non-exempt assets to help pay off creditors, while others involve repayment plans lasting three to five years.

Before going this route, exhaust your other options and consult a bankruptcy attorney. They can help you know what’s best in your situation.

Tips To Avoid Credit Card Debt

Of course, you don’t need to worry about credit card debt if you can avoid it in the first place. To do that, follow these tips:

• Monitor your spending. Review your budget to see where you can cut down on unnecessary spending — such as eating out, vacations and entertainment — to have more to put toward credit card debt.
• Pay attention to interest rates. Before signing up for a new credit card, shop around for the lowest interest rate. A slight percentage variation can make a big difference over time.
• Track your credit. The U.S. has three main credit reporting agencies: Equifax^®, Experian™, and TransUnion^®. By monitoring your credit with them, you can detect unauthorized transactions and correct any mistakes that could hurt your finances.
• Be mindful about opening new credit cards. While opening a new credit card can improve your credit mix and credit utilization ratio, it also opens the door to overspending and borrowing too much. Stick to one to three credit cards at a time.
• Pay more than the minimum and as much as you’re able. Paying the minimum monthly payment keeps you in good standing with your credit card company, but it doesn’t necessarily lower your overall balance. To do that, pay as much as you’re able.

FAQs About Credit Card Debt

Here are answers to frequently asked questions regarding credit card debt:

How much credit card debt is normal?

According to Experian™, the average credit card balance among U.S. consumers was $6,501 as of Q3 2023. However, that’s up from $5,910 a year earlier.

What happens if I’m in credit card debt?

Unless you pay it down, your debt will keep increasing. In worst-case scenarios, you could fail to make the minimum payments, which could lead to late payment fees, added interest, and a lower credit score. If your debt delinquency continues, the credit card company may eventually sell the debt to a collection agency and write it off as a loss, while you stay on the hook.

Does credit card debt go away?

It can. The best way to eliminate credit card debt is to pay it off in full. If that’s not an option, however, you may be able to get rid of it by negotiating with creditors or resorting to bankruptcy.

How do I get out of credit card debt?

You can get out of credit card debt by embracing the snowball or avalanche payment method, negotiating with creditors, seeking credit counseling, adopting a debt management plan, or declaring bankruptcy. Of course, some methods are better than others.

What are the pros and cons of credit card debt?

On the one hand, credit card debt can build your credit, pay for unexpected expenses, provide rewards and benefits, and make spending more convenient. On the other hand, it can also hurt your credit score if not managed well, lead to mounting debt at high interest rates, come with various fees and penalties, and create unnecessary financial and emotional stress.

To reap the benefits without the drawbacks, pay off your credit card debt in full each month.

The Bottom Line

If you’re struggling with credit card debt, you’re not alone. Know that there are many ways out of your current financial predicament.

Start by downloading the Rocket Money^SM app to better manage your monthly expenses. From there, you can explore some of the relief options explained above.