Pay Off Credit Card Debt Fast:
A Cash Cow Guide
Carrying high-interest credit card debt will slow your financial progress and harm your overall well-being. The ongoing interest and fees can destroy your ability to manage monthly cash flows and prevent you from reaching your most important financial goals. Furthermore, published research has shown that debt can lead to numerous health problems.
There are an overwhelming number of suggestions aimed at helping people become debt free, but many are unhelpful or unrealistic. The solutions outlined in this guide will allow you to eliminate your debt as quickly as possible while reducing the amount of interest that you pay.
The most common type of consumer debt is credit card debt, but many of the recommendations in this article apply to any form of high-interest debt.
Eliminate Your Credit Card Debt
Most of the strategies in this guide are designed to reduce the effective interest rate on your debt, which will save you money and accelerate your debt repayment plan. But it’s important to remember that these strategies are dependent on your ability and willingness to eventually pay down the debt.
Outside of bankruptcy, the only way to completely eliminate your debt is to repay the outstanding balance. If you borrowed the money, you are legally required to repay the debt. There are no clever strategies to circumvent that fact.
If you aren’t interested in pursuing a strategy to lower the interest rate on your debt and you would prefer to eliminate the debt in its current form, you should read my detailed debt elimination guide and develop a repayment plan. The remainder of this article won’t assist in that process.
If you would like to reduce your minimum monthly payments and the interest rate on your debt, the strategies in this article can provide significant savings and an extended repayment window.
Negotiate Your Credit Card Debt
If you would like to reduce the interest rate on your debt, you can either negotiate with the existing creditor or you can transfer the debt to a different creditor.
This section will discuss the negotiation of your existing debt, while the next section will cover debt consolidation techniques.
Ask for a Settlement
Most financial institutions are unlikely to forgive all of your credit card debt, but they do occasionally accept a smaller amount in settlement of the balance due and forgive the rest.
If you stop paying down your credit card debt and become delinquent, most issuers will eventually stop trying to collect past-due payments and consider the debt a financial loss. However, this offers no benefit to you, because the debt still exists and can be sold to a third party for collection. If the collection agency files a lawsuit, the court can (and will) approve wage garnishment as a means to collect the debt. Furthermore, your credit will be destroyed.
That is not the scenario you want.
Instead, you can offer a lesser lump-sum amount to settle the entire debt. The credit card company may accept your offer because a settlement is less risky than the alternative that I just described. If the creditor agrees to accept your offered settlement, they will forgive any remaining loan balance. You will likely owe taxes on the settlement because the portion forgiven is often considered taxable income.
Everything needs to be in writing, and you will need to speak with someone in authority (sometimes called a “settlement credit supervisor”) who can authorize the debt settlement. You can also seek counsel from a reputable credit counseling organization, who might negotiate a settlement on your behalf.
Negotiate Better Rates
Debt settlements are typically reserved for individuals who are at least 180 days past due on payments. If you are making still making regular monthly debt payments, most companies will not consider a settlement, but many will negotiate the terms of your debt.
The purpose of debt negotiation is to work out a modified payment plan that reduces the amount of interest and fees paid. During the negotiation, consider the following:
You are a valuable customer – The first thing you need to realize is your value to the creditor. Because your outstanding debt balance carries a double-digit interest rate, you are a profitable customer. The financial institution loves you because you are paying ridiculous amounts of interest each month.
You have other options – You should convince the creditor that you have a slew of other repayment options (discussed in detail later in this article), including balance-transfer credit cards, personal loans, home equity lines of credit, etc. If you can identify and explain your alternatives, the creditor will pay attention to your demands.
Find the right person – After researching your available options, it’s time to negotiate. Don’t expect a simple phone call with a low-level customer service agent. You need to immediately ask to speak with a credit supervisor. When you reach someone who has the authority to negotiate the terms of your debt, tell them the following:
- You have enjoyed being a loyal customer for (x) amount of time. Be sure to include any information that makes you a valuable customer, such as your payment history and the total amount of interest that you’ve paid to date.
- While you appreciate the relationship, you have other opportunities available that will benefit your family and save money. Be ready to discuss the other options (0% balance transfer, low-interest loans, etc.) and the respective interest rates.
- Say that you are willing to maintain the existing relationship, but only if the manager will agree to reduce your interest rate to match the other options that you have available.
If you come to an agreement, immediately ask for the terms in writing. If you don’t like the offer, be ready to hang up and walk away. You can either call back later or choose to transfer the debt elsewhere. Whatever happens, do not agree to continue paying ridiculous interest rates or fees.
Consolidate Your Credit Card Debt
If you are unsuccessful in negotiating the terms of your debt, or if you would rather not deal with negotiations at all, consider transferring and consolidating the debt.
Consolidation means that your existing debts are rolled into one new type of debt (hopefully with a lower interest rate). When you have multiple consumer debts, consolidation may provide a way to simplify and lower your monthly payment while eliminating late fees and penalties.
Keep in mind, consolidation does not eliminate the debt. Consolidation can reduce the interest rate and help you eliminate your debt sooner, but only if you use the money as intended and follow through with your debt repayment plan.
Because credit card debt is so profitable, many credit card issuers offer a very low (0%) introductory interest rate when you transfer your existing debt balance from another financial institution, something known as a balance transfer.
Depending on the institution, the 0% interest rate promotion usually lasts 6-24 months. After that time, interest rates default to double-digit levels.
Make no mistake, the 0% offer is intended to trap you. Thes financial institutions hope that you will sign up for their 0% interest credit card, transfer your existing debt, and then fail to eliminate the debt before the 0% promo period ends. If you have any remaining debt after the promotional period ends, the bank captures all of your future interest payments.
To avoid that scenario, you can consider two strategies:
- Pay down the entirety of your debt before the 0% period ends.
- Pay down part of your debt, then initiate another balance transfer right before the first promotional period ends.
For a more detailed discussion, see -> Balance Transfers and Credit Card Debt
Or to get started, you can compare balance transfer credit cards.
Personal loans are sometimes called debt consolidation loans because they are widely used to eliminate credit card debt.
When you are approved for a personal loan, the money is disbursed to you in a lump sum. You can use the proceeds to eliminate any existing credit card debt, leaving only the personal loan to be repaid. If the interest rate on the personal loan is less than your existing debt, you will realize interest savings over time.
Personal loans are traditionally unsecured, which means that you don’t pledge any collateral on the loan. That is the main difference between personal loans and the various secured loans discussed later in this guide. Because the loan is unsecured, it is riskier for the lender, which increases the interest rate on the loan.
Don’t expect the interest rate on a personal loan to compete with a 0% balance transfer. It’s never going to happen. However, personal loans offer several other advantages:
- An extended repayment period of 3-7 years
- An interest rate between 5-12%, which is far better than the 15-25% charged by most credit cards.
- By converting revolving credit card debt into an installment loan, personal loans can increase your credit score by a significant margin.
HEL (Home Equity Loan) or HELOC (Home Equity Line of Credit)
This strategy only applies to homeowners who have built equity in their home.
An HEL usually provides a lump sum of money that can be used for anything, similar to a personal loan. Most HELs are long-term loans (5-25 years) that are repaid in regular monthly installments. A HELOC is a revolving line of credit, much like a credit card. You can borrow at will against the line of credit and the repayment schedule depends on the amount borrowed. Both loan types are secured, with your home pledged as collateral. Should you fail to repay the loan, the issuing bank will foreclose on your home.
With that said, these loans are a great option for individuals who are serious about crushing consumer debt. Because your home is pledged as collateral, most home equity loans offer a lower interest rate than a comparable personal loan. Furthermore, the loan interest is often tax-deductible (if you itemize your deductions), which reduces the effective interest rate even further.
To determine the value of your home equity, calculate the difference between the market value of your home and the remaining balance on your mortgage. For example, if your home’s estimated value is $200,000 and your mortgage balance is $100,000, you have $100,000 of home equity. Financial institutions will typically lend up to 85% of your existing home equity, depending on your needs and creditworthiness. Using our $100,000 example, you could obtain up to $85,000 using a home equity loan.
If you must sell your home, the outstanding balance of your home equity loan is deducted from the proceeds of your sale. Continuing our example, if you obtained an $85,000 HEL and were forced to sell your home for $200,000, the lender would collect $100,000 for the mortgage balance + $85,000 for the HEL balance. You would retain $15,000 after repaying the debts.
LendingTree will allow you to compare home equity loans online, or you can shop around locally.
Retirement Account Loans
Your last loan consolidation option (and the one most commonly frowned upon) is through your retirement account.
Option number one is to withdraw your previous Roth IRA contributions. With Roth IRAs, contributions (but not earnings) can be withdrawn at any time without penalty or taxes. For example, if you contributed $5,000 to a Roth IRA in each of the last three years, your contributions total $15,000. If your Roth account balance has grown to $17,000 after investment earnings, you can always withdraw the original $15,000 in contributions without penalty, but you cannot withdraw the $2,000 of earnings.
If you decide to withdraw any Roth contributions, the money cannot be repaid. It’s treated as a permanent withdrawal, not a loan, which means you are permanently reducing your retirement account balance. If you have crippling credit card debt, Roth withdrawals can make sense, but you need to think through the ramifications before taking the money.
If you don’t have any Roth funds available, you might be able to request a loan from your retirement plan. 401(k) plans are traditionally the most likely to offer a loan provision, but other retirement accounts now offer loans as well. To determine if your plan is eligible, you can call your plan provider and ask the following questions.
- Does the plan offer loans?
- What are the terms of repayment?
- What are the current and historical loan interest rates?
First and foremost, if there is any chance that you will be unable to repay the loan, run the other way. You should never borrow against your retirement plan unless you anticipate being able to repay the loan in full, on time.
If you quit or lose your job, you typically have to repay any retirement loans in full within 60 days, regardless of the original loan terms. If you’re unable to pay by the deadline, the loan is treated as an early retirement withdrawal and taxed as ordinary income with an additional 10% penalty.
With that said, using the loan to pay down consumer debt is like earning a guaranteed return equal to the interest rate on your debt. If your debt carries a double-digit interest rate, this can be an excellent strategy because no investment in your 401k is going to offer a double-digit, guaranteed return.
Final Thoughts on Credit Card Debt
Research has shown that credit card debt is a chronic, recurring problem for many Americans. Before making any financial decisions, you should take some time to reflect on your situation, because none of the debt elimination strategies discussed in this guide will change the underlying behaviors that led you into debt.
If you aren’t 100% determined to destroy your debt, transferring or consolidating your debt is a waste of time and energy. Even if you lower your monthly payment, an uncommitted mindset will lead you straight back into debt and continue the vicious cycle.
If you are committed to permanently crushing your debt, then pick a strategy and get started.
- Easiest debt elimination strategy: Immediate payments
If you have disposable income, you can choose to tackle your existing debt right away. Instead of worrying about consolidation, you can make sacrifices to decrease your monthly expenses and increase your available cash flow. Then you can throw every available dollar at your credit card debt. You’ll eat some interest along the way, but you won’t have to mess with anything else.
- Best debt consolidation strategy: 0% balance transfer
If you would like to decrease the amount of interest that you pay, you can transfer your existing debt to a new credit card offering 0% interest for 6-24 months. During this time, none of your debt will accrue interest, which will reduce your required monthly payment and allow you to eliminate your debt sooner. If you can’t eliminate the debt before the 0% period ends, you will need to initiate another balance transfer to avoid double-digit interest rates.
- Best long-term debt consolidation strategy: Home equity loan (or line of credit)
Homeowners can use a home equity loan to eliminate any existing debt. Because your home is pledged as collateral, the loan will offer a competitive interest rate that is often tax-deductible. The downside is that you can lose your home if you fail to repay the loan.