The average credit card debt of a US household is over $15,000. That is a lot of money! Our neighbor to the north is in even worse shape in that an average Canadian household owes nearly $27,000 in credit card debt. Credit card debt can become an overwhelming problem if you don’t take care of it early because of the high interest rate. It’s best to avoid credit card debt so you don’t build up a balance, but if you already owe money, then here are 5 ways to get rid of your credit card debt.
Don’t just pay the minimum
Many credit card owners only pay the minimum required each month. Doing so will only prolong the agony. You can use a debt repayment calculator to estimate how long it will take to pay off a credit card debt. If you owe $1,000 with an interest rate of 18%, then it will take 8 years to pay off the full balance by making just the minimum payment. You will also pay $863 in interest. The bank is making a lot of money off of you if you are just paying the minimum. It’s much better to bite the bullet and pay off as much of the credit card debt as you can each month.
Cash out your saving account
It’s good to have some money in savings, but sometimes it is wiser to use that money to pay off the credit card debt. These days, the interest rate from a savings account is below 1% which is way below the 12-18% the banks charge on their credit cards. Once you pay off the credit card debt, then you can build up your savings again. You still need some cash for emergencies, though so keep at least $1,000 in your saving account.
Borrow from your retirement account
I hate this advice, but borrowing from your 401(k) is a valid way to get rid of credit card debt. If you have a 401(k), you can usually borrow up to 50% of the account value or $50,000, whichever is smaller. The interest rate is usually much lower than the credit card’s rate and all the repayment and interest will go back into your 401(k). I would leave this as an absolute last resort though because many people don’t pay back the 401(k) loan and it can leave a big dent in their retirement portfolios.
Get a Home Equity Loan
If you own a home and have some equity, then a home equity loan might be the way to go. These loans have lower interest rates than credit cards and you can deduct the interest on your tax return.
Debt consolidation could be a good option if you can get a lower interest rate overall. Consolidating your debt will make it easier to pay and keep track of because you only need to make one payment instead of sending off a bunch of checks each month. If you are in danger of defaulting, the debt consolidation company can help by lessening the pressure from the creditors. Canada debt consolidation is an option for our friends up north as well.
The most important thing is to change your lifestyle to live below your means. This will free up some money to pay off the debt. Once those debts are paid off, then you can start saving for retirement or other goals. You have to be vigilant and make sure to avoid racking up debt again. Good luck!