6 Steps to Get Out of Credit Card Debt

Got credit card debt? You’re not alone. Recent stats from Equifax indicate Canadians are spending more on their credit cards, and the average Canadian now carries $20,744 in consumer debt (excluding mortgages).

Credit card debt is a form of revolving debt that is accumulated when you don’t pay off your credit card balance in full each month. Without responsible credit card use, it’s easy to fall into debt. But, with a solid plan and some determination, it is possible to work your way out. Here are six helpful steps to help you get out of credit card debt. 

1. Set a Payment Strategy

Your first step to getting out of credit card debt is to select a payment strategy. Rather than just throwing small sums of money at your debt when you’re able, a payment strategy gives you a structured method that can help you stay on track with your payments. The payment strategy that is best for you will depend on how quickly you want to pay off your debt and how disciplined you are in your repayment plan. In addition to paying off credit card debt, you can also apply these strategies to other debts like student loan debt or consumer debt.   

The Avalanche Method

The avalanche method for debt repayment focuses on paying your highest interest debt first. Mathematically, this is the strategy you should choose if you want to pay the least amount of money in interest.

To implement the avalanche strategy, review your credit card debts and put them in order of highest interest rate to the lowest interest rate. Then, you focus on paying your debt with the highest interest rate first, although you must also make sure you pay your minimum payment on all of your other debts. Once your highest interest debt is paid, you move to the next highest interest rate on your list, and so on.   

While this method is a great choice for those who are motivated to pay off their most expensive debt fast, those that need a quick win to stay motivated might find this strategy difficult to stick to. This is because your highest interest debt might also be your largest debt and it can potentially take a long time before you achieve your first win in paying off an entire credit card. This is why some might consider the snowball method instead. 

The Snowball Method

When using the snowball method, you start with your smallest debt and work your way up to your largest debt. Like a snowball, you start with something small, and then as it gets rolling, it gets bigger and gains more momentum. For those that get a jolt of motivation from an early win, the snowball method is often a good choice. 

To implement the snowball strategy you review all of your credit card debt and order them from the smallest to the largest debt. You don’t worry about the interest rate. Your goal is to focus on paying off your smallest debt first while continuing to make your minimum payments on all of your other credit cards. 

Once the smallest debt is paid, you move on to the next, and so on. The benefit of this method is you don’t have to wait a long time to pay off that first credit card. However, you might end up paying more in interest if your smallest debts also have lower interest rates. 

Automating Your Payments

Automating your credit card payments is another useful strategy to consider. An automatic payment is when you set up your credit card payments to automatically come out of your bank account on a set schedule. This can help to avoid missing a payment, making a late credit card payment, and avoiding the associated fees. If your credit card company allows automated payments, you can choose if you want to set up auto-pay to cover your minimum payments, your full balance, or somewhere in between. 

You could also use this strategy in combination with the avalanche or snowball method. You could focus on paying off your highest interest debt or smallest debt first and then automate all of your other credit card payments to ensure the minimum payments come out of your bank account on the right date. 

2. Work With Your Creditors

If you’re struggling to make your credit card payments, reach out to your creditors as soon as possible. Explain to your creditors why you can’t make your bill payments on time and see if they can offer to extend your payment date or if they can negotiate a payment plan. It might seem like a long shot but most credit issuers in Canada provide programs that can help to reduce your minimum payments or provide a payment break. 

3. Consider Debt Consolidation

Debt consolidation is the process of combining multiple debts into one large debt. So, if you are carrying balances on three credit cards, you might opt to consolidate your debt by taking on a debt consolidation loan. You use the loan to pay off all of your credit card balances.

Consolidating allows you to simplify the debt repayment process. Now, instead of juggling three separate credit card payments with different interest rates and due dates, you can focus on repaying one loan. This can help to avoid missed or late payments, and the fees that go with them. 

You might also choose to consolidate to get better terms. For instance, if you have a good credit score, you might be able to qualify for a loan that offers a better interest rate than you were paying on your credit cards. A lower interest rate means you pay less in interest and more towards your principal which can help you to get out of debt faster. 

4. Consider a Balance Transfer

SinA balance transfer is another way you can consolidate your debt. Rather than taking on a personal loan, you can pay off multiple credit cards with a balance transfer credit card. To do this, look for a balance transfer credit card that offers a 0% APR promotion for a period of time, typically between 6 and 18 months. You also want a card that provides a large enough credit limit to pay off your other cards. 

The goal is to use the balance transfer card to pay off your other credit debts and take advantage of 0% interest. You want to aim to pay off the balance transfer card during the promotional period. If you can do this, you could save a lot of money on interest. 

If you are considering a balance transfer there are a few things to be aware of. First, most balance transfers charge a fee of 1% to 5% of the amount being transferred. To qualify for a balance transfer card that offers 0% interest and provides a sizable credit limit, you will most likely need a good to excellent credit score. 

5. Consider Bankruptcy

Bankruptcy is not a word most people want to utter or even think about, but sometimes it’s the only option left. While bankruptcy is not ideal and will impact your credit for six years or longer, it can provide you with the fresh start you need to rebuild your finances. 

Bankruptcy is a legal process that can discharge you from most of your debts including unsecured debts like credit card bills. The benefit of filing for bankruptcy is that it immediately stops creditor actions like collection calls and wage garnishment, and can give you a new financial start. 

However, bankruptcy will significantly affect your credit score and, while you don’t necessarily lose everything you have in bankruptcy, there are many assets you may have to give up. For instance, if you have accumulated significant equity in your home, you will likely have to use this to repay creditors.

6. Seek a Debt Relief Program

If you want to avoid bankruptcy, the only other government debt relief program available is a consumer proposal. A consumer proposal is a legal process that is administered by a Licensed Insolvency Trustee (LIT). Your LIT negotiates with your creditors on your behalf, offering to pay your unsecured creditors a percentage of what you owe them. Unlike bankruptcy, you don’t have to forfeit as many of your secured assets, like your home or car.

Other debt relief programs include credit counselling and debt settlement. A credit counsellor can provide one-on-one counselling as well as tips on how to create a budget and use credit cards responsibly. Before you work with a credit counsellor, it’s important you research the company to make sure they are legitimate. Also, take the time to ask about any fees or costs upfront so you aren’t surprised later on. 

Debt settlement is when you pay a company to negotiate with your creditors on your behalf to reduce your total debt. The debt settlement company offers your creditor a lump sum payment if they agree to lower your total debt. Know that there is no requirement for your creditors to negotiate with a debt settlement company, it is completely voluntary. There is a chance that you pay the debt settlement company to help and your creditors refuse the offer. It’s important you take the time to research the debt settlement company's reputation before you sign up.    

How to Stay Out of Debt?

If you’ve dug yourself out of credit card debt, you want to make sure you have a plan in place to prevent you from going back there. Or, better yet, if you’ve never been in debt and you want to ensure you never go into debt, follow these tips: 

Regularly Review Your Credit Statement

Awareness is key. Each month you will receive a credit card statement either online or by mail, so make sure you review it. Your statement includes important information about your current balance, your minimum payment, and how much you will pay in interest. Reviewing your statements regularly can help you to stay on top of your payments and is a good way to detect any errors and protect yourself against credit fraud.  

Set up a Budget

A budget is simply a plan for your money. Rather than spending haphazardly and having no idea where your money goes, a budget helps you to spend your hard-earned dollars on the things you truly value. Creating a simple budget can help you to avoid going into credit card debt by making you more aware of how much money you have available to spend on bills versus shopping.  

Pay More Than the Minimum

The gold standard of credit card use is to pay your monthly payment in full. However, if this isn’t possible, you should still strive to pay more than your minimum payment. A minimum credit card payment is the smallest amount you can pay to avoid late fees. Your minimum payment is usually a flat dollar amount ($10) or a percentage of your outstanding balance (3%), whichever is higher. You can review your credit agreement to confirm your minimum payment amount. 

While making your minimum payment is obviously better than skipping a payment, it’s still not ideal. If you only make your minimum credit card payment, you will pay more in interest and it will take you longer to pay off your balance. 

Pay On Time

Your payment history, which includes paying your bill on time, accounts for the largest percentage of your credit score. Missing a payment or making a late payment can hurt your credit score and can result in late fees. Making a late payment can also cause your current interest rate to rise and can make you lose any promotional rates your credit card company may have offered you. 

The Bottom Line

Getting out of credit card debt is often difficult, but it is possible. Depending on where you’re at in your debt journey, you can apply different repayment strategies. If you have the money to repay your debt, choosing a repayment strategy like the debt avalanche or debt snowball method can help to accelerate the process. If you can’t afford to pay your bills then you might need to reach out to a professional to see if a consumer proposal or bankruptcy is the right debt relief strategy for you.