New! Eligible SoFi members can invest in upcoming IPOs before they’re traded on the public market—only in the SoFi app.* Learn more

Tips for Reducing Credit Card Debt

November 23, 2020 · 6 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

Tips for Reducing Credit Card Debt

Americans are carrying more credit card debt than ever, and when the average credit card annual percentage rate (APR) for purchases hovers around 20% as of this writing, the interest on debt can be as crushing as the balance alone.

On top of a high APR, credit card companies generally charge what is referred to as compounding interest, a calculation that can make them even more challenging to pay off. Compounding interest means interest on a card that is charged not on the outstanding balance alone, but also the interest accrued.

In addition to compounding interest, forgetting to pay at least the minimum by the statement due date could result in a late fee penalty, which in most caseso is also added to the balance accruing interest. Forgetting to pay on time twice in a row, could result in a higher rate of interest charged on the account referred to as a higher penalty rate.

With all the above considered, a small debt could balloon quickly if a person isn’t paying attention to terms and due dates—or simply making only minimum payments.

The ever-increasing bottom line of credit card debt can be enough to keep some persons awake at night. But, working to reduce debt can help alleviate that burden, and could result in things like paying cards off sooner, saving money, a good night’s sleep, improved finances and more, in the process.

Read on for some tips on how different methods might help a person reduce credit card debt.

Creating A Budget

If eliminating credit card debt is the destination, creating a budget is like the road map that gets a person there. About a third of Americans say they have no budget at all, but implementing even a simple budget might help make managing money easier, and could help bring a goal like reducing credit card debt to a more attainable level.

When creating a budget, it’s recommended to start simple. Budgeters can start small with these simple steps:

  1. Gathering financials. It might be a little painful to comb through bills and account statements, but the more information a person has from the start, the more empowered they are to budget accordingly. For example, consider collecting your most recent monthly statements either digitally or physically. These may include, but are not limited to:

◦  Mortgage/Rent

◦  Utilities (water, gas, heat, internet, cable, HOA, etc)

◦  Pay stubs

◦  Credit card or auto loan statements

◦  Student loans or other miscellaneous recurring loans and bills

◦  Subscription services (Amazon, Netflix, Spotify, etc)

Taking the time to gather these documents could help give a person a clearer picture of what they’re spending month over month, but also might serve to highlight recurring or duplicate charges that should be eliminated (like when someone forgets to end their gym memberships months after they’ve stopped going).

  2. Determining expenses vs. income. Once financials are all laid out, a person may have enough information to determine current expenses versus income each month. Using the information you have gathered, such as a recent pay stub, could help a person determine their exact monthly income, post-tax–that’s the net amount they actually take home after taxes, health insurance, and other deductions. After calculating net income, try tallying up monthly expenses you identified (from the documents above) to help determine the average monthly expenses. Hopefully, the amount a person spends is less than they take home for income each month.

  3. Implementing budgeting guidelines. Calculating the above two steps could result in an actual budget creation. There are various ways to perform this task, from spreadsheets to apps; there’s seemingly limitless ways to help create a budget. One good idea is tailoring the budget to the person. One size usually doesn’t fit all when it comes to income and living expenses.

Feeling adrift? There are many tools to choose from but one common type of budgeting method for beginners can be the classic 50/30/20 budget. It doesn’t require complicated spreadsheets, or tricky apps to get started. The 50/30/20 method simply stipulates:

•  Half a person’s take-home pay should go towards “essential spending.” This could mean anything from housing costs and health insurance to groceries and utilities. It can be anything you need to live on a monthly basis.

•  One-third of a person’s post-tax pay should be tagged for “discretionary spending.” This spending is services a person could cut if there were in a pinch, like meals out, monthly streaming service bills, or gym membership.

•  Finally, 20% of post-tax income should be set aside for saving. The rest of a person’s paycheck is ideally reserved for retirement, emergency savings, or in the case of higher interest credit card debt, one idea could be to set aside funds each month to be used in making larger principal payments.

The 50/30/20 budgeting method is common for beginners because of its simplicity and flexibility. Trying to adhere to the percentages can sometimes show budgeters their blind spots, or perhaps highlight areas where they might need to improve. But, it can also be flexible, with percentage points waxing or waning based on an individual’s needs month over month.

The bottom line with budgeting? Something simple can be better than nothing at all. Some may consider that any budgeting structure that helps a person identify things like spending patterns is an improvement from sticking their head in the sand.

Paying More Than The Minimum

When a person has multiple credit card accounts racking up charges and interest, it can sometimes feel overwhelming. They might be unsure of which to prioritize for payoff, if at all, and end up paying the minimum due on every card each month.

But, if a person makes the minimum payment due alone, they might be surprised to learn how much more they may end up paying in interest as the account balance accrues. Paying more than the minimum amount owed each month could lead to saving in the long run since there’s a smaller balance to charge compounded interest on.

It might be tempting to keep paying the minimum balance owed, but a person could end up paying much more for interest charges in the long run because of the compounded interest. Just how much? Check out SoFi’s credit card interest calculator to get a general idea of how much you could possibly save on interest by calculating different repayment options.

Debt Payoff Strategies

Paying off more than the minimum each month is great, but coming up with a payoff strategy could offer a better outcome in the long run. Employing a method that works for your lifestyle could result in things like building momentum, alleviating stress, possibly making it simpler overall to conquer debt.

There are a number of budgetary methods online to help reduce balances on things like credit card debt, but here a few of the most well known are outlined below. Each method generally includes wiggle room in a person’s budget, to help facilitate repayment on outstanding balances.

•  Snowball. Like a snowball rolling down a hill, this method starts with the smallest debt balances first, then builds towards the larger balances. You’d start by determining the balance of debt, from smallest to largest, without considering interest rate. Then, pay the minimum on each bill, with the exception of the smallest—all extra cash is put towards paying off the smallest loan until it’s eliminated. From there, roll that payment amount into the next smallest debt, until it’s gone. Keep the pattern going until all debt is gone.

  Snowball method sometimes gets a bad rap because focusing on small debt balances first could mean paying more interest in the long run. But, the Snowball Method may have a positive psychological effect. Repaying smaller debts faster could lead someone to feel a sense of accomplishment that may then help them power through the rest of the debt repayment process.

•  Avalanche. If small wins off the bat don’t matter much, then some might turn to the Avalanche Method. This strategy starts with paying down the biggest interest rate debt first, paying minimums on all other debts, and contributing all free cash to the bill with the highest interest charges until it’s paid down or off. Continue, paying down debt with the next highest interest rate. Keep going until all debt is gone.

  One benefit of this method could be saving on interest payments over the life of each credit card balance, but the downside could be that it takes longer to see any “wins.” But, once things start moving, it should have an avalanche effect, with each loan toppling.

Consolidating Multiple Debts

If a person’s carrying high-interest debt on multiple credit cards, it can feel overwhelming. Multiple bills, due dates, and accounts could lead to confusion of amounts due, missed payments, and possibly the penalties that can come with missing payments. For some, a credit card consolidation loan might help to cut through the confusion by rolling all their revolving debt into one unsecured personal loan.

How can a personal loan possibly help? If a person has an outstanding amount owed on multiple cards, they may be able to consolidate all the debt into one personal loan with a single fixed rate payment.

What’s more, unsecured personal loans oftentimes come with a fixed interest rate that’s lower than the average credit card rate, which means less interest charges could accrue month over month.

Depending on how quickly a person pays off a personal loan, they could save money on interest over the life of the loan with a lower fixed APR. Streamlining debt might also lead to peace of mind for some—as does a set term with a final payment date, instead of a revolving debt like a credit card. It’s one payment a month, with one rate and a payoff date; instead of multiple open-ended debts of differing amounts with varied APRs.

Unsecured personal loans aren’t for everyone. While their APRs are generally lower than credit cards, not everyone will qualify for the lowest possible rates. And taking out a personal loan is still taking out additional debt, so it’s important to weigh the ramifications of adding a loan to one’s credit history.

Fortunately, applying for a personal loan doesn’t have to be complicated. With SoFi, you can check your personal loan rates online in minutes. You can rest easy with, no fees and a fixed rate and monthly payment.


SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
website
.

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
SOPL20007

All your finances.
All in one app.

SoFi QR code, Download now, scan this with your phone’s camera

All your finances.
All in one app.

App Store rating

SoFi iOS App, Download on the App Store
SoFi Android App, Get it on Google Play

TLS 1.2 Encrypted
Equal Housing Lender