How to pay off credit card debt

The impact of credit card debt on financial health

Running up a big credit card debt and struggling to repay it can have a serious impact on your financial health. It’s worth knowing you are not alone. Figures from The Money Charity show that outstanding credit card debt averaged £2,485 per household and £1,312 per adult in February 2024.

Carrying over a credit card balance from one month to the next generally attracts interest. Given that the average interest rate on purchase cards sits at 25.7%, this means debt can quickly spiral, making it increasingly hard to repay.

Having a high level of credit card debt can damage your credit score. It can indicate to lenders that you’re struggling to manage your finances. This can make it harder to get accepted for other forms of credit in the future, such as a loan.

If you want to see what impact this is having on your credit score, you can check your credit record for free with the three main credit reference agencies (Experian, Equifax and TransUnion).

The problem with minimum payments

Credit card providers typically only ask you to repay 1% to 2% of the outstanding card balance each month. Yet if you only pay this amount, it could take years to clear your debt and you could pay thousands of pounds in interest.

The table below highlights the impact of only making the minimum payment, with calculations based on a credit card balance of £3,000 with an interest rate of 21.9%.

Source: MoneySavingExpert calculator

Under rules brought in by the Financial Conduct Authority (FCA) in 2018, your card provider must write to you if you’ve been paying more in interest and charges than you’ve repaid on your credit card balance for 18 months or more.

Your card provider will ask you to increase your monthly repayment. The following table shows how much difference this could make, again based on a credit card balance of £3,000 with an interest rate of 21.9%:

How to assess your debt situation

Before you start tackling credit card debt, you need to assess your overall debt situation. Make a list of the different types of debt you have and how much you owe in total.

Certain debts, known as “priority debts”, should be your first focus. These include:

1. Debts that persistently left unpaid could lead to a custodial prison sentence: council tax, BBC licence fee, court fines
2. Debts that lose you your home: rent or mortgage
3. Essentials: gas, electric and water

The consequences of not repaying these debts can be more serious than failing to pay off your credit card. You might have your electricity supply cut off or lose your home.

Credit cards are non-priority debts, but you should still aim to pay them off as quickly as possible. Work out how much money you have left over each month after paying your essential bills and priority debts. This will tell you how much you can set aside for credit card repayments.

Then make a note of the following:

• Each credit card you have, including the provider
• How much you owe on each credit card
• The amount you’re repaying each month for each card
• The interest rate on each credit card

Having this list to hand will help you with some of the repayment strategies below.

Strategies for paying off credit card debt

There are several strategies for paying off credit cards. The one you choose will depend on what best suits your financial situation and preferences.

The snowball method

When it comes to working out how to get rid of credit card debt, the debt snowball method can be an effective choice.

Take a look at the steps below:

1. Pay the minimum monthly repayment on all credit cards.
2. Put any extra cash you have towards the credit card with the smallest balance.
3. Once you’ve paid off that credit card in full, start putting the extra cash towards the card with the next lowest balance.
4. Keep doing this with all cards until you’ve repaid all balances.

By focusing on the cards with the lowest balance, you’ll get a win much faster, making it suitable for those who find it difficult to stay motivated. Just be warned that you will likely pay more interest in the long run.

The avalanche method

The debt avalanche method works similarly to the snowball method, but you concentrate on the credit card with the highest annual percentage rate (APR) rate first.

1. Pay the minimum monthly repayment on all credit cards.
2. Put any extra cash towards the credit card with the highest APR.
3. Once you’ve cleared that credit card, focus on the credit card with the next highest interest rate.
4. Continue to do this until you’ve paid off all your credit cards.

This method won’t give you any early wins so will require more patience. But you are likely to save more money as you’ll pay off the most expensive debts first.

Credit card balance transfer

When considering how to clear credit card debt, another option is to use a balance transfer credit card.

These cards enable you to move debt from one or more credit cards to another card with a lower interest rate. Or, if you have a decent credit history, you might qualify for a card that charges no interest at all for around 12 to 28 months.

Balance transfer credit cards can help you pay off your debt faster and save you paying interest. But you’ll need to watch out for transfer fees of around 3%. Plus, if you don’t clear your balance before any 0% deal ends, interest will kick in.

Debt consolidation loan

Debt consolidation loans are a type of personal loan designed to help you pay off existing debts, including credit cards. They combine multiple debts into one monthly repayment with one lender.

Unlike credit cards, loans typically have fixed monthly repayments and you have a set term in which to repay the debt. This is usually between one and five years.

Personal loans can also charge lower interest rates than credit cards. But again, the best rates (around 6% to 7%) are reserved for those with good credit. If you have a poor credit score you could be paying many times that.

Negotiating with creditors

If you’re struggling to meet your credit card payments, you should speak to your credit card providers as soon as possible. They may be able to help you come up with a repayment plan to help you clear your debt. This could include reducing your interest rate, pausing payments or changing your payment date.

If you need help with debt you could turn to MoneyHelper, StepChange, National Debtline or Citizens Advice.

Longer-term strategies to reduce credit card debt

There’s no quick-fix solution. You need a long-term strategy to reduce your credit card debt. The tips below can help cut the chances of debt problems in the future:

Create a realistic budget

Work out how much money you have coming in each month and how much you spend on bills, debt repayments and other expenses. You could use the free online budget planner from MoneyHelper to get started.

You’ll then be able to see how much money you have left over each month (if anything) and how much extra you can afford to put towards credit card repayments.

Cut back on spending

Careful budgeting could also highlight some areas where you could make cutbacks. Perhaps you’re paying for a subscription (such as a streaming service) that you could manage without. Or maybe you could quit smoking, stop eating out as often or even look into switching to a better car insurance or broadband deal.

Any money you save can help you clear your debts faster.

Build an emergency fund

If you can, it’s sensible to put some spare cash into an easy-access savings account. This means you can access the funds quickly if you need to pay off expensive debt or cover an emergency repair at home.

Professional help

If your debt has spiralled out of control and you don’t know how you’ll ever repay it, it’s best to seek professional advice.

When to speak to a debt adviser

You should seek debt advice if any of the following apply:

• You’re regularly worrying about money
• You’re struggling to meet your debt repayments
• You can’t pay your household bills
• You’re ignoring letters from your credit card provider or other lenders

There’s no need to pay for debt advice. You can speak to any of the debt charities listed below for free, confidential debt advice.

How credit counselling can help

Credit counselling can help you assess your financial situation. Counsellors will work with you to create a budget to help you meet your debt repayments. A debt adviser will likely want to see your bank statements and a full list of your debts and creditors, so they can come up with the most appropriate repayment plan.

Depending on your situation, your debt advisor might suggest a debt management plan. Here, all your debts are combined under one agreement and you make monthly repayments to clear it.

Interest and other charges are often stopped under a debt management plan. But it can have an impact on your credit file, so you should consider it carefully. Debt management plans can last five to 10 years.

Conclusion: Paying off your credit card debt

Paying off credit card debt might seem daunting but it’s important to start taking steps to clear it as soon as possible. The quicker you do this, the sooner you’ll be debt-free.

Be sure to pick a strategy that works for you and don’t be afraid to switch to a different method if your financial situation changes.