How to Pay Off Credit Card Debt

The new year is a good time to focus on paying down credit card balances accrued over previous months, particularly during the holidays, even if, like many Americans, you are carrying less credit card debt than you were before the pandemic.

Over all, American credit card balances dipped 13 percent from the end of 2019 through the third quarter of 2020, as consumers spent less and whittled card debt during the pandemic, according to federal data.

Requests for help with credit card debt typically spike at the start of a year, according to Money Management International, a nonprofit credit counseling agency, but “we have not seen the normal increase we would have seen,” said Thomas Nitzsche, a spokesman for the agency.

The pandemic put a halt to vacations and dining out. Americans who didn’t lose their jobs were left with more cash to pay down card debt. And the federal government’s pandemic relief efforts, including cash stimulus payments, further bolstered their finances, said Ted Rossman, an industry analyst for CreditCards.com. The Federal Reserve Bank of New York found that people who received the first round of stimulus payments mostly saved the money or used it to pay debts.

Of course, not everyone has been so lucky. About 42 percent of Americans said their financial situation had worsened since the start of the pandemic because of job losses or drops in income, according to a survey by the financial website NerdWallet. Nearly half of those in worse shape said they had taken on debt to pay bills and cover necessities, according to the survey, which Harris Poll conducted in November via online interviews of more than 2,000 adults.

“The pandemic has absolutely turned everything upside down when it comes to household finances,” said Sara Rathner, NerdWallet’s credit card expert.

Some Americans are most likely in “survival” mode, using their credit cards to cover lost income and making minimum monthly payments, Mr. Nitzsche said. His agency is increasingly fielding calls seeking help with housing issues, like paying rent and mortgages, he said. Federal moratoriums against evictions are set to expire in the coming weeks.

The credit bureau Experian found that the average card balance at midyear was down 11 percent from a year earlier but still a hefty $5,900. The average balance at the end of 2020 was about $5,800. With average credit card rates around 15 percent, interest can add up quickly if balances aren’t paid in full each month. Households that carry balances will pay almost $1,200 in interest on average this year, NerdWallet calculated.

So if you did rack up some card debt during the holidays, perhaps as a reward for a challenging year, it makes sense to come up with a plan to start paying it off — if not during “Frugal February,” then as soon as your finances allow.

Card debt is typically the most expensive way to borrow because it’s not secured by an asset like a car or a house. “It’s one of the worst types of debt a person can have,” said Karla McAvoy, chair-elect of the National Association of Personal Financial Advisors, a group for fee-only financial planners.

The federal government is now distributing a new round of stimulus checks, this time in the amount of $600. If you need the money for basics, those take priority, of course. But if you can, it’s smart to use some to pay down debt and to set some aside as a cash reserve.

“You should do both, if you can,” so you can begin to build up a savings cushion, said Matt Schulz, chief credit analyst at LendingTree, an online lender.

Having some cash on hand gives you more payment flexibility — few landlords accept credit cards — and reduces the need to use a card in the future, said Jeremy Shipp, a financial planner and spokesman for the Certified Financial Planner Board of Standards, an industry group.

A quarter of Americans who have received or expect to receive a second stimulus check said they planned to use the money to pay down debt, according to an online survey from Bankrate.com and YouGov of 1,203 adults. About 30 percent said they would save at least part of the check.

Here are some questions and answers about managing credit card debt.

What is the best way to pay off credit card debt?

If you have multiple cards — and most people do — Ms. McAvoy recommends paying off the one with the highest interest rate first.

Other financial planners suggest paying off the one with the smallest balance, which can give you a sense of accomplishment and encourage you to keep going.

You can also consider consolidating credit card debt, perhaps with a lower-rate personal loan, to make payments more manageable, Ms. McAvoy said. Having just one bill to pay may be less stressful, she said.

If you can find a card with a zero-interest offer, transferring your balances and paying the new card off over time may be an option. But banks are making fewer zero-interest transfer offers of late, and those that are available tend to have shorter payoff terms and carry higher transfer fees, Mr. Rossman said.

Can I use a home equity line of credit to pay off my card debt?

Many homeowners with mortgages saw their home equity — the difference between a home’s value and the amount owed — increase over the past year. If you qualify, a line of credit secured by your home will generally offer a much lower interest rate than the one you’re paying on a credit card. But keep in mind that the home equity loan is secured by your house, so if you can’t pay, you could lose your home.

“It’s still debt, so you want to be careful,” Ms. McAvoy said.

Can I ask my card issuer to lower my interest rate?

Yes. Even before the pandemic, banks from time to time offered to reduce interest rates temporarily, usually for customers with good credit. But even if you aren’t targeted with an offer, you can request a reduction.

“It’s always worth asking the issuer if they’ll lower your interest rate,” Mr. Schulz said.

During the pandemic, some banks have offered to lower monthly payments or waive interest charges for people who are having financial difficulties.