If you struggle with credit card debt, you're not alone -- the average American credit card balance is more than $15,000. But there are many ways you can reduce your debt without harming your credit score, and with a solid payment plan in hand, you'll be debt-free in no time.

In this article:

Understanding credit card debt
The first step in getting rid of your debt is understanding how it's made. Every month, you make your purchases. At the end of the month, you receive your statement asking you to pay for that month's purchases as well as any other debts you haven't paid off. You then have 21 to 25 days (depending on your credit card) to pay off the previous month's debt. If you don't pay it off, you'll be charged interest, and a charge of your APR (annual percentage rate), divided by 12, times your outstanding balance, will be added to the debt you owe. Here's an example.


You have a credit card with a 15% APR, a $35 late fee, and a 25-day grace period. In January, you spend $500.

On Feb. 1, you receive a statement saying:

  1. Your outstanding balance is $500.
  2. Your minimum payment is $25.

From there, you have a few different options. Because your grace period is 25 days, you have until Feb. 26 to do any of these:

If You Pay ...Your Outstanding Balance Will Be:If You Paid This Amount Every Month:
$0

$541.25:

  • $500 in unpaid purchases
  • $6.25 in interest
  • $35 in late fees
You'd probably get a debt collector calling at your door.
$25

$480.94:

  • $475 in unpaid purchases
  • $5.94 in interest
Your $500 in purchases will cost $588, and it'll take you nearly two and a half years to be debt-free.
$250

$253.13:

  • $250 in unpaid purchases
  • $3.13 in interest
Your $500 in purchases will cost $503, and you'll have your debt paid off in three months. Note that it takes longer to pay off $500 than two payments $250 because of interest charges.
$500 $0 You'll have paid off your balance in full, and your $500 in purchases will remain just $500.

The key takeaways here:

  • Under the terms of your credit card agreement, you can pay anywhere between the minimum payment and the total amount owed without violating your credit card agreement.
  • If you make less than the minimum payment, you will probably pay a late fee, and if your card has a penalty interest rate, that higher rate might be applied to all newly incurred balances. Making less than the minimum violates your agreement.
  • If you pay more than the minimum but less than the total amount outstanding, you will be charged interest at a rate of your APR, divided by 12, times outstanding balance. This interest charge is then added to your outstanding balance.
  • The only way to not add to your balance is to pay off your debt in full.

There are two ways you can lower your interest charges:

  1. Lower the amount of debt outstanding.
  2. Lower the interest rate.

We'll break down in detail how to do each of those.

Lower the amount of debt outstanding
While there are a couple tricks you can use to pay off your debts more efficiently, and tools you can use to make it more painless, in the end, cutting down your debt comes down to this: You need to put more money toward getting debt-free. This means:

  • Once you've established a rainy-day fund of around three months of expenses, put all your money toward getting debt-free.

    Think of it this way: If you have credit card debt at an 18% interest rate, you're getting a guaranteed 18% return on your investment. Nothing else you can possibly invest in will give 18% returns with zero risk.

  • Set up a recurring payment from your checking account to your credit card balance on the day you get paid. You can't spend what you don't have.

    Alternatively, divert part of your paycheck to a savings account earmarked for credit card payments.

  • Look for ways to boost your income part-time, like working online or renting out your car.

  • Check out our tips on making and sticking to a budget for more information.

Allocating more money to getting debt-free is the best way to move the needle; that said, you can also allocate your money more efficiently by paying off your highest-interest debt first (debt snowball aside). Other than that, it's all about putting more in to get more out.

Lower the interest rate
This is where things get a bit interesting. There are a number of ways to reduce your interest rate; you should try the following and stop at the first one that works.

1. Apply for a 0% balance transfer credit card
The easiest way to cut your interest cost is to apply for a new 0% balance transfer credit card. Such cards have an introductory period (usually six to 18 months) where your outstanding balance isn't charged any interest. You can shift your old credit card debt to the new card and have some time to pay it down without accruing interest charges. Credit card companies are eager to steal others' business and are opening their purse strings to debts from other lenders.

Be careful, however, of balance transfer fees. This one-time charge, usually 3%-5% of the transfer, is added to your balance when you shift it over. For example, if you transfer $1,000 to a new credit card with a balance transfer fee of 3%, your outstanding balance at the end of the month will be $10,30.

2. Shift to a lower-rate card with your same bank
Remember that banks are competitive and want you to keep your accounts with them. Try to switch your debts to a lower-rate card at the same bank by threatening (politely, of course) to leave and take your money elsewhere. Alternatively, try to negotiate a lower rate on your existing card.

3. Consider debt consolidation
If you have the credit for it, consider taking out a home equity line of credit or another secured loan to pay off your (unsecured and therefore more expensive) credit card debt. However, keep in mind that if you fall behind on your debts, you can lose your house.

What to do if you're in over your head
When worst comes to worst, you do have a few options:

  • Call up your lender. Think about it from the lender's perspective: They'd rather not have you default and lose all the money you owe them. Instead, at the first sign of trouble, you should call up your bank and try to work out a payment plan.
  • Get credit counseling. Sign up for a free consultation with a credit counselor, who can help you understand your options and put together a budget. Make sure the counselor has the Department of Justice's seal of approval.
  • Consider the nuclear option. If all else fails and you just can't pay your bills, your last resort could be declaring bankruptcy.

The article Dealing With Credit Card Debt: How to Get Debt-Free originally appeared on Fool.com.

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