How to pay off $5,000 in credit card debt

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If you want to pay off $5,000 in credit card debt, try these strategies to help you get out of it faster. (iStock)

Credit cards can be a valuable tool for building your credit history and earning rewards. But unexpected expenses and overspending can lead to an abundance of credit card debt. The average American owed $5,525 in credit card debt at the start of 2021, according to a Experian Report.

Not sure if you have too much credit card debt? Here’s how to tell if your credit card balance is too high and some strategies for paying it off $5,000 in credit card debt.

A personal loan can help pay off your high-interest credit card debt. You can easily compare personal loan rates from several lenders using Credible.

How to know if you have too much credit card debt

Different theories exist regarding how much debt you should have. Multiple large balances on multiple credit cards could indicate trouble on the horizon. On the other hand, high balances can be manageable if you also have high income and credit limits, although high balances come with higher interest charges.

You can use a few metrics to determine if you have too much debt, regardless of your income or the number of debts: your credit utilization ratio and your debt-to-income ratio.

Credit utilization rate

Excessive debt is bad for your finances, but it’s also bad for your credit score. A good way to get a clearer picture of your level of debt is to calculate your credit utilization ratio. Credit utilization, which makes up 30% of your FICO score, measures how much available credit you are using.

To determine your credit utilization rate, divide the total amount you owe by your total credit limit. Suppose you have a balance of $3,000 on a credit card with a credit limit of $10,000 — your credit utilization rate for this card is 30% (3,000 / 10,000 = 0.3) .

Remember that credit usage applies to each card individually and to all of your cards collectively. If you have multiple credit cards with balances, 30% is your “per card ratio.” If you have another credit card with a balance of $2,500 and a credit limit of $5,000, your overall credit utilization rate is 37% (5,500 / 15,000 = 0.37).

Your credit usage is important because it indicates how you manage your revolving credit. A low credit utilization rate can show that you use revolving credit moderately, but that you are not necessarily dependent on it. On the other hand, lenders may consider you a credit risk if your credit utilization rate is high.

A general rule is to keep your credit utilization rate below 30%.

Debt to income ratio

Your debt-to-income ratio (DTI) is another measure that can help you determine if your level of debt is a concern. DTI is the percentage of your gross monthly income that you use to pay your rent, mortgage, credit cards, and all other monthly payments.

If your debt is too high, lenders may deny you home loans, auto loans, and other credit products. On the other hand, a low DTI can reassure lenders that you can afford a new loan.

You can calculate your debt-to-income ratio by dividing your total monthly debt payments by your gross monthly income. For example, if you have debt payments equal to $1,000 each month and your pre-tax income is $4,000, your debt-to-income ratio is 25% (1,000 / 4,000 = 0.25). The ideal debt-to-income ratio is generally below 43%. In the last example, adding a new loan with a monthly payment above $720 would raise your debt-to-equity ratio above 43%.

Knowing how much you owe is a great first step to creating a budget and ultimately paying off your credit card debt.

Decrease spending

When paying off credit card debt, the longer you can pay beyond your minimum monthly payment, the better. By reducing your expenses, you can find the extra cash you’ll need to make higher credit card payments and, ideally, pay your credit card bill each month.

Start by reviewing your recent transactions and identifying ways to reduce unnecessary spending. Finding and canceling monthly subscriptions you no longer use can give you a quick win.

Some bills you can’t escape, like utility bills. But that doesn’t mean you can’t negotiate a lower rate, especially if your state has multiple natural gas and electricity providers to choose from. All it takes is a quick phone call asking for a lower rate, and it could mean saving you money.

By looking at your expenses, you might find out where you’re overspending each month, like streaming services or buying coffee. Create a budget to plan how you will reduce expenses and avoid future debt.

Of course, reducing your spending won’t do any good if you keep increasing your credit card debt. Only use your credit card when absolutely necessary. Instead, use cash or a debit card.

Refinancing your credit card debt with a personal loan can get you a lower interest rate that could help you pay off your debt faster. Credible, it’s easy to compare personal loan rates from various lenders, without affecting your credit score.

Pay off the best cards first

You can usually save more money by paying off high-interest credit cards first. The longer you wait to pay off high interest rate cards, the more interest you will pay over time.

Debt avalanche method

Paying off your credit cards with the highest interest rates first is known as debt avalanche method. Start by listing all of your credit card debt, along with their interest rates, current balances, and minimum monthly payments. Rank your accounts from highest to lowest interest rates.

Continue to make minimum payments on each debt, but pay as much as possible on the credit card with the highest interest rate. Once you’ve paid off that card’s balance, you can then direct those funds to the credit card with the highest balance, while continuing to make minimum payments to your other accounts. Repeat the process until all of your credit card debt is paid off. Using the debt avalanche method can save you money by eliminating your most expensive debts first.

Use a balance transfer card

What if you could pay off your credit card balance by paying a lower interest rate – or even better – without paying any interest? Balance transfer credit cards offer low or even 0% annual percentage rates (APRs) — your interest rate plus fees — for an introductory period. This period can last up to 21 months. With a 0% promotional offer, you can transfer your credit card balance to a balance transfer card and pay off your debt without interest during this period.

While a 0% APR can yield significant savings, you’ll generally need good to excellent credit to qualify for a 0% balance transfer card. And, as with any financial product, it’s wise to weigh the pros and cons of balance transfer cards to determine if one is right for you.

Advantages

The inconvenients

  • Your regular APR could be higher. If you do not repay the transferred amount before the promotional period expires, your APR will change to the card’s normal rate, which may be higher than the rate on your current cards.
  • You may pay a balance transfer fee. Balance transfer cards usually come with a balance transfer fee, usually around 3% to 5% of the amount you transfer. Make sure the fees aren’t so high that they wipe out your APR savings.
  • You could add to your debt. If you transfer your balances, but continue to use your original cards or other cards, you could take on more debt.

Take out a credit card consolidation loan

Like a balance transfer card, a consolidation loan lets you combine high-interest cards and other debt into one account with a fixed monthly payment. A debt consolidation loan can make sense if it lowers your APR. Of course, credit card consolidation loans have pros and cons that are worth considering.

Advantages

  • You could snag a lower interest rate. In November 2021, the average interest rate on a two-year personal loan from a commercial bank was 9.09%, while the average credit card rate was 16.44%, according to data from the Federal Reserve.
  • You can simplify debt management. It is easier and more convenient to manage a single payment rather than multiple payments.
  • You will have a deadline. Consolidation loans are for a specific period of time, which means you will have an end date to pay off your debt, as long as you make your monthly payments on time.

You can view your prequalified personal loan rates when you compare rates from multiple lenders with Credible.

The inconvenients

  • You may pay a higher interest rate. If you have fair or poor credit, you may not be approved for a debt consolidation loan with a lower interest rate, which could increase your costs.
  • You could make your debt worse. Debt consolidation can save you time and money. Be careful not to offset these advantages and increase your debt by making purchases beyond your means with your credit cards after paying them off.
  • You can pay fees. Some loans come with an origination fee, which is an upfront fee taken from your loan amount. You will also likely have to pay late fees if you miss a payment.