Five ‘Credit Reset’ Steps to Clearing Credit Card Balances

1. Set up an emergency fund

Losing your job or facing unexpected debt can lead to more debt if you don’t have cash set aside for emergencies. Financial advisors often recommend that you have enough cash readily available to cover your expenses for three to six months.

Putting this money into a high-yield savings account makes the money grow even if it sits with the bank.

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2. Review spending and create a budget

As you commit to building an emergency fund, you can review your total debt and monthly expenses. Seeing where your money goes will give you opportunities to cut costs and free up space in your budget to pay off bills.

You’ll probably find that you’re spending more than you’d like on food and subscriptions, and cooking at home and canceling a streaming service or two can put some money back in your pocket. You can use that extra money to pay off debt.

You can also use your findings to create a budget you can stick to, reducing your current spending so you have more money to put towards paying off your debts. You can create a budget with pen and paper, a spreadsheet or with the help of a budgeting app like YNAB.

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3. Check your credit

Now is the time to properly understand your credit situation. List the balances and annual percentage rates (APRs) of your financial obligations.

Make sure you pay the minimum amount on all your debts, and then you can start paying off the remaining balance.

4. Choose a payment strategy

Two popular debt settlement strategies are the avalanche method and the snowball method.

The snowball method involves paying off your loan with the smallest balance first, then moving on to the second smallest balance and so on. That way the little winners along the way will keep you motivated.

The avalanche method involves paying off the debt with the highest interest rate first, then moving on to the debt with the second highest interest rate and so on. This method usually results in you paying less interest over time.

Remember that in both cases, you must pay the minimum required on all debts.

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5. Prevent debt lending

You want to make sure that you are stopping the debt from piling up and while you are paying off your debt. That might mean sticking to a strict budget, making automatic payments and using one credit card instead of the many you used to have. (You can keep the remaining cards active with one small monthly subscription, if you want to build your credit history, if it makes sense for your overall financial plan.)

You should also avoid taking out new loans or credit cards as you pay off debt.