As reported by WalletHub, credit card debt was $1.30 trillion in August 2024, setting a new record. Despite surpassing the previous peak, it’s still $99 billion shy of the all-time high set in 2007.
Although the Federal Reserve recently cut interest rates, credit card rates remain high. These factors combined have led WalletHub to predict a further increase in credit card debt by $100 billion before the end of 2024.
Key Findings from WalletHub’s Credit Card Debt Survey:
- Financial stress. Credit card debt is causing 35 percent of Americans to feel extremely stressed.
- Everyday charges. People who carry debt use credit cards for everyday purchases 62 percent of the time. As a result, every purchase accrues interest.
- Savings struggles. Nearly one-third of Americans cannot save money because of their financial obligations.
- Non-essential debt. About 20 percent of Americans admit that most of their debt comes from non-essential expenses.
- BNPL concerns. “Buy now, pay later” loans harm the credit reports of over half of Americans.
- Recession fears. According to 35 percent of Americans, their credit card debt will not be fully paid off until there is a recession.
Here are practical strategies for reducing and eventually eliminating credit card debt.
1. Become Familiar With Your Debt Situation
To tackle credit card debt, you must first understand what you owe. For this, gather your credit card statements, taking note of the following:- Outstanding balance. The amount you owe your credit card(s) at the moment.
- Interest rate (APR). You can determine how much interest you’ll pay using the annual percentage rate.
- Minimum monthly payment. To avoid late fees, you need to pay the smallest amount possible.
2. Determine a Realistic Budget
A budget is one of the most critical steps to reducing debt. Maintain a monthly budget, dividing your expenses into essentials (e.g., rent, groceries) and non-essentials (e.g., dining out, entertainment). By creating a budget, you can identify each area where you can make savings to pay off your debt faster.An easy way to budget is to follow the 50/30/20 rule. You should allocate 50 percent of your income to needs, 30 percent to wants, and 20 percent to debt repayment and savings. Depending on how much debt you have, adjust these percentages to prioritize the payment of that debt.
With a budget, you can avoid overspending and see how much extra money you can devote to reducing your monthly credit card debt.
3. Don’t Just Pay the Minimum; Pay More
It may seem like a small win to make minimum payments, but it’s a long and expensive road to financial freedom. That’s why paying more than the minimum on your credit card can make a big difference.
Suppose you have a $5,000 credit card balance with a 20 percent interest rate. As Experian explains, if you pay the minimum monthly payment of $150, you will pay off the debt in four years and two months. Additionally, you will pay $2,359.09 in interest charges.
However, if you increase your monthly payment to 6 percent, or $300, you could pay off the debt in just one year and eight months. This would also save you $1,452.28 in interest, resulting in a savings of $906.81.
4. Set a Priority for Paying Off Your Debt
You can pay down your credit card balances in a variety of ways, depending on the type of debt you have:Debt Avalanche Method
Using the Debt Avalanche Method, you pay off the most expensive debt first and make the minimum payments on the rest. Using this approach, you can become debt-free faster and save money on interest.- Organize your debts by interest rate, starting with the ones with the highest rates.
- Don’t forget to allocate as much extra money as possible towards the highest rate card.
- You can then move on to the next highest loan once it has been paid off.
Debt Snowball Method
As part of the Debt Snowball Method, you pay off the smallest debts first, no matter their interest rates, while making the minimum payments on all the rest. Rather than focusing on building confidence and momentum, this strategy focuses on building momentum.- From smallest to largest, list your debts.
- Whenever possible, pay off the smallest debt.
- After it’s cleared, move on to the next smallest debt, applying the amount from the paid-off debt to the new debt.
5. Consolidate Your Debt
Using debt consolidation as a strategy can simplify your credit card debt and potentially reduce its cost. In this case, you take out a lower-rate loan or credit card to repay your existing high-interest debt.To consolidate debt, you can use the following methods:
- Using a balance transfer credit card. The interest rates on transferred balances are temporarily low or zero on these cards. It is possible, however, that the interest rate will increase substantially once the introductory period is over. There may also be fees associated with balance transfers.
- Debt consolidation loans. Sometimes, a personal loan can be used to pay off credit card balances in a lump sum. With a loan, you can manage repayments over a longer period of time because the interest rate is usually lower than with credit cards.
- Home equity loans. For homeowners, a home equity loan can provide a lump sum of cash to consolidate debt. However, using your home as collateral can be risky since you might lose your house if you can’t repay the loan.
- Interest rates. Make sure you compare the interest rates on your existing credit cards with those on the new loan or credit card. To save money, make sure the new rate is significantly lower.
- Fees. It is important to be aware of any fees associated with a balance transfer or origination. In addition, they may offset the savings that can be made from a lower interest rate.
- Repayment terms. Review the repayment terms of the new credit card or loan. Although longer repayment terms may result in lower monthly payments, they may also increase the overall cost of borrowing.
6. Get in Touch With Your Creditors
Don’t hesitate to contact your creditors if you need a lower interest rate. Moreover, if you’re underwater financially, explain your situation. Generally, credit card issuers will negotiate payment terms or offer hardship programs—this is especially true if you have a good payment history.Your issuer may offer a hardship program to provide relief if circumstances beyond your control, such as unemployment or illness, reduce your ability to make payments. However, even if you do not suffer from unemployment or illness, inflation can cause financial hardship. As reported in a NerdWallet survey, costs have increased by 20 percent since 2019, but median income has increased by only 12 percent.
Ultimately, negotiating with your issuer or accepting the terms of a hardship program could lead to lower interest rates or waived fees. Maybe these small changes will make a difference in your debt. And, even if they refuse, at least you were proactive.
7. Do Not Take on New Debt
To pay down credit card debt, you must stop accumulating more. To reduce temptation, you may want to cut up your credit cards or remove them from online payment options.- For everyday purchases, use cash or debit cards instead of credit cards. According to research, people tend to spend more when using credit cards than cash. For example, people using credit cards to purchase sporting event tickets spend 64 percent more than those who use cash.
- Unsubscribe from retailer emails that encourage impulse purchases.
- Once you’re debt-free, avoid using your credit card for non-emergency purchases.
8. Boost Your Income
If you struggle to make ends meet, you might want to consider ways to increase your income. After all, if you earn more, you can pay off your debt much faster.- Side hustles. You can earn extra money by freelancing, tutoring, dog walking, or driving for a ride-share service.
- Sell unwanted items. Get rid of items you don’t need by selling them on eBay, Craigslist, or Facebook Marketplace.
- Ask for a raise. Depending on your employment status, you may be able to negotiate for a raise or seek a promotion.
9. If Needed, Seek Professional Assistance
An experienced credit counselor may be able to help you if your debt feels insurmountable. A non-profit credit counseling agency can assist you in creating a debt management plan (DMP) and negotiating with creditors on your behalf. However, make sure you choose an agency accredited by the National Foundation for Credit Counseling (NFCC).With a DMP, you consolidate your debt into a single monthly payment with potentially lower interest rates. It may, however, have a short-term impact on your credit score.
10. Track Your Progress and Keep Yourself Motivated
Getting rid of credit card debt can be long, but staying motivated is key. As such, use a debt repayment tracker or app to celebrate your small victories.Remember why you’re doing this-whether it’s for financial freedom, peace of mind, or future goals to remain focused.
The Bottom Line
Despite credit card debt’s overwhelming nature, you can still regain control over your finances without resorting to debt settlement. When choosing a method, you should consider your financial situation, your goals, and your personal preferences.Remember, becoming debt-free often takes patience, commitment, and a combination of strategies.
By John Rampton
The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
