One of the hallmarks of the COVID-19 era has been economic tumult — and recent credit card spending trends reflect this. While the average card balance has increased steadily for years now, it actually fell off during the pandemic, leaving the average American adult with a balance of $5,315 at the end of 2020 — nearly $1,000 less than in 2019. Still, despite that drop, more than half of US adults added to their card balances — yet another example of the unequal distribution of financial hardship we have faced since March 2020.
And, for now, the decline of credit card debt has paused, with $17 billion added to our national balance during the second quarter of 2021. As such, here are some best practices for curbing your spending and hatching a practical, actionable plan to pay off your credit card balances.
Figure out how you got into credit card debt
One of the most important steps to get a handle on credit card debt is to understand what got you into debt in the first place. Otherwise, you may end up in the same boat soon after paying off your current card balances.
Brittney Castro, CFP for the Mint financial app, believes bad habits often stem from a lack of financial literacy. “College students are often offered a credit card on campus or apply for multiple credit cards online, thinking they are more or less free money,” she says. “What they aren’t told is if the balance is not paid off in full every month, they will be charged the credit card’s APR (interest rate) on their balance (the money spent using the card), which can sometimes be as high as 29.99%. This can quickly spiral into a debt balloon.”
To avoid this situation, it’s important to know how credit cards work. Credit comes in handy in many situations, but the convenience could cost you. The longer you carry a balance, the more you will pay in interest charges. “Proper and smart credit card habits include making payments on time and paying off the full balance every month,” she says. “In other words, only charge it if you can afford it.”
Build a budget
There are plenty of reasons why you may be in over your head with credit cards. You may not be aware of how much you actually spend. Or you had an emergency, but no emergency savings fund to draw on, and paid with your card instead. Regardless of the reason, knowing how much money comes in — and goes out — is essential to taking control of your finances. Creating a budget to rein in spending and pay down your debt is crucial.
Plain and simple, credit card debt is the result of spending more than you can afford to pay back. A good budget could take some time to set up, but will ultimately act as a visual tracker of your financial status. To build a budget, create an income category by adding up all the money that comes in each month. Then categorize and add up all your expenses. Budgeting apps do most of the heavy lifting. Some of the most popular are:
- Personal Capital
- Goodbudget
- Mint
- PocketGuard
- YNAB (You Need a Budget)
Once you’ve set up a budget, ask yourself the following questions:
- Are my expenses more than my income? If you’re spending more than you make, you have two options: cut back on your expenses or pick up extra hours at work (or a side hustle) to bump up your earnings.
- Am I setting aside any money towards an emergency fund? Growing a rainy day fund could help you avoid turning to credit cards in an emergency.
- Could I lower my spending? Take a look at your spending for ways to cut back, such as dining out less or canceling some subscriptions. Send the money you save towards paying off your credit cards faster.
- How much do I owe? Figure out the current balances on each of your credit cards to decide how much you owe and how long you’ll need to pay them off.
- How much interest am I paying? Determine how much of your card payments go towards interest and take note of the cards with the highest interest rates.
Choose a debt payoff strategy
Once you’ve made a budget and have an idea of how much credit card debt you need to pay off, it’s time to start whittling away at it. There are a few ways you could approach debt payoff. Some of the most popular methods to get out of credit card debt are:
The avalanche method
If you have more than one credit card to pay off, the avalanche method saves you the most money, since you’re paying off your most expensive debt first. Start by allocating the most money towards the credit card with the highest interest rate and make sure you’re paying at least the minimum on all the other cards. Once you’ve paid the balance off on the highest-interest credit card, focus the funds on the next-highest-interest card and so on.
The snowball method
The opposite of the avalanche method is the snowball method. It uses momentum to keep your debt payment plan going. Pay off the smallest balance first and build on your success until you pay off the card with the highest balance. Hide your cards as you pay them off to avoid the temptation of spending again.
Pay more than the minimum
A general way to get out of credit card debt is to pay more than the minimum for your card each month. Otherwise, it could take years to get rid of a balance. For example, paying the monthly minimum of a $5,000 balance at 17% APR can take ten years and cost a total of $10,000.
In addition, carrying high balances could significantly affect your credit score since credit utilization weighs heavily. Carma Peters, CEO of Michigan Legacy Credit Union, says, “The largest negative impact on your credit score is keeping a balance that exceeds more than 50% of your limit.” The sooner you pay down your balance, the faster you can rebuild your credit.
Balance transfer card
Certain credit cards offer enticing signup bonuses such as a low introductory rate for balance transfers. If you have good credit, you may qualify for a card offering balance transfers at 0% interest for 12 months or longer. Taking advantage of a balance transfer can buy you time to pay off a high balance for free. Just make sure you’re able to pay the balance in full before the term ends, or you could get hit with interest for the remaining amount, or worse, the full transferred balance.
Debt consolidation loan
If you’re juggling several credit cards, the best plan may be to take out a personal loan for the total you owe on all credit cards. You’re essentially consolidating all your debt into one loan to save considerably on interest.
The average credit card interest rate hovers around 16%. In comparison, a debt consolidation loan’s APR is around 6%. That’s big savings. However, your credit score could affect your interest rate — and the chances of getting approved for a loan.
Debt counseling program
Debt counselors can work with you on creating a repayment plan, as well as give you advice on how to manage your finances. Keep in mind that most debt counselors are fee-based. Depending on your financial situation, it may be better to DIY debt repayment and apply the fee you’d pay a counselor towards your credit card debt.
Hardship assistance programs
If you’re struggling with the bills and experiencing financial hardship, contact the card issuer. Creditors typically have hardship assistance programs available that could waive certain fees, lower your interest rate or defer your payments for a few months.
Consider debt settlement or bankruptcy
Debt settlement and bankruptcy are two additional ways to get out of credit card debt. The trouble is, they will likely affect your credit score. Brian Dechesare, a former banker and founder of Breaking Into Wall Street, warns that these methods should be used as a last resort. “You should only consider both in extreme situations when you’ve exhausted all other options and can’t make ends meet to pay,” he says.
Debt settlement
Contacting the creditor to negotiate a lower balance can help you get out of credit card debt if you have a larger balance. According to Dechesare, “Most lenders will only consider a debt settlement if the debt is over $10K, so for smaller debts, you may be better off consolidating or paying it off.”
You could get as much as half forgiven, but it comes with lasting consequences. Dechesare says, “debt settlement could drop your credit score by 100 points and will stay on your record for seven years.”
Bankruptcy
For extreme financial hardship, bankruptcy can help you wipe your slate clean. The moment you file, you’ll get instant relief from creditors. If the court grants you a bankruptcy discharge, you’ll no longer be obligated to pay your debts. However, there are drawbacks worth noting. You’ll be required to attend credit counseling before filing. It can be expensive when you account for filing fees and a bankruptcy attorney. If your debt is discharged, the bankruptcy will be public record and remain on your credit report for seven years, as well as send your credit score plummeting.
Review your finances regularly and set goals
Once you’re out of debt or on your way to being credit card debt-free, it’s important to establish healthy financial habits to keep you from slipping. Sticking to your budget will be vital. You may want to do an annual review of your spending and make budget adjustments. In addition, prepare for unexpected expenses by putting money into an emergency savings account. Lastly, set goals and stick to them. Saving a down payment for a house or establishing a retirement fund is a great way to keep your eye on the prize and your spending in check.