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Few things cause more financial distress and anxiety than a large pile of high-interest credit card debt.
Millions of Americans of all income levels have large balances on credit cards that charge very high interest rates. According to Federal Reserve data, the average APR on cards issued by commercial banks was 16.45% late last year, and business card fees can be well over 20%.
While card balances declined significantly from a peak of $927 billion in late 2019, they remain high at $841 billion at the end of the first quarter and could continue to grow.
“Credit card debt continues to be a big problem,” said Rachel Gittleman, financial services outreach manager at the Consumer Federation of America. “There were some repayments early in the pandemic, but I think the balances could pick up again as the cost of living increases.”
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If you’re struggling to make minimum payments on credit card balances, there are options that can help you reduce the amount owed and/or minimize the interest you pay on the debt.
However, there is no magic recipe for high debt. The solution begins with changing your own behavior.
“The only long-term solution is to correct your spending habits,” said Summer Red, financial counselor and senior education manager at the Association for Financial Counseling and Planning Education. “Nothing will succeed unless you stick to a reduced spending plan.
“You must bring your expenses below your income level.”
A $10,000 credit card balance at 20% interest will cost you $167 a month, and that just makes sure your balance doesn’t grow. To start paying off debt, you need to do more.
There are two key aspects to taking control of your spending; Don’t use your credit cards and create a sustainable budget that includes paying card balances.
On the first page, Red suggests people cut up all but one of their credit cards. Do not cancel the accounts as your credit will suffer
If you’re still itching to use your card, pop it in the freezer. “It takes about three hours for a credit card to be thawed and ready to use,” Red said. “It gives you time to think about your purchases.” Only use the card for purchases that you can pay for at the end of the month.
Working with a certified financial advisor can help you figure out your best options.
Rachel Gittleman
Financial Services Outreach Manager at the Consumer Federation of America
On the second front, you have to make some sacrifices to start reducing debt. That could mean downsizing a house or apartment, selling a car, or cooking more at home. It’s important that you create a budget that lists all of your expenses and income to determine where you can cut expenses and pay down debt.
Gittleman recommends getting help. “Every consumer’s financial situation is different,” she said. “They have different debts, different spending habits, and different items of value to them.
“Working with a certified financial advisor can help you figure out your best options.”
When it comes to debt repayment strategies, there are two basic repayment models. The first – called the snowball method – pays off the smallest debt balances first to give consumers some momentum. The idea is to pay the minimum amounts on all debt balances to avoid late fees or higher interest, and then apply the rest to your smallest debt balances.
If you cash out this balance, switch to the next smaller balance. “The motivation to pay off debt is very valuable,” Red said. “Seeing that can be a powerful incentive for people.”
If you don’t need the positive reinforcement, you can focus on the debt with the highest interest rate first. In the long term, you save the most interest with the so-called avalanche method – from the highest to the lowest interest rate.
While changing your spending behavior is the only thing that will get you out of a debt hole in the long term, there are other steps you can consider to reduce the amount you owe or the interest you’re being charged. Here are four measures to consider:
- Call your credit card company to see if you can reduce the amount owed or lower the interest rate on the debt. Do not lead with the possibility of filing personal bankruptcy, but explain that you cannot pay your current balance under the existing conditions. Credit card companies want to get paid and may offer a facility to make sure they do.
- Credit card balance transfers to other cards that don’t offer interest for a period of time can make sense, but they’re not free. They can offer 0% interest for a six or 12 month period, but typically charge 3% to 4% of the balance upfront. If you don’t pay off the debt during this grace period, you won’t be much better off in the end.
- Consolidating your high-yield credit card debt and paying it off with a cheaper personal loan can drastically reduce your interest expense. Most likely it would have to be a home equity loan if your credit profile is bad. The downside is that if you don’t get your spending under control, your home could be in jeopardy down the road.
- If your debt is simply too high — very often due to medical expenses, which are a key factor in 60% of personal bankruptcies — bankruptcy may be your best option. If most of your debts are unsecured, such as B. credit card balances and medical bills, bankruptcy can give you a fresh start. Talk to a financial advisor and bankruptcy attorney before taking this step.
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