Americans have an estimated $931 billion in credit card debt as of 2017, according to NerdWallet. The reasons behind that stunning statistic aren’t as clear as glass. It isn’t just because Americans are living beyond their means.
The 2017 American Household Credit Card Debt Study revealed that putting medical expenses on credit cards, and cost of living outpacing income are major factors in Americans going into credit card debt. For many people, credit card debt brings stress, even shame. But, it doesn’t have to.
Look at Your Personal Credit Card Debt
To lower your personal debt, there are a couple of different approaches that you can take. Before you settle into a plan, you have to understand what you’re looking at. First, write down the total debt, minimum payments required, due dates, and the interest rates on each credit card. Use this list to choose a repayment method that you feel can work for you.
Understanding Debt Repayment Methods
The most common debt repayment structures look at either total debt or at interest rates. Both typically work the same way but flip the priority.
The debt avalanche method compares interest rates. With this method, you focus most of your repayment on the debt with the highest interest rate first, then move on to the next highest interest rate. This method suggests that you pay more than your minimum on the debt with the highest rate, and at least the minimum payments on the others. When you get the one with the highest interest rate paid off, you focus on the next.
The debt snowball method, popularized by Dave Ramsey, suggests that you start with the lowest total debt. Pay those off, then add the payment amount from a paid-off card to the minimum payment of the next, until that is paid, and so on.
Choose the Right Credit Card Debt Repayment Strategy
Forbes magazine compared of the two main methods in structured debt repayment. The authors found that if you stayed consistent and payment amounts were equal in both methods, you’d pay off all of your debts in the same amount of time. However, the avalanche method could save you more money because you’d start with the highest interest rate and work to the lowest – saving the extra money.
The problem, they noted, comes into play with motivation. With the snowball method, because you’re seeing smaller balances paid off more quickly, it can be easier to stick with the plan. The downside is, you’d end up paying extra interest on larger debts.
Look at the big picture – where you are, where you want to go, and when you want to get there. That will help you decide which strategy will work best.
Steps to Get Control of Your Credit Card Debt
There are a variety of steps you can take, and advice from many different sources and professionals. Those tips often include the following:
- Prioritize Your Debts. Prioritize your debt before you create your budget. This way you can determine your top debt repayment, saving, and spending priorities.
- Stick to a Budget. A common objection to a budget is that it feels forced and makes things harder. The budget doesn’t tell you what to do. Rather, it tells you what your priorities are and allocates your money to those things.
- Pay Bills on Time. Paying your bills on time, even the minimum payments, is key to getting a handle on debt. If you get overwhelmed and avoid paying at all, you’ll incur penalties, your interest rate will skyrocket, and you’ll just get deeper in the hole.
- Try to Negotiate a Lower Interest Rate. If you have a strong history of on-time payments, your credit card company may be willing to lower your interest rate. This can help you to avoid creating more debt as you pay off what you have.
- Don’t Go Further into Debt. As many financial gurus note, you won’t get out of debt if you keep creating it. There are many ways to reduce the temptation to spend, like cutting up your credit cards (or at least making it harder to use them). You can even try freezing your credit with the credit bureaus. This step is usually one people don’t consider unless they’ve had their identity stolen, but it could work. Paying cash for items can help you to slow down and keep an eye on your financial goals.
Reducing credit card debt takes planning and patience. You might choose to enlist the help of a professional. However, you can overcome debt and pay off those credit cards!