Managing Credit Card Debt

Many of the things we love about credit cards — convenience, safety, tracking, rewards — are the same qualities that tempt us into overuse. Now comes the aha! moment when we must confront our credit card debt, sponsored by the staggering 16+% interest rate carryover balances typically accrue.

Effectively managing credit card debt can be daunting. But with proper budgeting (including responsible spending), attention to due dates, having (and adhering to) a strategy, paying more than the minimum due, and maybe considering consolidation or discussions with a credit counselor, you can conquer credit card debt.

Know this going in: Plenty of folks are in the too much credit card debt boat. We’re Americans, and one of the things we’re best at is spending money we haven’t earned. Check it out:

Before the coronavirus pandemic, Americans piled on credit card debt as though it were a race to the top of Mount Everest. In November 2017, we surged past the previous peak of $1.02 trillion set in May 2008 and, for 28 months, we scarcely looked back. By the end of February, we’d tacked on another $98 billion, owing credit card issuers a record $1.1 trillion.

Then COVID-19 happened. In March, the economy was thrown in a deep freeze — one of those scary old Kelvinators that open only from outside — and, even as millions of Americans were laid off or furloughed, something weird happened: Credit card debt plunged. On a line graph, it resembles a cliff right out of a Road Runner cartoon: straight down.

In June, the Federal Reserve found that during March and April, revolving balances plummeted at an annualized rate of 65% — the biggest fall in the report’s 52-year history — to $1.02 trillion, wiping out two full years of debt pile-on. Perhaps we followed personal finance advisers’ advice and spent federal Cares Act checks on paying down debt.

Of course, there’s macroeconomics, and there’s what’s going on in your household finances. At the same time overall debt was plunging, the average credit card debt held by consumers was $6,354. For consumers carrying balances (58% of all active card accounts), that average debt was a staggering $9,333.

As we mentioned, it’s a big boat. That doesn’t mean you have to stay on until it finds an iceberg.

Tips to Manage and Reduce Credit Card Debt

Getting on top of your credit card debt generally relies on a three-pronged attack involving arresting spending habits, improving saving habits, and getting serious about a debt-elimination strategy.

In June, the average interest rate on credit card balances was 16.01%. That’s actually a favorable rate historically, but it’s enormous when you consider the Federal Reserve plans to keep lending rates to banks at nearly zero through 2022; 30-year mortgage rates are stuck at close to 3%; and unsecured personal loans start around 6%.

If you’re the average balance-carrier, hacking away at nearly $10,000 in credit card debt at 16% will threaten your ability to buy a house, save for college, feather a retirement nest egg, invest, or even cope with day-to-day expenses.

Continue to Pay Your Credit Card Bills on Time

As you launch your plan to whittle down credit card debt, your primary goal is simple: Pay on time. Not just some of your credit card bills, and not just most of the time. All of the bills, all of the time.

The fine print in your credit card agreement (which you probably didn’t read) gives the issuer lots of ammunition to make your financial life miserable with a single late payment. In addition to dinging your credit score with reports to the Big Three (Experian, TransAmerica, Equifax), card issuers can hit you with late fees, higher interest rates, and credit-limit reductions.

Bottom line: DON’T BE LATE!

Practice Responsible Spending

Once you have your financial calendar mapped out so you’ll never miss making at least the monthly minimum payments on time, move on to creating a climate of financial responsibility. Learn to live within your means and look for opportunities to cut your expenses.

This begins with evaluating your current earnings and your spending habits. It also may mean making adjustments; you may have to trim spending, unless you can immediately increase your income.

• Use credit wisely — If you’re thinking of putting something on a credit card and you cannot pay it off in three months, think again.
• Develop a realistic budget and stick to it — Failure to create a monthly budget is a recipe for getting overwhelmed by debt. It may be eye-opening to track your purchases.
• Avoid impulse buying — You can easily wreck a budget with just a handful of impulse purchases each month. Need a little help sticking to a shopping list? Leave your credit cards at home; take only the cash you have available to spend.
• Tighten your extravagances — Skip the coffee shop; bring a mug from home. Don’t let magazine covers, popup ads, or shop windows trigger your fashion impulse.
• Examine your bills — See if you can cut back on cable, internet, and streaming choices. Review all the riders on your insurance policies.
• Look for deals on groceries — Wait for sales and use coupons. Consider less expensive store brands at the grocery store.
• Take good care of your possessions — Proper maintenance extends the life of the things you rely on and helps you avoid big-dollar repair jobs.

Choose a Credit Card Payment Strategy

Ready to pay off credit card debt? Excellent. First: Avoid setting yourself up for failure. Instead, settle on a SMART strategy, one that is Specific, Measurable, Attainable, Realistic, and Time-bound.

Next, place reminders of your ultimate goal in conspicuous places. A picture of the next house. That river cruise through Europe. The kids’ dream college. Confronting the larger ambition each time you’re tempted to charge can help you stay on schedule.

Now, get a strategy (or two) to achieve your larger SMART goal. Among the most successful methods are paying more than the minimum, the debt snowball, the debt avalanche, and automation.

• Paying more than the minimum means exactly that. There’s more on this approach below.
• The debt snowball method involves paying off the lowest balance first (and keeping it paid off), then, motivated by your sense of achievement, rolling the amount freed up into the next smallest balance. As your confidence grows, so will the amount you can apply to each successive debt balance, until, like a snowball rolling down a hill, you’re using larger and larger payments to eliminate your debt.
• The debt avalanche is a dubiously named variation on the debt snowball. Instead of attacking the lowest balance, you target the balance with the highest interest rate. What the debt avalanche lacks in instant gratification it makes up for by being more cost-effective and paying off credit card debt faster.
• Automating your payments is a simple way to make certain you stay current on your debts, thus avoiding late fees, penalty interest, and bad reports to the credit monitors. If you’re pursuing the snowball or avalanche approach, you’ll have to be somewhat more alert to the shifting nature of your debts. … Also, keep sharp watch on your bank balance; overdraft fees can be more punishing than late penalties.

Make Sure You Have an Emergency Fund

If the response to the COVID-19 pandemic taught us anything, it’s that robust economies can turn on a dime. And when that happens, even great, reliable, dependable, productive workers — you, for instance — can find themselves without reliable income in an emergency situation.

Maybe when coronavirus hit, you had reserves typical of many Americans: i.e., next to nothing. That’s a hard lesson, but it’s also one from which you can gain.

Looking ahead, your budget should include room to build an emergency fund, one, ideally, equal to six months of expenses. Take it on with determination, patience, and steadiness, one small direct deposit at a time.

This way, if you’re ever again unemployed with credit card debt, you won’t suffer instant panic. You’ll have prepared.

Pay More Than Your Minimum Payment

The minimum monthly payment listed on your statement is the lowest amount you can pay on your account and remain in good standing with the issuer.

Usually calculated as a small percentage of your total credit balance — it’s almost like a check-in fee, to make sure you’re still there — the monthly minimum is the least you can pay and avoid late fees and interest penalties, as well as maintain a good repayment history.

That’s nice, but interest never sleeps. It’s always (always, always) accruing on your balance. Right now, as you read these words, up it went. Paying only the minimum will keep you on the hook for the maximum amount of time.

Strive to pay any amount more than the monthly minimum. If you can — and if you keep it up — you’ll lower the long-term cost of your credit card debt.

One novel, but effective, approach to conquer credit card debt one bite at a time: Target specific purchases that appear on your bill. Camping equipment from Dick’s Sporting Goods. All your lattes in a month. That gift for your colleague’s daughter’s wedding shower. Those Johnston-Murphys from Amazon.

Research discovered consumers pay 15% more toward their debt when they scan their statements and choose specific purchases for repayment. Subjects said repayment-by-purchase reduces the sense that they’re up against a limitless sea of debts; instead they feel they’re making actual progress with each purchase paid off.

Consider Consolidating Your Credit Card Debt

We mentioned the historically low interest rate climate above. One way to take advantage: explore debt consolidation programs.

If you can qualify for a low-interest personal loan — from a bank, credit union, or credible peer-to-peer source — you’ll benefit from a single, likely lower overall, payment. And with your new responsible spending discipline, you’ll be out of credit card debt far sooner, with much less paid to interest.

Work with Creditors to Lower Your Interest Rate

Does the following describe you?

• You’re well-established with your credit card issuer(s).
• Your payments are punctual and at least the minimum.
• You don’t breach your credit limit.

If all of that is true, you may be able to lower your interest rates simply by asking your card issuers to cut you a break.

Credit Card Terms to Know

Credit-card speak involves lots of specialized nomenclature that rarely comes up in regular conversation. But if you’re going to master your credit card debt, you need to know the lingo. Here’s a primer.

• Annual fee — A yearly fee issuers charge for the privilege and perks of using their card. Sometimes called a “membership” or “participation” fee. Some annual fees can be breathtaking; it’s up to you to decide whether the benefits are worth it.
• Annual percentage rate (APR) — The yearly interest rate, including costs and fees paid to make the loan. The calculation equals the periodic rate multiplied by the number of billing periods in a year. Separate APRs may be shown for balance transfers, cash advances, or other bonus offers.
• Average daily balance — Calculated by adding each day’s balance and dividing the total by the number of days in a billing cycle. That result is multiplied by the card’s monthly periodic rate (the APR divided by 12).
• Balance transfer — Shifting an unpaid balance from one credit card to another, often in search of lower interest rates offered by card issuers advertising ultra-low teaser rates.
• Credit limit — The maximum amount you’re allowed to borrow on your card. Some issuers will block charges above the limit; others will approve them but charge an over-the-limit fee.
• Finance charge — The charge for using a credit card and carrying a balance.
• Grace period — The interest-free period allowed between the date of a transaction and the billing date for zero-balance cardholders. Not offered by all card issuers.
• Late fee — The fee charged by the card issuer for missed payments, often as much as $35 for each incident.
• Minimum payment — The minimum amount you must pay, on time, to keep your account in good standing. Usually equal to 2% of the outstanding balance.
• Over-limit fee — The fee charged for exceeding the credit limit on your card, usually in the ballpark of $35.

Get Help Managing Credit Card Debt

Tumbling headlong into a pit of credit card debt often is a one-person job. Climbing out can require help — more help, even, than you can get from a financial advice radio show or even an article on the internet.

If you’re someone who can benefit from getting coached up, make an appointment with a nonprofit credit counseling agency. A credit counseling session will help evaluate your situation and guide you toward a strategy to conquer your debt.

In some circumstances, especially for consumers who want immediate stress relief, the discipline of a structured plan, and a date certain they’ll be debt free, the counselor may recommend a debt management plan.

Entering a DMP has plenty of upside, from putting the solution to your debt trouble on auto-pilot, getting a break on your interest rates, and in all likelihood a once-a-month payment that’s lower than the combination of your current minimums.