How to Pay Off Credit Card Debt
Thanks to inflation, it’s harder than ever to pay off credit card debt. You can shake your fist at the sky or the Federal Reserve or the pandemic policies that have made everything cost more.
The bottom line is that Americans are piling up debt at the fastest rate since the credit card was invented.
“As inflation rose to near 40-year high levels, many consumers have used credit to help manage their budgets, leading to record- or near-record high balances,” Michele Raneri, vice president of U.S. research and consulting at TransUnion, said in the company’s May 2023 report.
Total credit card debt is $986 billion. That’s a 17% jump in one year. The average American carries $5,733 in credit card debt, and only 35% are paying off that balance every month.
The average credit card interest rate has soared to 20.9%. That’s the highest since the Fed began tracking annual percentage rates in 1994.
That’s the bad news. The good news is that all of the bad news doesn’t have to drive you crazy or into the poor house. Here’s what you need to know.
The Importance of Paying Off Credit Card Debt
Let’s put this in real inflationary terms. If you owed the aforementioned average of 5,733 in 2022, your total interest payments would have been $1,003.
One year later, it would be $1,330.
That’s $330 hard-earned dollars essentially spent on nothing. Then there are the benefits of having a good credit score.
Carrying a hefty monthly balance damages your credit because 30% of your credit score is based on credit utilization. Ideally, you won’t rack up charges of more than 30% of your credit.
So, if your total credit limit is $10,000, your total balance should not exceed $3,000. If it’s higher than 30%, it indicates to potential lenders that you’re having trouble managing your financial responsibilities. You’ll risk being turned down for a loan or paying higher interest rates if you do get one.
So, how do you increase your credit score? Paying your bills on time and lowering your debt burden are the two big ones, and there are other tricks of the trade that are worth researching as well.
8 Tips to Manage and Reduce Credit Card Debt
Eliminating credit card debt depends on three things: spending habits, saving habits and determination. That last one will make the following steps more manageable.
1. Continue to Pay Your Credit Card Bills on Time
Paying on time means no late fees and other charges. Paying the entire balance on time means you won’t be socked with exorbitant interest charges.
The fine print in your credit card agreement gives the issuer a lot of ammunition to make your life miserable if you’re late on a payment. That will eventually show up on your credit reports at the three major credit bureaus (TransAmerica, Equifax and Experian).
2. Practice Responsible Spending
Learn to live within your means and look for ways to cut your expenses.
- Use credit wisely: If you’re thinking about charging something you can’t pay off in three months, think again.
- Develop a realistic budget and stick to it: Write down your monthly income and expenses, then track your spending.
- Avoid impulse buying: Stick to your shopping list. Leave your credit card at home and carry only the amount of cash you’ve budgeted for your shopping trip.
- Tighten your extravagances: Make coffee at home and skip that $5.29 Blond Espresso Roast at Starbucks. Don’t let magazine covers, popup ads, shop windows or Kardashians trigger your fashion spending impulse.
- Examine your bills: See if you can cut back on cable, internet, and streaming platforms. Review your insurance policies for possible savings.
- Look for grocery deals: Wait for sales and use coupons. Consider buying less expensive store brands. They’re often as good as the name-brand products.
- Take care of your possessions: Proper maintenance extends the life of things you rely on and helps you avoid big-dollar repair bills.
3. Choose a Credit Card Payment Strategy
If you’re serious about paying off credit cards, it means making more than the minimum monthly payment. There are three proven methods to do that.
- Debt Snowball: This involves paying off the card with the lowest interest rate first. That motivates you to pay off the next-lowest, then the next, and it snowballs until you’ve paid off all your debt.
- Debt Avalanche: This is the opposite approach. Attack the card with the highest interest rate first. Work down from there. It makes more mathematical sense than the snowball, but it lacks the quick gratification that some consumers need.
- Automating Your Payments: It’s a simple way to stay current on your bills, thus avoiding late fees, penalty interest and bad reports to credit monitors. Just keep a close watch on your bank balance. Overdraft fees can be worse than late penalties.
4. Make Sure You Have an Emergency Fund
Life happens. People get laid off, cars break down, kids need stitches, the air conditioning unit goes on the fritz. They aren’t regular expenses, but unexpected bills always seem to always pop up.
To be prepared, try to build an emergency fund. Ideally, it should equal six months of expenses, in case you find yourself out of work. That will keep you from having to slap down that expense on your credit card.
5. Pay More Than Your Minimum Payment
Credit card companies love it when customers pay the lowest amount required to avoid late fees. It barely reduces the overall balance and the interest charge. You’ll do yourself a huge financial favor by paying as much as you can every month.
A good approach is to target specific purchases on your bill. Camping equipment from Dick’s Sporting Goods. The lawn mower from Home Depot. The Hunter Biden painting.
Whatever the item, research shows consumers pay 15% more when they scan their statements and choose specific purchases to repay.
6. Consolidate or Transfer Your Credit Card Debt
Consider rolling all your high-interest bills into one with a lower overall interest rate. Such debt consolidation programs have helped countless consumers conquer their debt problems.
Consolidating with a low-interest personal loan from a bank, credit union or credible peer-to-peer source will lower your overall bill and help you manage multiple credit card payments.
You could also take advantage of balance-transfer cards. Get a credit card with an extremely low (probably zero) introductory rate, then transfer the balances from your other cards to the new one.
But be aware, there’s usually a transfer fee of at least 3%. And pay off the bill before the introductory rate expires (usually 12 -18 months), or you’ll get hammered by the inflated regular rate.
7. 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 always on time.
- You don’t go over your credit limit.
If all that’s true, contact your card issuers and ask them to lower your interest rates. They just might.
8. Increase Your Income
Captain Obvious says the more money you make, the more money you’ll have to pay off your debts. There are plenty of side jobs that will conjure up more cash.
- Get a second job.
- Ask for a raise.
- Take on more hours at work.
- Look for temporary or odd jobs (handyman, babysitting, yard work) on job boards.
- Sell personal belongings you no longer use or need.
- Make a side business out of something you’re good at.
Credit Card Terms to Know
If you’re going to master your credit card debt, you need to understand credit card language. Here’s the lingo.
- Annual Fee: Issuers charge a yearly fee for the privilege of using their cards. It’s sometimes called a “membership” or “participation” fee.
- 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. Separate APRs may be shown for balance transfers, cash advances and other bonus offers.
- Average Daily Balance: Calculated by adding each day’s balance and dividing it by the total number of days in the billing cycle. The result is multiplied by the card’s monthly rate.
- Balance Transfer: Shifting an unpaid balance from one credit card to another.
- Credit Limit: The maximum amount you’re allowed to borrow on your card. Some issuers block excess charges, while others charge over-the-limit fees.
- Finance Charge: The charge for using a credit card and carrying a balance.
- Grace Period: The interest-free period allowed between the date of the purchase and the billing date for zero-interest cardholders. Not all card issuers offer it.
- Late Fee: The fee charged for missed payments.
- Minimum Payment: The smallest amount you must pay on time, usually 2% of the total balance.
- Over-Limit Fee: The fee charged for exceeding your spending limit.
Should You Close Your Credit Card After Paying It Off?
If you pay off your card, you might want to chop it into little pieces and toss them in the air while doing a victory dance. Resist that urge.
Canceling your card will lower your credit utilization ratio, which makes up 30% of your credit score. A credit card is also handy in an emergency when you don’t have cash.
You have to use them occasionally to keep the accounts active. So, buy something cheap and pay it off immediately. If you don’t want to pay the annual fee, switch to a card with no fee.
Get Help Managing Credit Card Debt
Getting into debt is often a one-person job. Getting out might require help.
If you need some help, contact a nonprofit agency for a credit counseling session. A certified counselor will evaluate your situation and devise a strategy that could get you out of credit card prison.
It could be through a debt management plan. Counselors work with your creditors to lower interest rates and monthly payments. You make one monthly payment to the nonprofit, and it’s lower than the combination of your current payments.
Inflation might slow down, but it’s not going to go away. Keep in mind that you can still pay off your debts with planning and determination. That beats just shaking your fist at the sky.
» Learn More: How to Pay Off $40,000 in Credit Card Debt
About The Author
Tom Jackson focuses on writing about debt solutions for consumers struggling to make ends meet. His background includes time as a columnist for newspapers in Washington D.C., Tampa and Sacramento, Calif., where he reported and commented on everything from city and state budgets to the marketing of local businesses and how the business of professional sports impacts a city. Along the way, he has racked up state and national awards for writing, editing and design. Tom’s blogging on the 2016 election won a pair of top honors from the Florida Press Club. A University of Florida alumnus, St. Louis Cardinals fan and eager-if-haphazard golfer, Tom splits time between Tampa and Cashiers, N.C., with his wife of 40 years, college-age son, and Spencer, a yappy Shetland sheepdog.
- N.A. (2023 May 11) Credit Card and Unsecured Personal Loan Balances Remain at or Near-Record Levels as Consumers Navigate Challenging Economic Climate. Retrieved from https://newsroom.transunion.com/q1-2023-ciir/
- Schulzx, M. (2023, July 10) 2023 Credit Card Debt Statistics. Retrieved from https://www.lendingtree.com/credit-cards/credit-card-debt-statistics/
- Dickler, J. (2023 June 20) Average Credit Card Rate is 20.69%, but 0% offers are still available, experts say. Retrieved from https://www.cnbc.com/2023/06/20/credit-card-rates-stand-at-a-record-20point69percent.html
- Brooks, K. (2023 May 15) Americans continue to pile up credit card debt, edging close to $1 trillion. Retrieved from https://www.cbsnews.com/news/credit-card-debt-total-us-data-2023/