Wondering why everyone's always talking about credit card debt? It's become quite the pickle to pay off! In this article, we'll explore why this problem is growing and arm you with some savvy strategies to wipe out that debt. Get set to master your finances!
Why Payoff of Credit Card Debt Is Hard Now
Economic Uncertainty
In recent years, economic uncertainty has become a common theme. Factors like the global pandemic, job market fluctuations, and inflation have left many individuals with less financial stability. When the future is uncertain, paying down credit card debt can take a backseat to immediate financial concerns.
The Rising Tide of Credit Card APRs
Credit card interest rates are gradually rising. Even a slight increase in the interest rate can substantially increase the total amount you owe, making it more challenging to pay off your debt. This year, 2023, credit card debt exceeded $1 trillion for the first time. Borrowers aren't scared off by interest rates that are the highest they've been in almost 40 years. Bankrate said that this week's average APR was 20.71%.
Apart from that, LendingTree found that store credit cards have even higher rates, with APRs that are usually 30% or more.
The fact is that the present-day credit card rates are the highest they’ve been in a long time, and they will increase in the future.
High-interest rates can make it harder for people with credit card debt to pay off their amounts quickly. Instead, people who only pay the bare minimum might see their amounts grow.
There are also signs that people with credit cards are having a harder time paying off their debt. The Fed says the credit card delinquency rate hit 2.77% in the second quarter of 2023. This was the highest number since 2012 when it was 2.82%.
A separate study from J.D. Power found that 51% of credit card users couldn't pay off their total amount every month and let the debt rollover from one month to the next, which added interest. That was the first time the number of Americans carrying debt was higher than the number of people who paid their bills in full.
The Minimum Payment Cycle
Credit card companies typically require only a minimum payment each month. While this may seem manageable, it often covers mostly interest and very little principal. This leads to a cycle of debt where you never make significant progress in paying down your balance.
High Cost of Living
The cost of living, including housing, healthcare, and education, has increased. With these rising expenses, it can be challenging to allocate funds toward credit card debt repayment.
Temptation of Easy Credit
The accessibility of easy credit and the prevalence of credit card offers can lead to increased credit card usage and, consequently, higher debt levels.
Control Spending Habits
Not controlling your spending habits, even if there are pending debts, can lead to problems. Some individuals have difficulty paying off their credit card debts because they haven't changed their spending habits.
If there are no new revenue streams and you still have pending debts, you should at least change your spending habits. It's better to control them and practice responsible spending. My advice is to allocate your earnings properly and include debt payments as a separate category.
Mark Damsgaard, Founder and Head of Client Advisory, Global Residence Index
What You Can Do About It
While the challenges of paying off credit card debt are real, there are steps you can take to tackle it:
Create a Budget
Start by creating a comprehensive budget that outlines your income and all of your expenses. A budget will help you explore areas where you can cut back and allocate more funds toward debt repayment.
Prioritize High-Interest Debt
If you have multiple credit cards, repay the one with the highest interest rate. This will save you money in the long run. Make larger payments on this card while paying the minimum on others. Roy Lau, Co-Founder of 28 Mortgage, comments,
Creating a debt-repayment plan with small, achievable goals helps to maintain motivation. Breaking down the debt into manageable chunks and celebrating progress can be empowering.
Developing healthy financial habits, such as budgeting, can alleviate stress and provide a sense of control. Lastly, cultivating a positive mindset towards debt repayment and focusing on long-term financial goals can strengthen commitment and resolve.
Avoid Making New Charges
While working to pay off your debt, avoid making new charges on your credit cards. Using cash or a debit card for purchases can help you stay within your budget.
Negotiate a Lower Interest Rate
Many people need to learn this, but you can talk to your credit card companies about getting a lower interest rate. To find out, just call the number on the back of your card. If you've always paid on time, it will help your case.
Any deal you get from a credit card company could save you hundreds or even thousands of dollars in interest as you pay off your debt. It's possible that not every deal will work with every card.
Consider a Balance Transfer
Look into balance transfer offers, especially if you have high-interest credit card debt. Transferring your balance to a credit card with a 0% introductory APR can temporarily relieve high-interest charges. Start with the ones that cost the most in interest. Every month, put as much as possible on your bill transfer card until it's paid off.
When you move balances to this credit card type, the introductory APR is 0%. That means you won't have to pay interest during the introductory time. Most of the time, these cards have a fee for transferring balances. But, the interest you'll save is worth the fee.
Opt for the Snowball or Avalanche Method
The snowball method requires paying off the smallest debt first to build momentum. The avalanche method prioritizes the highest interest rate debt to minimize overall interest costs.
Seek Professional Help
If your debt is overwhelming, you can contact a credit counseling agency or a debt settlement company. They can give you affordable solutions, negotiate with creditors on your behalf, and provide a structured repayment plan.
Boost Your Income
Look for opportunities to boost your income. This could involve doing a part-time job, freelancing, or selling items you no longer need.
Build an Emergency Fund
An emergency fund can prevent you from adding to your credit card debt when unexpected expenses arise. Even a tiny fund can provide a safety net.
Maintain Financial Discipline
Staying disciplined in your financial habits is crucial. Avoid impulse purchases, and consistently follow your budget and debt repayment plan.
Get Financial Education
Educate yourself about personal finance. Understanding the intricacies of credit, interest rates, and budgeting will help you manage your debt more effectively.
Monitor Your Progress
Keep track of your debt reduction progress. Seeing your balance decrease can motivate and help you stay committed to your goal.
Conclusion
Loren Howard, Founder of Prime Plus Mortgages
In today's financial landscape, paying off credit card debt can be challenging, mainly because of the higher interest rates.
My advice to help you overcome this hurdle is to make an effort to clear your credit card balance in full each month. By doing so, you won't have to worry about interest charges and late fees. This disciplined approach not only makes it easier to manage your payments but also helps you maintain a lower credit balance, making a big difference in managing credit card debt.
