Opher Ganel, Wealth of Geeks
In its latest Quarterly Report on Household Debt and Credit, the Federal Reserve of New York found outstanding credit card balances in the US grew by $52 billion at the end of 2021, a record quarterly increase.
Millions of Americans now face higher minimum monthly payments as credit card balances surge higher.
But financial experts say it’s not all doom and gloom. Here are their best tips to help reduce debt and regain control of your finances.
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Pay down your debt faster by lowering your interest cost
When you carry outstanding balances on your credit cards, high-interest rates often represent the most significant costs. Fortunately, there are multiple ways to reduce those rates.
You can contact your card issuer and ask for an interest-rate reduction. Good, long-time customers have a better chance of gaining this grace. The credit company will often agree rather than lose a customer to another lender.
You might also look at consolidating your debt with a peer-to-peer loan at a more competitive rate from companies like Lending Club or Prosper.
“Consider a debt consolidation loan if you can only afford to pay the minimum (or just over the minimum), if your credit cards all carry a high-interest rate, and your credit score is at least 600,” says Blaine Thiederman, Founder of Progress Wealth Management. “Look for consolidation loan providers that charge a minimal origination fee (if any at all),” Thiederman says.
Some companies also offer special balance transfer rates - even as low as 0% interest rate for 18 to 24 months. These offers may come with a 3-5% fee but could also provide a one-time cash bonus to offset that cost. Just make sure you put a plan into place to pay off all the balances in a timely fashion. Multiple transfers over time just delay the inevitable and could rack up even more debt.
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Pay more than the minimum
While it may be challenging to pay more than the minimum required payment for your credit cards each month, it can save you thousands of dollars and accelerate your debt payoff by several years. Even small additional amounts help.
For example, if you have $12,000 in credit card debt outstanding, paying an additional $5 a month will get you out of debt four years earlier and save over $2,000 in interest. Paying an extra $10 a month eliminates your debt six years sooner and saves nearly $4,000 in interest costs.
Your minimum payment also decreases by paying more than the minimum each month, so choosing a consistent amount and sticking to it makes it even easier to get out of debt.
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Consider the Snowball Method
The “Snowball Method” is a popular strategy for paying down debt on multiple credit cards.
You start by making the minimum required payment to each credit card, except for the card with the least debt remaining.
Next, send as much as you can afford to pay to this card and repeat this process each month until the balance reaches zero.
Then continue this process with the next smallest balance card until you only have one card remaining.
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Try the Avalanche Method
The “Avalanche Method” is another popular debt reduction strategy.
With the Avalanche Method, you will pay the minimum required payments to the credit cards with the lowest interest rates, then send as much as you can afford to pay towards the credit card with the higher interest rate.
The benefits of this method outweigh the Snowball Method, but it requires considerable discipline.
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Use free online resources
You can also find helpful websites and online tools to help you develop a strategy to pay off your credit cards and monitor your progress. In addition to dozens of debt reduction blogs that offer strategies and support for their readers, one resource recommended by financial experts is PowerPay, a tool created by Utah State University.
“Use PowerPay so you can see the light at the end of your debt tunnel,” says Maggie Klokkenga, owner of Make a Money Mindshift. “PowerPay is a free online debt payment calculator where you can enter all of your debt, and the calculator will provide the different ways that you can pay down the debt, for example, lowest balance first (debt snowball) or highest interest first (debt avalanche),” says Klokkenga.
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Avoid temptation
Of course, to successfully pay off your credit cards, you will need to avoid accumulating additional debt. With online shopping transactions always just a click or two away, what steps can you take to reduce temptation?
“One trick to getting people over the credit card hump is to make it hard to use the card and all forms of it, including online forms which are now so easily stored on websites,” says Terri Bailey of Better Financial Counseling. “My recommendation is to take apps off your phone, don’t physically carry cards, and stay off of your trigger websites,” says Bailey.
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The bottom line
Financial experts suggest that paying off your entire balance each month ranks as the best way to use a credit card. But if you’re deep in credit card debt, your first and immediate concern involves not digging yourself deeper.
Look for ways to consolidate your debt. Then cut expenses even a little and bump up your payments over the minimum.
Financial freedom is an achievable goal — but it will take work.
