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 surpassed $1 trillion, a new record. Should consumers be worried?
While millions of Americans face higher minimum monthly payments as credit card balances surge higher, financial experts suggest individuals can take action today to reduce their debt and regain control of their finances.
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Pay down your debt faster by lowering your interest cost
When individuals carry outstanding balances on their credit cards, the most significant costs they incur are from high interest rates. Fortunately, consumers have multiple options to consider that could help them save money with reduced interest costs.
For instance, consumers can request an interest rate reduction with their card issuer. If they are a good, long-time customer, the issuer may agree rather than risk losing them to another lender. Another option is to consider consolidating debt with a peer-to-peer loan at a more competitive rate from companies like LendingClub or Prosper.
Blaine Thiederman, Founder of Progress Wealth Management, advises, “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. Look for consolidation loan providers that charge a minimal origination fee (if any at all).”
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Consider a balance transfer
Another option involves consolidating debt with a balance transfer offer from companies like Bankrate or NerdWallet that offers a zero percent interest rate for 18 to 24 months. While these offers may come with a 3-5 percent fee today, they could provide a one-time cash bonus.
The advice given is to pay more than the minimum required payment for credit cards each month, even though it may feel challenging. This approach can save thousands of dollars and accelerate debt payoff by several years. For example, with $12,000 in credit card debt outstanding, paying an additional $5 a month can lead to being debt-free four years earlier and saving over $2,000 in interest costs.
The minimum payment also decreases by paying more than the minimum each month, making it easier to get out of debt. The text suggests considering the “Snowball Method,” a popular strategy for paying down debt on multiple credit cards, and the “Avalanche Method,” another popular debt reduction strategy with benefits that outweigh the Snowball Method.
Individuals can use free online resources to develop a strategy to pay off credit cards and monitor progress. In addition to debt reduction blogs, one recommended resource is PowerPay, a tool created by Utah State University. Maggie Klokkenga, owner of Make a Money Mindshift, recommends using PowerPay to see the light at the end of the debt tunnel, describing it as a free online debt payment calculator that provides different ways to pay down debt.
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Avoid accumulating additional debt
To successfully pay off credit cards, individuals need to avoid accumulating additional debt that risks increasing their total loan balance. Additionally, they should consider steps to reduce temptation in online shopping transactions.
Terri Bailey of Better Financial Counseling suggests making it hard to use the card by removing apps from the phone, not physically carrying cards, and staying off trigger websites.
Most experienced financial advisors suggest that paying off the entire balance each month is the best way to use a credit card. However, the immediate concern for those deep in credit card debt involves not digging themselves deeper.
Consolidating debt using a zero or low-interest-rate balance transfer offer, even with a 3 percent fee, could save almost all interest costs and quickly get them out of debt. Cutting expenses and making payments over the minimum can also save thousands of dollars and years of debt servitude.
While the New York Fed’s Q3 2023 report on household debt appears ominous, financial professionals encourage consumers to start with small steps today that will pay dividends over time as credit card balances decline.
