Rosalind Evans
Americans collectively owe close to $1 trillion in credit card debt.
According to a recent report on household debt from the Federal Reserve Bank of New York, the total credit card debt reached $986 billion at the beginning of 2023, remaining unchanged from the previous record set at the end of 2022. Typically, debt balances decline at the start of the year as borrowers try to pay down debt after the peak holiday shopping season. However, this year marks the first time a decrease has not been observed in two decades. Researchers from the New York Fed attribute this trend to inflation and a higher cost of living.
Credit card balances have surged by nearly 20% compared to the previous year, as indicated by a separate quarterly credit industry insights report from TransUnion. During the same period, the average balance rose to $5,733, as revealed by TransUnion.
Michele Raneri, TransUnion’s Vice President of U.S. Research and Consulting, stated, “As inflation rose to 40-year-high levels, many consumers have used credit to help manage their budgets, leading to record- or near-record high balances.” LendingTree’s Chief Credit Analyst, Matt Schulz, expressed concern that credit card debt will likely continue rising soon.
Following the Federal Reserve’s recent interest rate hike, the average credit card rate has reached an all-time high of over 20%. With such sky-high Annual Percentage Rates (APRs), credit cards have become one of the most expensive ways to borrow money every month. Nevertheless, many Americans continue to accumulate increasing amounts of debt. According to a Bankrate report, almost half of credit card holders carry debt from month to month.
Despite these challenges, there are strategies recommended by experts to help pay down high-interest credit cards once and for all. Here are five key approaches:
- Evaluate your spending:
Create a basic budget, as most experts suggest. Schulz emphasized the importance of understanding your household’s monthly income and expenses, stating, “You may not like what you see, but it is better to deal with the reality of the situation than to bury your head in the sand.” Utilize worksheets or online tools to analyze your spending habits and optimize your funds.
- Plan a repayment strategy:
There are two primary approaches to repayment. The avalanche method involves prioritizing debts from highest to lowest interest rate, allowing you to pay off the debts that accumulate the most interest first. The snowball method, on the other hand, focuses on paying off the smallest debts first, regardless of interest rate, to gain momentum as debts are eliminated. In either case, make minimum payments on all debts while allocating extra cash towards accelerating the repayment of one chosen debt. Nelson advised setting up automatic payments and text alerts to ensure timely payments.
- Utilize 0% balance transfer credit cards:
Schulz recommends taking advantage of cards for up to 21 months with no interest on transferred balances. Aggressively pay down the balance during the introductory period to maximize the benefits. Otherwise, any remaining balance will be subject to a new annual percentage rate, typically around 23%, similar to rates for new credit.
- Negotiate a lower credit card rate:
If you have an existing balance, consider contacting your credit card issuer to request a lower annual percentage rate. Schulz encourages individuals to request, stating, “You have nothing to lose.” According to a LendingTree report, 76% of people who requested a lower interest rate on their credit card within the past year were successful. Additionally, negotiate a reduced annual fee, a higher credit limit, or waive late fees.
- Take advantage of high-yield savings accounts:
In addition to reducing your debt, it’s important to build up your emergency savings to prevent accumulating more debt while working towards paying off existing balances. “Robust savings are key to getting out of debt,” emphasized Schulz. Consider leveraging competitive rates offered by online banks. Greg McBride, Chief Financial Analyst at Bankrate.com, highlighted that after years of low returns, some online savings accounts and one-year certificates of deposit now offer rates as high as 5%. McBride noted, “This could be ‘last call’ for savers,” suggesting it’s an opportune time to lock in rates for longer-term savings.
By reassessing spending, implementing a repayment strategy, leveraging balance transfer cards, negotiating lower rates, and prioritizing savings, individuals can take proactive steps to pay down high-interest credit card debt. It requires discipline and commitment, but these strategies can help alleviate the burden and pave the way toward financial freedom.
