In August 2023, Americans managed to set a new record in credit card debt, surpassing $1 trillion for the first time ever. In the second quarter alone credit card balances managed to rise by $45 billion, breaking that $1 trillion threshold. While sources vary, the average American is said to have around $7,000 in credit card debt, with an average interest rate of about 25% as of October 2023.
What’s worse, is 3 in every 5 Americans have some credit card debt. That’s a whopping 60%. With rising cost and higher interest rates, it’s easy to understand why – especially considering almost 50% of Americans rely on their credit cards to cover emergencies or large expenses. Most do not even have a significant savings or emergency fund to cover unseen circumstances, forcing them to used credit. So if you’re like most Americans, you probably carry some debt yourself. The fact that you have landed here is good though – that means you realize your debt and are trying to do something about it, which is a great first step.
- I have put together a list of six steps to help realistically tackle your debt and pay it off sooner rather then later. Although there is no such thing as an easy fix or way out, these steps will help you understand your debt, get out of it, and hopefully stay out!
1. Understand Your Debt
Understanding how you got into debt the first place is a great way to start. Did you have an unforeseen event come up and you had to use your credit cards to pay for it? Or did you take a vacation you couldn’t afford? Maybe you financed a new car, which ate up a good chunk of your available monthly income. Or perhaps it’s just your spending habits. Regardless, knowing and understanding how you got into debt in the first place will help you from repeating the same mistakes. It’s easy to find yourself in debt, but finding a budget and sticking with it (living within your means) is a great first step and a good way to avoid most unnecessary debt.
2. Make a Plan
It’s easy to pay the monthly minimums on every payment. It’s also easy to continue to use the same credit cards and bring up that balance you just paid down, digging deeper into the same bottomless never-ending rabbit hole. Unless you have an active plan for eliminating your debt, and keeping it from coming back, your’e likely to continue using your cards and get nowhere. Not to mention if you’re paying the minimum payment, you are probably only covering the interest you’re being charged monthly anyway, not actually helping your balance much. Having an active plan can be like having a budget, or even just strategy for paying off your debt. But having a plan will give you direction to follow and stay on course.
3. Cut Expenses
This is in my opinion the most important step. By cutting your expenses – not only are you increasing your available money at hand – you are also building good money handling habits. This might take discipline, but it’s well worth it. Pay attention to the money you have coming in and going out. You’ll be surprised when you start cutting back how much all these little expenses here and there add up to a significant amount of money rather quickly. You don’t even necessarily have to have a budget, just ask yourself before you buy it, do I really need it? Or can I go without it? If it’s an essential item perhaps you could even buy a cheaper version of it? It all adds up, and it all adds up to savings in the long run.
4. Pay it off
After all, this is the whole point right? You want to pay it off. Although probably the hardest step, it’s also the most important. You can pay it off anyway you can find – whatever you find that works best for you. Here are 3 popular ways of paying off credit card debt:
- snowball effect
- avalanche affect
- take out a personal loan
The snowball effect – is taking on smaller balances first. You simply pick your lowest balance and pay it off as quickly as you can. The following month, you use that extra money you have freed up and put towards your next smallest balance. You continue doing this until your debt is paid off. This process takes a while, but it does work. For many it’s the easiest because you’re seeing your first results relatively quickly.
The avalanche effect – is tackling your highest interest balance first. This could take a while if it’s a high balance, but theoretically it will save you the most money since that rate is also costing you the most. However, keep in mind you’re still being charged interest in on all your remaining balances until they’re paid off completely.
Taking out a personal loan to pay off your credit card balances. Although I would never recommend taking out more debt – depending on your situation this might be the best option. I personally have done this, and it’s a good way to consolidate all your debt to more than likely lower interest-rate then you have on your cards. You can still pay extra to pay it off early, but now you are not paying multiple credit card companies but instead making one easy payment. Just be careful not to use your credit cards after you use the personal loan to pay them off, otherwise you’ll just get yourself deeper in financial trouble.
Here are also some other less popular ways, which depending on your situation might work better for you.
- use saving
- ask a friend/relative
- save up money and use that
Using your savings is pretty straightforward. If you have the money in the bank, or access to it it might be a good idea for you to use that cash to pay down your credit cards. Chances are, the interest on your credit cards is costing you more than you are making on that money anyway so you might as well put it to better use. It’ll save you money in the long run.
If you have a friend or family member that could or is willing to help you, you could try asking them. Just remember, you don’t want to wreck friendships or create bad family ties. Be conscious about it and understand if they are unwilling to help you. And if they do, make sure to take responsibility to pay them back. After all, they are doing you a big favor.
If you’re like me and you’re a natural saver, it might be easier for you to put money aside, and then when you have enough saved take it and pay off your card balances either one at a time or all at once. Although in the meantime you’re still paying interest on your balances, the satisfaction of seeing that value go up might help with your spending habits. Plus paying it off all at once is encouraging.
Things to stay away from:
Below are just a few of the things to stay away from:
- new credit cards
- balance transfers
- home equity loans
New Credit Cards – If you are trying to pay off your credit cards, one of the worst things you could do is get another one. Even if they offer things like 0% or a low introductory APR, you should still stay away so you don’t further your debt.
Balance Transfers – I’ve heard a lot of people talk about balance transfers, especially ones that offer 0% interest for X amount of time. The thing is, you’re not really solving anything you’re just sweeping it under the rug. In the meantime, you’re likely to waste another year not paying on it, probably still spending like normal, and then in a year or so have the same dilemma with possibly even more debt under your name. You don’t want that. (On a sidenote to that, if you are disciplined and can be strict about not using credit and making sure you pay that balance off within the set time, it might be something to consider although I do not recommend it).
Home Equity Loans – I’m sure a lot of people will disagree with me, but I personally think taking out home equity for anything is the worst thing you could do. Period. Your house is your greatest asset, and if you have equity that just means a percentage of it is paid off. Good for you! Wouldn’t it be nice to own it someday? Wouldn’t it be nice to someday not have a mortgage and not have to work your whole life to pay it off? Banks make money when you refinance your home. They get money from closing costs, that you get charged for. It might seem like a quick and easy fix, but nothings free. It will just cost you over the next 30 years instead of maybe the next few.
5. Put in the Work
The step probably no one wants to hear, but the reality is, in order to get it out of your debt you will have to put in the work. There is no quick or easy fix, because the longer you put it off the more it will cost you in the long run. You’re better off to start working towards it today, so tomorrow you can live a better life and not have to stress about it. This might mean working longer hours or cutting back on your spending, but in the long run it will be more then worth it. Perhaps you’re just not making enough? Ask yourself, is it time for a career change? If you’re like me and you fell into debt because you simply weren’t making much, maybe it’s time to look for ways you could raise your income.
6. Treat Your Debt Like the Enemy
Your debt is a heavy burden. It is costing you extra money every month, that you’re basically just lighting a match to. You’re working to pay the credit card companies a percentage of what you borrowed from them. Was it worth it? Perhaps. But the stress of having the debt and knowing how much it’s costing you monthly is a burden that hopefully you will not continue to have. If you want to get ahead, or ever live a better lifestyle, you will have to start managing your money and treating debt like an enemy. All it does is make someone else wealthy. All of your hard work is going to make the rich richer. You don’t want that.
Conclusion
It is possible to be debt-free. Spending and wanting becomes a bad habit, but once you learn how to value the dollar and manage your finances – as a value for your time it becomes easier to reassess and prioritize your spending. Learn from your mistakes. If you manage to get out of debt that’s great! But learn from it and don’t make the same mistakes.