What to do if you’re nervous about credit card debt

Few things cause more financial distress and anxiety than a large chunk of high-interest credit card debt.

Millions of Americans of all income levels hold large amounts on credit cards that charge very high interest rates. According to the Federal Reserve, the average annual interest rate on cards issued by commercial banks was 16.45% at the end of last year, and rates charged on credit cards in stores can be well over 20%.

While card balances have dropped significantly from a peak of $927 billion at the end of 2019, they remain high at $841 billion at the end of the first quarter and could continue to rise.

“Credit card debt is still a big problem,” says Rachel Gittleman, financial services manager for the American Consumer Federation. “There were some payouts at the start of the pandemic, but I think balance sheets could start growing again as the cost of living rises.”

If you’re struggling to make minimum payments on your credit card balances, there are options to help you reduce the amount you owe and/or minimize the amount of interest you pay on your debt.

However, there is no silver bullet for large debts. The solution begins with changing one’s own behavior.

“The only long-term solution is to fix your spending habits,” said Summer Red, financial consultant and senior education manager at the Association for Financial Counseling and Planning Education. “Nothing will be successful if you don’t stick to a plan to cut costs.

“You must bring your expenses down to the level of your income.”

A $10,000 credit card balance with 20% interest is costing you $167 a month, and that only ensures your balance doesn’t increase. To start paying off the balance of the debt, you will have to do more.

There are two key aspects to gaining control over your spending; not use your credit cards and make a sustainable budget that includes paying off card balances.

On the first front, Red suggests people cut all but one of their credit cards. Don’t cancel accounts because your credit score will suffer

If you’re still struggling with the urge to use your card, put it in the freezer. “It takes about three hours for a credit card to thaw and be ready for use,” Red said. “It gives you time to think about your purchases.” Use the card only for purchases that you can pay at the end of the month.

On the second front, you will have to make some sacrifices to start reducing your debt balance. This could mean downsizing a house or apartment, selling a car, or doing more cooking at home. It’s important to create a budget that shows all of your expenses and income so that you can identify where you can cut costs and pay off debt.

Gittleman recommends seeking help. “Every consumer’s financial situation is different,” she said. “They have different debts, different spending habits and different values ​​for them.

“Working with a certified financial advisor can help you find the best options.”

When it comes to debt repayment strategies, there are two main repayment models. The first—called the snowball method—pays off the smallest balances of debt first to give consumers some momentum. The idea is to pay minimum amounts on all debt balances to avoid late fees or higher interest, and then apply the balance to the smallest debt balance.

When you pay off this balance, you move on to the next lowest balance. “Motivation to pay off debt is very valuable,” Red said. “Being able to see this can be a powerful boost for people.”

If you don’t need positive reinforcement, you can focus on the debt with the highest interest rate first. In the long run, the so-called avalanche method – from the highest rate to the lowest – will save you the most on interest payments.

While changing your spending pattern is the only thing that will get you out of debt, there are other steps you can consider to reduce the amount you owe or the interest you pay. Here are four things to consider:

1. Call your credit card company to see if you can reduce the amount you owe or reduce the interest rate on your debt. Do not lead with the possibility of declaring personal bankruptcy, but explain that you are unable to pay your current balance on existing terms. Credit card companies want to get paid, and they can offer some help to make sure they get it done.
2. Credit card balance transfers to other cards that don’t offer interest for a certain period may make sense, but they’re not free. They may offer 0% APR for a six- or 12-month period, but they typically charge 3% to 4% of the balance up front. If you don’t pay off your debt during this grace period, you won’t get much better at the end of it.
3. Consolidating your high-interest credit card debt and paying it off with a lower-interest personal loan can cut your interest costs significantly. It should most likely be a home equity loan if your credit profile is poor. The downside is that if you don’t control your spending, your home could be at risk in the future.
4. If your debts are simply too high – often due to medical expenses, which are a key factor in 60% of personal bankruptcies – bankruptcy may be your best option. If much of your debt is unsecured, such as credit card balances and medical bills, bankruptcy can give you a fresh start. Talk to a financial advisor and bankruptcy attorney before taking this step.