The average U.S. household with credit card debt carries a balance of nearly $16,000. That balance accrues interest that adds to the borrower’s debt. In September, 2017, the national average credit card interest rate was 16.14 % APR. This tremendous financial burden can limit a family’s flexibility for buying a house, saving for college, saving for retirement, and even managing day-to-day expenses.
The key to correcting this situation is a three-pronged attack of changing spending habits, changing saving habits, and pursuing a debt payoff strategy.
Change your spending habits
The first step is to review the spending habits that led to your credit card debt.
- Create a budget. Make a list of your monthly bills and track your daily expenses for several weeks to see where you’re actually spending money. Separate the essential from the excessive. Then plan a realistic budget that doesn’t exceed your means.
- Stick to your budget. Track your expenses vs. the budget you set up. If you stay on track, great! If not, look for opportunities to tweak things to get on track.
- Recognize that some sacrifice might be needed, from giving up designer coffee to putting off purchasing the latest fashions. If you can avoid spending a few dollars every day, you’ve earned a few dollars to apply to debt payoff.
- Avoid situations that lead to impulse spending. If you’re in the habit of window shopping or online surfing that turns into impulse buys, find an alternative activity. Exercise can be a good choice. You can find plenty of free activities, plus improved physical health can prevent some medical expenses.
- Develop healthy, cost-effective eating. Avoid heavily processed foods with empty calories and high costs. Cook simple dishes at home instead of spending higher prices for eating the same dishes while dining out.
- Look at your waste streams. As gross as it might seem, checking to see what you throw out might reveal opportunities to avoid buying things that just end up in the trash.
Change your saving habits
Avoiding spending is a good start. Proactive saving is a valuable next step.
- Build an emergency fund of three to six months of living expenses. That way, if an emergency occurs, you will not have to add to your credit burden to get through a difficult time.
- When you get a windfall from a tax refund, work bonus, monetary gift or other one-time payment, save it instead of splurging.
- Avoid false savings. Applying for a new credit card to get a one-time 10% savings can be very expensive in the long run if you carry a balance with a higher interest rate. Even the inquiry for the application can impact your credit score and lead to higher interest rates in the future.
Develop a strategy for debt payoff
You have to make choices when deciding how to pay off debt. Paying more than the minimum payment shortens your overall payoff time. If you have multiple cards, decide what strategy you’ll use for paying them off.
- Pick your debt with the highest interest rate and pay it off first, reducing your overall interest payments.
- Pay off a card with the smallest balance first, giving you a sense of accomplishment on your payoff path and reducing temptation to spend.
- Pay down the debt on any cards that are close to your credit limit .
These decisions depend on a combination of the financial effects and psychological factors that impact your ability to carry through with your debt efforts. Always make sure you’re paying at least the minimum amounts on time to avoid getting into credit score issues.
There are many methods to help pay off your debt, including credit card balance transfers, personal loans and home equity loans. These approaches can help you get a lower interest rate, which then reduces your monthly payment or shortens your payoff time. All have their pros and cons. Learn about each of these debt consolidation methods here.
Be aware of the benefits and risks before you commit to any new debt consolidation strategy. Most importantly, be prepared to change behaviors that led to the buildup of debt in the first place, so that it doesn’t happen again.