Credit cards are a way of life for Americans in general —
and Coloradans in particular. According to one recent study, Colorado residents
have the second highest median credit card debt in the country, behind only
Alaska.
But while Coloradans may have slightly more credit card debt
than the average American, it’s only a difference of degree. A recent study
from Inside 1031 found that over half of all Americans (55%) carry a credit
card balance from month to month, and that since the beginning of the pandemic
in March 2020, 44% of Americans have taken on more credit card debt.
Worse yet, a lot of these debtors are carrying this high
interest debt for years or even decades. According to the survey, 40% of credit
card debtors haven’t been debt-free since before 2018 — and 15% say they’ve
been carrying debt since before 2006. That kind of long-term indebtedness is a
tightrope act; more than half of American credit card debtors (57%) have missed
at least one credit card payment, with 31% missing a payment in 2021. From
there, it’s a short distance to default, bankruptcy, divorce, or even selling
your home for cash to pay off debts.
So how do you get out of credit card debt? It’s not as hard
as it may sound, but it takes honesty, discipline, and a good plan. Here are
some tips to get out from under your credit card debt, no matter how much it
is.
Figure out where you stand
Before you can tackle your credit card debt, you have to
figure out how much debt you have.
Put together a list
of all your credit cards, the balance you’re carrying on each card, and the
annual percentage rate (APR) on each card. It can also be helpful to organize
your list from highest APR to lowest APR, so you know which debts are charging
you more interest.
Total up all your balances: This is your target number.
Analyze your spending
Next, you want to figure out where all your money is going.
Look over several months of your financial statements to get
an idea of your expenses. You’ll want to split them into two groups: necessary
expenses and unnecessary ones.
In the first group, you’ll put expenses such as rent,
groceries, utilities, and debt payments, including student loans. These are
vital, non-negotiable costs, but some, such as debt payments and student loans,
can be consolidated.
In the second group, you should include things you can live
without — unused gym memberships, entertainment subscription services, meal
deliveries, etc. You’ll want to eliminate as many of these as you can. Start
with expenses that you don’t use or don’t provide great value. Don’t overlook
small, recurring charges, especially ones that are automatically billed. These
can add up to a lot of savings if you cut enough of them.
Try to be as objective here as possible; every dollar you
cut from your budget now is a dollar you can allocate toward paying down your
credit card debt.
Make a budget — and stick to it
Once you’ve figured out your income and your expenses, it’s
time to put together a budget. A budget will formalize all your expenditures
and protect you from extraneous spending.
Be strict with yourself, but be realistic — build in a
little wiggle room for small unforeseen expenses and the occasional impulse
buy. You want to write a budget that you can stick to long-term, not a punitive
one you’ll burn out on after a month.
As you work on a budget, also explore ways to increase your
income. The more money you can bring in, the more you can throw at your debts.
This could include a part-time job or even using apps to make money.
Choose a debt reduction strategy
Experts recommend these three strategies to systematically
pay down your debt: the snowball method, the avalanche method, and the blizzard
method.
The snowball method was popularized by Dave Ramsey and calls
for you to pay off your smallest debt first and then proceed to the
next-smallest, and so on, until you’ve paid off all your debt.
A big advantage of this approach is the psychological
satisfaction you get from paying off a debt completely. Once you taste that
feeling, it’ll serve to motivate you even more.
The avalanche method calls for you to pay off the balances
with the highest interest rates first. While you’re concentrating on your
high-interest debts, you’ll make minimum payments on the rest of your debts.
Once you’ve eliminated your debt with the highest APR,
you’ll allocate that same amount of money to pay off the debt with the
second-highest APR, and so on.
The big advantage to this is that it’ll save you the most
money in the long run, since you’re tackling the most rapidly growing debts
first.
The blizzard method
is a hybrid of the avalanche and snowball methods. Using the blizzard method,
you’ll first pay off your smallest debt and then move on to your debt with the
highest APR.
The advantage of this approach is that you get to have the
quick win of completely wiping your smallest debt off the slate before tackling
your most expensive debt.
Consider a balance transfer
If you’re paying off several cards, you may want to consider
transferring all your balances onto a single balance transfer card. Many
balance transfer cards come with a low or even zero interest rate for an
introductory period, so not only is it more convenient than paying off several
separate accounts, you’ll also save money.
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