Debt was already a significant hurdle for Americans in the
years leading up to the COVID-19 pandemic; back in 2018, a study by
Northwestern Mutual found that average personal debt (exclusive of home
mortgages and among those with some debt) surpassed $38,000.
The situation is far more dire now, as we near the third
year of pandemic living.
The average U.S. household carries $155,622 in debt —
that’s a collective $15 trillion — up 6.2% from January 2021. The debt
comprises student loans and mortgages and yes, credit card debt. Lots and lots
of credit card debt.
No debt is fun, but credit card debt can be the most vicious
because it tends to boast the highest interest rate and can tank your credit
score if not aggressively managed. When you’re dealing with high credit card
debt as so many of us are, it can feel impossible to get out of the hole, but
you have to start the process ASAP.
“Debt has escalated during the crisis as people have had to
find ways to pay their most urgent bills,” said Dr. Guy Baker, author and
founder of Wealth Teams Alliance. “Once order is restored, the debts will have
to be eliminated.”
It can be a painful process, Baker emphasized, but it’s a
doable one. Even if your debt is mighty, there is a clear and well-traveled
path to financial solvency. You might not entirely ease yourself of credit card
debt in 2022, but you can take substantial steps to minimize it so that
someday, you will be free. What exactly are those steps? GOBankingRates
consulted a number of financial experts to find out.
Here’s your 10-step plan to tackling credit card debt in the
new year.
1. Tally Up, Review and Analyze Your Debts
According to Howard Dvorkin, CPA and chairman of Debt.com,
the first step to tackling debt is to take a full inventory of your debts.
“Know how much is owed, to whom and where (you) are with payments,” he said.
As you do this, you’ll want to check for anything that might
look suspicious to you (identity theft is alive and well). From there, take the
time to scrutinize your spending behavior and patterns.
“Take a hard look at where your money is going and how much
is coming in,” said Nishank Khanna, CFO of Clarify Capital. “Understanding your
financial habits will give you a solid idea of where you’re overspending and
where you can feasibly cut back in order to save. Oftentimes, our spending
patterns tell us a surprising story about how we interact with money.”
Dvorkin added that it’s important also to download your
latest credit report.
2. Make a Spreadsheet Budget
“The best way consumers can start paying off credit card
debt is to make a budget spreadsheet to track their income and expenses,” said
Rick Orford, personal finance expert and writer for The Financially Independent
Millennial. “Consumers can start by looking at their last three months’ income
and expenses and organize them on a spreadsheet.”
From there, Orford advises that you distinguishing your
wants from your needs. “Needs are things like rent, mortgage, insurance and so
on,” he says. “Wants are things that make us feel like we’re keeping up with
the Joneses.”
Another way to think of this is to separate nonessentials
from essentials and commit to only spending on the essentials. Keep your
spreadsheet always handy to hold yourself accountable and to track your
spending.
3. Establish (or Keep Building) an Emergency Fund
Technically this step could go under the budgeting step, but
it’s so important, it’s worth breaking out into its own step. When you’re
making that budget of essentials, make sure you factor in a portion of money
that will go directly into an emergency fund. This isn’t just you being extra
cautious — this is you helping yourself to avoid falling into even more debt as
time goes on.
“It’s never been more important to put money aside for an
emergency fund,” said Khanna. “Before
you pay off your debt, here’s still quite a bit of financial uncertainty which
will likely continue to be present throughout 2021. Before you pay off your
debt, you’ll want to build a nest egg, if you haven’t already. Emergency funds
work as financial safeguards. Debt can be an unavoidable survival mechanism
when you have nothing saved. Stashing away cash protects you from running into
a situation where you need to increase your debt burden in order to survive.”
4. Talk To Your Credit Card Providers About How They Can
Help
If you’re buried in debt and you don’t see any way of
getting out, take the time to talk to your credit card provider(s) to learn how
they might be able to make the situation less terrible. True, these financial
institutions aren’t exactly known for their overflowing empathy, but they also
want to retain your business.
“Most credit card companies offer relaxation on the interest
rates when you have trouble paying your bill, so try to speak to customer
service or a hardship officer,” said Marius Thauland, a financial expert at
Sumo Finas. “Let them know you are having trouble paying off your debt. They
might lower your interest for a period or waive current late fees to give some
breathing room.”
5. Investigate Various Debt Relief Processes
Once you’ve assessed your debt, look into options for debt
relief. What is available to you depends on the nature and severity of your
debt.
“See if (you’re) eligible for a balance transfer offer,”
said Dvorkin. “For those with $5,000 or less in credit card debt, this is one
of the fastest ways to pay off debt. A recent New York Fed Credit survey showed
that credit card rejections have risen. This may mean less balance transfer
offers for those with gaps in employment and income.”
For those with high minimum payments, Dvorkin suggests
investigating debt consolidation. “This is a good option for those with up to
$25,000 in credit card debt,” he said.
A debt management program is better suited as an option for
people with over $25,000 in credit card debt or bad credit. “Back in
June[2020], the CFPB released its quarterly report on debt settlement and
credit counseling trends. In this report, it predicted a rise in debt
settlements as our economy weathers another economic downturn,” Dvorkin said.
And finally, there is the option of debt settlement. This
option should only be sought out by those who “don’t care about the credit
damage but want to get out of debt without declaring bankruptcy,” said Dvorkin.
Bankruptcy is what you should look into only if there’s no other way out and
you’ve received trusted counsel on the matter.
6. Consider Refinancing Your Mortgage, If Applicable
“Oftentimes, once credit card debit is accumulating, you are
paying a significant amount of interest each month. Some credit cards are even
in the twenties in terms of percentages,”
said Melissa Cohn, executive mortgage banker at Raveis Mortgage in New
York.
“If you do own a home with equity in it, consider taking on
a cash-out refinance on your home loan, which will leave you closer to the
threes in terms of interest payments and eliminate those balances,” Cohn said.
“Carrying high balances has a significant impact on your credit score, so this
can be one of the first steps toward repairing it as well. It is better to
carry a small amount of debt across a number of credit cards than to accrue all
on one if possible. Contact your lenders to see what lower rate loans are
available.”
7. Set a Deadline for Debt Relief — Even If It’s Far Off
Work out how long it will take you to pay down your debt.
(For starters, just find a debt payoff calculator online; there are numerous
free options, including this one from FinancialMentor). Once you work out a
deadline, keep it top of mind — even if it’s years away. This is important
because it helps cement the deadline as a goal.
“When it comes to setting goals, it’s always been a best
practice to have a deadline for accomplishing your goal,” said R.J. Weiss, a
certified financial planner and founder of the personal finance site The Ways
to Wealth. “As soon as you’re done tallying up your debts, it’s important to
set a deadline for when you plan to pay off your debt. Most importantly, you
want to update your deadline at least once a month based on your progress.
Staying motivated through the debt payoff process is hard. That’s why having a
target date to pay off your debt is so important. It keeps you focused on what
matters.”
8. Prioritize Which Credit Card You’ll Pay Down First
While you need to make at least the monthly minimum payments
on all your cards, you should focus on paying down one card at a time
“Typically start with highest interest rate debt and work
your way down to the lowest interest rate,” said Tracey Bissett, CFA, president
and chief financial fitness trainer at Bissett Financial Fitness.. “From a
psychological/mindset point of view, it may be a good quick win to pay off a
smaller balance on one card — this will give you confidence to keep going.”
Bissett also encourages people to make payments as often as
possible, not just once a month, as doing so “will reduce the amount of
interest that continues to accumulate, as the principal balance will always be
reducing.”
9. Stop Using Credit Cards (as Much as Possible)
Remember that when you’re paying off a card, you have to
keep it off the table. Consider it dead and gone. Ideally you should stop using
all credit cards, but if you must use one, use it only for essentials like
groceries or gasoline. Also, try to get creative with ways you can pay.
“If you have some kind of rewards on your cards, can you use
them to pay for your existing expenses, give as gifts so you don’t spend money
and/or get the rewards and sell them for funds to pay down the card balance?”
said Bissett. “Think about rewards that give you things like gift cards or
physical goods like electronics or small appliances.”
10. Enlist a Support Buddy
Paying down debt can be an emotionally draining task. It is
normal to feel overwhelmed and like you may never truly break through to the
other side (it’s called “debt fatigue,” FYI). You don’t need to go through this
alone, and while you can absolutely pay a financial coach or even financial
therapist to help provide you coping tools and strategies, the cost of such
services might be beyond your budget.
Letting others in can be helpful if you’re struggling or even if you
feel like you might benefit from some extra accountability.
“Tell your family and friends that you are paying off your
credit card debt,” said Sundin. “This step works out two advantages: you get
some support for your effort and help reduce temptations. And more often than
not, you may find someone else is doing the same thing. Now you have a support
buddy and both of you can help track your debt progress and stick to your
payment plans.”
11. Patience! Change Is Hard
“Be kind to yourself,” said Bissett. “You are most likely
feeling guilt, shame, embarrassment or other negative emotions. You are not
alone and you will get through this. The majority of people with credit card
debt don’t have an overspending problem. There is usually something that has
happened that led to the accumulation of debt that was beyond your control,
i.e., job loss, illness, divorce, business failure or in the case of [late], a
global pandemic.”
Remember, too, that you aren’t only paying off debt — you’re
changing your financial habits, something that takes courage and patience.
“Change is hard; it takes truly wanting to have a different
outcome (and) most people never change their habits,” said Carma Peters, CEO of
Michigan Legacy Credit Union. “You have to be so sick of where you are that you
want something different for the rest of your life. That is how truce change
happens. Starting to exercise is one right decision every day, so is changing
your financial habits.”
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