Credit card debt affects a majority of Americans, and the average credit card debt per U.S. household is almost $16,000. (This article from NerdWallet suggests the reason is that costs for things such as tuition and health care have outgrown household income.) While very common, credit card debt can be a source of anxiety and stress in many households.
The good news is that with the right approach, you can pay down your credit card debt sooner rather than later. Here are some strategies that you can employ, in order to start chipping away at your credit card debt.
Pay off Highest APR/Interest first: This strategy is sometimes called “Debt Avalanche,” as you are tackling the card with the highest interest rate or APR. High interest rates can escalate a debt situation from manageable to unmanageable faster than you may realize. To find out what you’re paying in interest per day, divide your APR by 365 (to calculate daily percent). That number, multiplied by your current card balance, is added as interest at the end of every day. In other words, you’re battling compound interest in an unfavorable way. Using the “Debt Avalanche” strategy, you eliminate the greatest factor of compounding interest. Financial guru Suze Orman advocates this approach.
Pay off Lowest Balance First: This approach to debt payoff is called “Debt Snowball,” in which you pay off the smaller amounts of debt and build up to the larger balances. Doing this will help you gain momentum and hopefully get motivated to continue the trend of paying off your debt. Financial guru Dave Ramsey advocates this approach.
Consolidate. Debt consolidation is another option. If you have good credit, some companies will let you transfer the full amount of your credit card balance for a lower interest rate. You have to be careful — sometimes they offer 0% APR for the first year only, after which you could be saddled with an APR higher than what you were originally paying. That said, if you are planning on paying off the debt fast, this may not be an issue!
Don’t throw good money after bad. If you have a 401K or other retirement account, do not try to use it to pay off your credit card debt. You will end up having to pay a 10% withdrawal penalty in addition to taxes on the withdrawal at your current tax rate. Even if you believe your stress levels will decrease once your credit card debt has been paid off, it isn’t worth losing 30% or more of the money you take out. Another strategy is a secured loan. These include payday loans and loans that put up your home, car, or other property. In addition to high interest rates, many of these loans prevent you from filing bankruptcy if you cannot make payments. (Read more about the dangers of payday loans here.) Instead, you risk losing the property used to secure the loan. Try earning more money and/or saving more money instead.
Make minimum payments at the very least. If you are able, try to make more than the minimum payment month to month. This will help keep you ahead of the compounding interest and trim your balance faster. If you can’t afford more than the monthly minimum payment, however, do not try to stretch your budget too thin. You can throw any extra money you have at the debt when you have it but ensure your basic needs are met.
Paying off your credit card debt is almost like a diet. You won’t notice any changes overnight, but if you stay diligent and stick to your plan, those small changes will start adding up. Like a diet, you don’t have to restrict yourself at all times. Give yourself something to look forward to as you reach certain milestones, like doing something fun each time you reach a milestone, such as paying off a card. A light celebration at each mark will make the process less painful, and before you know it, your hard work will pay off!