Consumer debt is increasing – A LOT! As a nation our credit card debt is at the highest level ever. How much? Try a whopping $986 billion according to LendingTree.com. The top three states with the highest average credit card debt are Connecticut ($9,408), New York ($9,165), and New Jersey ($9,044). Surprisingly, California is not even in the top 10. We come in at number 15 with an average credit card debt of $7,758. For those of us who control our cash flow and are diligent and pay off our cards in full each month (about 35% of cardholders), this seems horrendous. For those struggling to pay debt, read on for some tips to tackle your debt.
Although this post is for those carrying credit card debt, the recommendations and reminders apply to all of us. This debt reveals two things immediately: one, you have sufficient income to qualify for a credit line (and likely a credit limit higher than the average debt), and two, you are struggling (obviously) with paying off that debt. This is likely due to having strayed from your budget. Other contributing factors are most likely the rising interest rate environment and some post-pandemic pent-up spending that has yet to be paid in full.
What action steps can you take to resolve this? The first steps are obvious reminders for all of us.
First, get back on track with your annual budget. Budgeting is the foundation of wealth building. It could be that you have legitimate increased expenses you have failed to accommodate in your cash flow. Review your annual expenses and your budget and make adjustments as needed. The 50-30-20 approach is the Golden Rule of budgeting but keep in mind it’s a guide and you may need to tweak or temporarily adjust those percentages. 50-30-20 recommends we spend no more than 50% of our net income on absolute necessities such as rent, food, and health care, and 30% on lifestyle wants, and that we save and invest 20% of our income.
Most obvious – reduce spending. Once you review your budget, you may need to have a serious acknowledgement that you need to reduce what you are spending on. Of course, you have to cover your basics. If you are receiving packages every day from online shopping, that’s probably an area you can reduce. Consider terminating or temporarily eliminating recurring luxury services such as grocery delivery, meal plans, laundry services, auto detailing, etc. Yes, it’s hard to do, but it doesn’t have to be forever.
Now, tackling that debt once you are serious means having a plan. If you are not sure how much you owe, that’s the first step. Pull all of your statements or log in to your accounts for a recent update. Note the name of the account, the balance, the minimum payment, and the APR (annual percentage rate). You really need to know the APR. Record all of this in a spreadsheet or document of your choice. You need to see the totals. Next, pick an attack plan!
Avalanche: The avalanche method actually saves you the greatest amount of money over the debt paydown timeline. With the avalanche method, you tackle your highest interest rate debt first. You take any extra "topping up" payment amounts (amounts over and above the minimum payment) from other debts and apply all of it to your highest interest rate debt, plus its minimum payment. By tackling the highest interest rate debts first, you retire those debts faster, thus, saving on the amount of interest paid. Once the highest rate debt is retired, that monthly payment amount gets applied to the debt with the next highest interest rate. Continue this until all debts are retired.
Snowball: By using the snowball strategy, you tackle the smallest debts first. This gives you a psychological boost – a quick win! Take those extra "topping up" payment amounts from other debts and apply it all to your smallest debt, plus its minimum payment. Paying off the smallest debts first can be a psychological win for many folks and motivate you to pay down more debt. If speed is your goal, this snowball approach is a winner.
Balance Transfer: Use this approach with caution! If you are tempted by spending freely, and adding to your debt, this approach may not be the best for you. Basically, you receive and qualify for an offer to move your outstanding balances to a new credit card with a zero or low-interest rate for a specified period of time (like 18 months). Use caution because right now, the average APR on new issue cards is 20.35% to 27.31%. If you do this, you need to pay off the entire amount by that final offer period month (by month 18 in our example). If you do not meet this timeline, you could be subject to interest on the entirety of the original amount transferred at a potentially higher rate than what you transferred away from. This would defeat the purpose of the balance transfer. If you have good credit, stable income, and can pay off the entire amount within the time frame, this could be a good option. If not, the new card may have a higher APR and you could end up paying more than intended.
Remember, with either approach, do not skip any minimum payments! Skipping or missing a payment can affect your FICO score.
As an independent Certified Financial Planner™, I can help you prepare a budget, investment strategy, or debt reduction plan. Contact me and let’s get started! #talktometuesday #education #Hireaplanner #stressfree #savings #debt #CFPPro #budget #budgeting #time #compounding #avalanche #snowball #balancetransfer