Credit card debt continues to rise in the U.S., as higher inflation and interest rates make it more challenging to keep up with everyday expenses. Total household debt rose to $17.06 trillion in the second quarter of 2023, according to the latest Quarterly Report on Household Debt and Credit by the Federal Reserve Bank of New York. An increase in credit card debt led the way, up by $45 billion to a new high of $1.03 trillion.
This break into trillion-dollar territory for credit card debt continues a recent trend, according to a study by Experian. The analysis found that average consumer credit card debt expanded from $5,315 in 2020 to $5,910 in 2022 - an increase of 13.2%. What's more, average debt levels increased regardless of credit score, with “poor” and “excellent” rated borrowers reporting the largest percentage increases.
So with national credit card debt topping $1 trillion, let's look at six ways to pay down that balance for good.
1. Pay more than the minimum
One of the easiest ways to decrease your credit card debt is by getting compounding interest under control.
Every credit card carries an interest rate, which is simply the cost of borrowing money. Any unpaid balance carried forward on that card will accrue interest, which is then added to the balance of what you owe. Given credit cards carry interest rates in the 15-22% range, based on national averages, the impact of compounding interest can add up fast.
That's why making only the minimum monthly payments, and consistently carrying the remaining balance forward, is a poor strategy for paying off debt.
For example, if you're told by the credit card company to make a minimum payment of 4% on your credit card each month, a $2,000 balance at 19% interest will result in a minimum monthly payment of $80. However, by paying only the minimum each month, it would take you two years and nine months to pay off the card! Furthermore, you'll have paid $566.15 in interest alone during that time.
Yet if you put $300 toward the same credit card debt each month, you'll only end up paying $130 in interest, and pay off that $2,000 debt in eight months.
To figure out how quickly you can pay off your credit card debt, simply use an online credit repayment calculator, like this one from Calculator.net. This will help you identify how long it will take to pay off your credit card debt based on the amount you can afford to pay on a regular basis.
2. Use the “debt avalanche” method
If you have multiple credit card or loan payments to manage, perhaps consider the “debt avalanche” method. This strategy involves lining up all debts from highest to lowest interest rate.
Once your highest interest rate balance is identified, commit the highest possible monthly payment you can afford to this debt until it's paid off. While you're doing this, make sure to pay the minimum balance on all your other debts - don't try to multi-task!
This method will help pay down your total debt load faster by reducing principal on your highest-interest balance. Once that first balance is paid in full, roll that monthly payment amount forward and apply it to the balance with the next highest interest rate, and so on.
Using the example above, when that $2,000 is paid off after eight months, keep that $300 earmarked in your budget - simply roll it forward to the next most pressing debt balance.
3. Use the “debt snowball” method
A different twist on the “debt avalanche” method is the “debt snowball” method. Instead of lining up loans from highest to lowest interest rate, you'll line them up from smallest amount owed to largest amount owed.
With this strategy, you'll be committing most of your monthly debt repayment dollars to the smallest loan first, until it's paid in full. Again, you'll want to maintain minimum monthly payments for any other balances. This method can be a great motivator for those in debt, as you're more likely to achieve payoff success early on.
As with the avalanche strategy, once your smallest loan amount is paid in full, simply roll that monthly payment amount forward to the next balance in line.
4. Switch credit cards
Depending on how much credit card debt you're carrying, you might want to consider switching credit cards. Interest charges are a key piece of how credit card debt accumulates, as described earlier. Therefore, transferring to a lower- or zero-interest credit card could save a lot - not only while you pay down debt, but when you start using your credit card again, too.
Many issuers offer special promotions for those who switch credit card companies, offering low to 0% interest rates for the first year or more. Rather than worrying about interest accruing, you can simply focus on paying down your debt - before the interest rates kick in when the promotion ends. Having this time limit can also help keep you motivated to pay the balance down before time is up.
5. Consolidate with a personal loan
If you've accumulated a lot of credit card debt, it might be best to step away from credit cards altogether for the time being. In this case, consolidating your debts into a personal loan at a lower interest rate could certainly help. Rather than paying down multiple credit cards, you can consolidate them into one payment on a personal loan, from a lender such as your bank or credit union.
Plus, the interest rate on this type of loan is likely to be much lower than the 19% or so you can expect from most credit cards. However, this will depend on your credit score. But once approved for a personal loan, you can focus your efforts on one simple payment each month.
6. Build a budget and stick to it
If you haven't already, create a budget. This may seem basic, but it's a key piece to keeping debt under control over the long haul. Many of us go into credit card debt over mismanagement of everyday spending, or a failure to save - which means when an emergency comes up, there aren't enough rainy-day funds readily available to cover those costs.
However, by creating a budget and sticking to it, it's possible to get spending under control, manage debts, and even start putting aside cash for emergencies, as well.
This task can seem daunting, but luckily there are many budgeting applications available. After filling out your budget to include essentials, nice-to-haves, irregular payments, emergency funds, and so on, you will be able to see how much is left over. Then you should be able to assign that dollar amount to your credit card payments and other debts each and every month.
A great benefit is that many budgeting apps allow you to connect to your banking institutions. So whenever you buy groceries, for example, it will demonstrate on the app how much you have left in your budget for groceries. This will keep you motivated, and help to identify unnecessary spending.
In the end, whatever method you choose, just get started! Putting off credit card debt repayment will only make it worse. So stop using that credit card, and start paying it down today.
On the date of publication, Amy Legate-Wolfe did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
