Credit card debt has been rising exponentially in the United States. Owing to higher prices of basic goods and rising interest rates, it is quite understandable why credit card debt is constantly on the rise. According to the latest data from the Federal Reserve, credit card balances reached an all-time high of USD 1.08 trillion in the third quarter of 2023. Moreover, currently, the average American has a credit card debt of USD 6088. If you are one of the many people stuck in a credit card debt trap, this post will help you navigate the ins and outs of credit card debt elimination.
What causes huge credit card debt?
There are an array of reasons that cause credit card debt, these include:
High Interest rates
The first and very crucial reason that can cause credit card debt is a higher interest rate. Credit cards with higher interest rates usually run over 20 percent APR. With such high rates, more than half of the minimum payment every month you make is gobbled up by accrued monthly interest charges. This directly culminates in higher credit card debt, as it is very challenging to pay off the debt altogether.
Unexpected medical bills and emergency expenses
The cost of medical care has increased manifold in recent years. Nowadays, health insurance companies mandate patients to cover more expenses out of their pockets. For many people, credit cards become the sole way to fund expensive but necessary medical procedures, even in case of the presence of a health insurance policy.
No budget
Last but not least, the lack of personal control and discretion is a major reason that people fall into credit card debts. People can exceed their income when they use a credit card. The maximum amount you can spend if you pay for everything with cash is determined by the size of your paycheck. However, there are no such restrictions with a credit card, which lures people to overindulge.
What is the impact of high credit card debt?
A high credit card debt has multiple repercussions, which include:
Credit score
A high credit score negatively impacts your credit score. The higher your debt, the poorer your credit score. This reflects badly on your financial background and hampers the ability to procure loans and most importantly, low-interest loans.
Higher interest rates
A higher credit debt means a low credit score, which ultimately inhibits your ability to be eligible for favorable loan and interest terms in the future. With a poor credit score, you will only be able to procure loans with high-interest rates. This ultimately pushes you into a debt trap.
Mental and well-being effect
Last but not least, a high credit card debt can deteriorate a person’s mental and physical well-being in many ways. The thought of paying off the debt can put a lot of strain and the individual might have to curtail other important expenses of their life.
How to pay off your credit card debt?
Now that we have learnt the basics of credit card debt, let us check out some simple ways to eliminate it.
Debt snowball method
The debt snowball method is an excellent way to get out of debt easily. It includes the following steps:
1. Make a list of all your credit card balances, ranging from the lowest to the highest, and don’t forget to include other debts like auto or school loans. Do not worry about the interest rates and simply start paying minimum amounts on your debts but the smallest ones.
2. Put as much money as you can into your smallest debt and eliminate it as soon as possible. After the first debt is paid off, apply the money you were paying toward it to the next-smallest loan and make the required minimum payments on the remaining debts.
3.Keep repeating the process until all your debt is done.
Debt avalanche method
The debt avalanche approach is the second strategy for getting rid of credit card debt. This involves setting aside enough money for each loan source’s premium payment, then allocating any remaining cash for repayment to the debt with the highest interest rate. After paying off the highest-interest loan, leftover repayment money goes to the next-highest loan. Plan your budget and adhere to it.
The third way is to plan your budget and then stick to it. You should analyze your income, expenses and spending habits and after you have a firm grasp on your finances, it becomes easy to understand if you will be left with any money to pay off your debt.
Seek professional consulting
Last but not least, if all fails, then it is best to seek professional consulting services that specialize in credit card debt.
So, there we have it, a crisp overview of credit card debt elimination.
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This post brought to you by Atif Sharif.
Photo: iStock