How to cope when you’re stressed about credit card debt

London, United Kingdom

Peter Muller | Image source | beautiful pictures

Few things cause financial hardship and anxiety more than a high-interest credit card debt.

Millions of Americans of all incomes carry large balances on credit cards which charge very high interest rates. According to Federal Reserve data, the average annual percentage on cards issued by commercial banks was 16.45% at the end of last year, and the rate charged with in-store credit cards could up to more than 20%.

While card balances are down significantly from their peak of $927 billion at the end of 2019, they remained at a high of $841 billion at the end of the first quarter and could continue to grow.

“Credit card debt is still a big problem,” said Rachel Gittleman, director of financial services outreach at the American Federation of Consumers. “There was some payoff at the start of the pandemic, but I think the balance could start to grow again as the cost of living rises.”

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If you’re having trouble making the minimum payments on your credit card balance, there are options to help you reduce the amount you owe and/or minimize the amount of interest you pay on the debt.

However, there is no silver bullet for high debt. The solution begins with changing your own behavior.

“The only long-term solution is to fix your spending habits,” says Summer Red, a senior financial advisor and educational manager at the Association for Financial Counseling and Planning Education. “Nothing will succeed unless you stick to a reduced spending plan.

“You must receive your spending below your income.”

Why you should consolidate your debt

A $10,000 credit card balance with 20% interest costs you $167 per month, and that only guarantees that your balance won’t get bigger. To start paying off your balance, you’ll have to do more work.

There are two main aspects to controlling your spending; Don’t use your credit card and draft a sustainable budget that includes paying off the card balance.

On the front, Red suggests people cut all but one of their credit cards. Do not cancel your account as your credit score will be affected

If you’re still struggling with the itch to use your card, put it in the freezer. “It takes about three hours for the credit card to thaw and be ready to use,” says Red. “That gives you time to think about your purchase.” Only use the card for purchases you can pay at the end of the month.

Working with a certified financial advisor can help you figure out your best options.

Rachel Gittleman

director of access to financial services at the American Federation of Consumers

On the second side, you’ll have to make some sacrifices to start reducing your balance. It could mean downsizing a house or apartment, selling a car or cooking at home more. It’s essential that you draft a budget that covers all of your expenses and income to determine where you can cut your spending and pay off debt.

Gittleman recommends seeking help. “Every consumer’s financial situation is different,” she said. “They have different debts, different spending habits, and different things of value to them.

“Working with a certified financial advisor can help you figure out your best options.”

For strategies to pay off debt, there are two basic repayment models. The first method – known as the snowball method – pays off the smallest debts first to motivate consumers. The idea is to pay the minimum amount on all outstanding balances to avoid late fees or higher interest fees, and then apply the remainder to your smallest outstanding balance.

When you pay off that balance, you move on to the next smallest balance. “The incentive to pay off debt is very valuable,” says Red. “It can be seen that it can be a powerful motivator for people.”

If you don’t need positive reinforcement, you can focus on the debt with the highest interest rate first. In the long run, the so-called avalanche method – from highest interest rate to lowest interest rate – will save you the most on interest costs.

While changing your spending pattern is the only thing that will get you out of debt in a sustainable way, there are other steps you can consider that can reduce the amount you owe or the interest you pay. . Here are four actions to consider:

  1. Call your credit card company to see if you can reduce the amount you owe or lower the interest rate on the debt. Don’t lead to the possibility of personal bankruptcy, but explain that you cannot pay your current balance on existing terms. Credit card companies want to get paid, and they can offer some relief to make sure they do.
  2. It might make sense to transfer credit card balances to other cards that don’t charge interest for a period of time, but they’re not free. They may offer 0% interest for a period of six or 12 months, but they usually charge an upfront fee of 3% to 4% of the balance. If you don’t pay off your debt within that grace period, you won’t be better off at the end of it.
  3. Consolidating your high-interest credit card debt and paying it off with a lower-interest personal loan can dramatically reduce your interest costs. Chances are, it will have to be a home loan if your credit record is poor. The downside is that if you don’t control your spending, your house could be at risk down the road.
  4. If your debts are simply too great — often because of medical expenses, which are a major factor in 60% of personal bankruptcies — bankruptcy may be your best bet. If most of your debts are unsecured, such as credit card balances and medical bills, bankruptcy can give you a fresh start. Talk to a financial advisor and bankruptcy attorney before taking this step.

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