Ways to Eliminate Credit Card Debt in 2022
Debt is the most terrifying subject and has been at the forefront of American lives for decades. But credit card debt is the most vicious as it tends to have higher interest rates than student debt. It can tank a credit score if not aggressively managed.
According to a Moneygeek survey, the average cardholder in the US had $5,935 in credit card debt in Q4 2021. The total sum of credit card debt reached $860 billion in Q4 2021, which had since decreased from $894 billion in early 2020 but achieved a staggering growth up to $40 billion from Q4 2020.
The emergence of the pandemic gave birth to uncertainties and hardships, making it impossible for Americans to steer clear of credit card debt, with overall debt going up 5% since Q4 2020.
The important thing to note is that credit cards are beneficial only if you build credit and receive perks. But not paying high-interest rates on them. If the latter is the case, this shows these credit companies are draining the life out of you — making money from every fee paid by businesses that accept credit cards, transaction fees, and of course, interest.
Most new credit cards have an ARR of 17% and above. If you’d like to rid yourself of debt, you should consider abandoning the use of your credit cards completely. Up until you reach a stage where you won’t put yourself at financial risk. However, you could use them only if you:
a. Prepared an emergency fund that can cover 3 months’ worth of expenses and above, assuming you have nothing coming into your bank account.
b. Avoid late payments and can pay off your credit card debt in full every month, not just your minimum monthly payments.
It is also important to learn how to use credit cards responsibly because doing so would help prevent you from accumulating a great deal of debt. Plus, paying your credit balances in full every month should be a top priority.
“The most important reason is that it can help you build is a good credit score. If you pay your bills on time, whether they’re utilities, cable and phone bills, or credit card payments. This will show lenders that you’re responsible and conscientious about paying your debts,” says Kamy Turky — Financial Advisor at Solar Energy Hackers.
“If you carry a balance on the credit card(s) and pay interest, you’ll be saving way more money by paying off the balance each month. If your minimum payment is $20 per month but adds up to $180 in additional fees over 12 months, it’s probably better to just pay $200 every month. This way, you are not charged interest”.
You can easily calculate the amount of credit card debt you owe. How? By using a free credit monitoring service like Credit Sesame.
“If you’re struggling, one way to do this is to take out a personal loan from a bank or credit union to pay off your credit card balance and then making payments on the loan. This will likely have a lower interest rate than what you’re being charged on your credit card(s),” he adds.
Paying off credit card debts takes rigorous planning and commitment. But luckily for you, there are easier ways to do it which will be totally worth it.
- The Debt Snowball Method
Using this method, you’ll basically re-arrange your debts in ascending order without considering the interest rates on the cards. Then take the effort to pay the minimum balances on each of your credit card sums and send any extra cash you make into the credit card with the least interest-bearing balance.
The debt snowball method allows you to achieve results much faster. So it’s ideal for those who prefer to see quick results or save money on interest. But the problem is if you follow this path, you might end up getting higher interest rates over the long term.
Let’s have an example of how this exact method would play out if you’re faced with five credit cards of different balances and interest rates.
a. $520 with 0% interest rate.
b. $748 with 7% interest rate
c. $4,000 with 14% interest rate.
d. $873 with 16% interest rate.
e. $1,641 with 25% interest rate.
If you chose the debt snowball method, you’d start by paying credit card A and then credit card B. Next is credit card D, followed by E and C.
Whichever method you choose, it’s important to make sure your decision is based on what is right for you. Be it getting quick results or saving money on interest.
2. The Debt Avalanche Method
The debt avalanche and the snowball method require you to take a critical look into your debts and break them down into bite-sized chunks. Thus, making it easier to stay motivated or get faster results.
Using this method, you’d simply re-arrange your credit card debts in descending order (from highest to lowest interest rates). After that, it’s time to pay the minimum balances on each of your credit card accounts that are due. And sending any extra cash you make into the credit card earning the highest interest rate.
“Avoid paying interest by paying off your credit card balances. Even if you have a credit card with a high APR, paying off your statement balance in full will prevent you from paying interest altogether. This saves money each month that would have gone towards interest and having lower balances relative to your credit card limits helps improve your credit scores further,” says Nathan Grant, Senior Credit Industry Analyst at Credit Card Insider.
In the end, the outstanding balances of that card will be paid in full and you no longer have to make monthly payments. Next, you start paying the credit card debt succeeding the former with the highest interest rates, and so forth until all your credit balances are paid off.
3. Create a Budget in Spreadsheet
“If you’re struggling with on-time payments, the best ways to be able to pay EMIs monthly is to do some budget planning, increase your repayments, use your investment returns, and practice debt consolidation,” says Christopher Liew CFA — Creator of Wealth Awesome.
One of the ways to pay off your credit card debts is to create a budget spreadsheet to help you track all income and expenses. Start by looking at past income and expenses month after month and organize them into spreadsheets. Do this for the span of the past 3–5 months.
From there, you need to separate your needs from your wants. Your needs start from groceries, rent, utilities, and so on. Wants on the other hand, are just mere non-essentials such as taking a vacation to Paris.
So it’s important to separate your essentials from non-essentials by including them in your spreadsheet and commit to spending only on essentials. Remember to keep your budget spreadsheet close to keep track of your progress and hold yourself accountable.
“It also increases your credit limit. This is useful for when you find yourself in a bind and need more money than usual. Also, a higher credit limit will assist in saving money by bringing down the percentage of credit usage,” says Luis Lopez of Go Freight Hub.
4. Start Building an Emergency Fund
Making an efficient budget is essential and it would be wise to take a small portion of your income — preferably one you don’t need to spend right away and deposit it directly into an emergency fund. This makes you extra cautious which is always helpful in shielding against a financial crisis like sudden unemployment or falling into more debt.
This has never been truer with the world going through a pandemic, and global economies still on the cusp of recovering. You would want to build a nest egg as there is still a bit of financial uncertainty. This could likely continue over the years.
Debt can be the only way out if you have no income saved to help you go through a financial crisis. Emergency funds, however, can be seen as financial safeguards. So creating a stash of income will prevent you from running into a situation where you need to increase your debt burden, thereby creating a breathing room.
5. See if you Qualify for a Balance Transfer Card
It’s important to assess your debt and look for options that provide debt relief. One such debt relief is a balance transfer card. However, not every debt relief will be available to anyone because what is available to one person depends on the nature and severity of that person’s debt. Balance transfer cards have the outstanding benefit of saving money on interest rates by allowing you to transfer all outstanding balances of a card with a high-interest rate to a card with literally no interest. It’s faster to pay off debt using this method if you have $5,000 or less in credit card debt.
- See if you qualify for a card with better terms and rates. For balance transfer cards, the prerequisite is to have a good to excellent credit score. This accounts for having a FICO score of 670 and beyond, and you’ll be able to pay off your credit card debt within a year or less, making them a good option.
Typically, almost all of these cards issue a 0% interest rate for one year and up to 18 months without an annual fee. They also have 3% to 6% transfer fees on balances but you could also find cards with 0 fees.
6. Talk and Negotiate with your Credit Card Providers
Sometimes, you might feel like you’re drowning in debt and there’s no way out of it. When this happens, it might be time to have a word with your credit card company to see how you might be able to make things easier. It sounds intimidating, I know — but believe it or not, these financial institutions want to keep you as a customer, which means they might be open to negotiations. So explain your financial situation to the card issuer.
The way this plays out is one of two scenarios. It is either:
a. Your credit card issuer might be willing to offer relaxation on the interest rates and other hardship programs. You can search for credit cards who are close competitors to yours with better rates. Then see if you qualify for them and share them with your credit card company to see if they would waiver yours — or late fees at the very least.
b. You convince them to let go of your debt or part of it. This could work if you’re in serious financial trouble. You could both agree to pay a slice of the balance owed as payment in full while they waive the rest, including late payments. This should give you some breathing room.
7. Consider a Consolidated Loan
“To get a loan, you need to ensure a healthy credit score, which will assist you in having more loans in the future. Not paying your credit card balances would showcase the inability to repay bank loans. Therefore, banks won’t consider giving you heavy loans for business/education or other purposes.
The goodwill you’ll create with the bank is perhaps the biggest advantage. Since you’ll be paying your credit card bills on time, banks may consider providing you with an overdraft facility. Plus you’ll also avoid any late fees or interest charges if you’re paying back bills on time,” says Sally Stevens, Financial analyst at FastPeopleSearch.io.
