Americans’ $868 Billion Problem
by Kailey Hagen
Student loan debt gets a lot of attention these days because it’s crippling many new graduates’ ability to save for their future and ruining the credit of those unable to keep up with their payments. But it’s not the only serious debt problem Americans are struggling with.
The Federal Reserve Bank of New York reports that Americans now carry a collective $868 billion in credit card debt, and delinquencies are rising. Credit card debt ties with mortgages for the most common type of debt in America, according to Northwestern Mutual’s 2019 Planning & Progress Study. Here’s a closer look at how the problem got so bad, and what you can do about it if you’re one of the millions of Americans who are shouldering part of this burden.
The problem with credit card debt
Credit cards are a valuable way to earn rewards on your everyday purchases and they can help you finance big purchases because you’re buying now and paying later. But if you can’t pay back what you borrow at the end of the month, your remaining balance starts to accrue interest.
Credit card interest rates are notoriously high — in some cases, more than 30% — and this causes your balance to grow quickly, making it more difficult to pay off. If you continue to charge new purchases to the credit card, the problem only gets worse.
Nearly one-third of Americans report paying interest rates greater than 15% on their credit cards, according to the Northwestern Mutual survey, while 19% reported that they don’t even know what their rate is. Failing to understand this important factor can make it difficult to come up with an effective debt repayment strategy because you don’t know which card to target first.
Credit card issuers also make it easy to take on debt because they only require a small monthly minimum payment. About 12% of Americans say they always make the minimum payment, while an additional 15% say they often do.
It may be tempting to only pay the minimum if you are unfamiliar with credit card terms or don’t fully understand the consequences of not paying your bill in full. Others might only be able to afford the minimum payment, especially if they have a lot of credit card debt.
But this amount will only cover your monthly interest charges and won’t decrease the principal. Essentially, it’s just kicking the problem down the road a little bit — and costing you money. And if you’re charging more to the card each month, you’ll raise your principal balance, which will in turn increase your monthly interest payments. It all adds up to a costly and often debilitating debt cycle that some Americans never get out of.
How to get rid of your credit card debt for good
Digging yourself out of credit card debt will probably take months or even years, depending on how much debt you have, but it is doable. You just need the right strategy.
First, make a list of all the credit cards you’re carrying debt on and note their balances and annual percentage rates (APRs). You can find this information in your cardholder agreement. Then, order them by APR, with the card that has the highest APR first and the one with the lowest APR last. If two cards have the same APR, put the one with the lower balance on top.
You should aim to pay your cards off in this order if you want to pay the least overall interest.
Aim to make the minimum payments on all of your cards each month to avoid late fees and then put all of your extra cash toward the card at the top of your list. When you’ve paid off that debt, move onto the next card on your list, and so on until they’re all paid off. Try to avoid charging new purchases to your credit cards during this time so that you don’t drive up the balances. You may need to cut back spending in order to free up cash for debt repayment, or you could try working a little extra.
Your card issuer may also be willing to reduce your interest rate if you request it. Reach out to the company by phone and explain why you would like a lower interest rate. Highlight your loyalty if you’ve had the card for a while, and your good payment history, if you have one. You could also threaten to transfer your balance to a different card issuer if it doesn’t comply. Be firm, but stay polite. Card issuers aren’t obligated to change their terms for you.
If your card issuer refuses to lower your interest rate, you can make good on your threat and transfer your balance to a new card that offers a 0% introductory APR on balance transfers. This temporarily halts the growth of your balance, which can make your debt easier to pay off. But you’ll pay a fee, and if you don’t pay off your balance in full before the introductory period ends, the remaining balance will begin to accrue interest at your new card’s interest rate.
Another option is to take out a personal loan to cover the debt. Personal loan interest rates also tend to be high, so this isn’t the most affordable solution, but it will get you a regular monthly payment so that you won’t have to worry about your balance increasing any further.
It goes without saying that if you’re going to try the above debt repayment strategies, you must make an effort to avoid taking on new credit card debt in the future. Stick to a budget and monitor your spending each month to ensure you don’t carry a balance anymore. It’s a lot of work, but it’ll be worth it in the end, both for your wallet and your peace of mind.
This content was produced by The Ascent, a personal finance brand by The Motley Fool.
