Overwhelmed by credit card debt? You’re not alone. Millions of Americans struggle with it each year. In fact, the average American adult has about $5,000 in credit card debt. Not to mention the over $1 trillion in accumulated credit card debt for all Americans. It’s an ongoing issue that is quite a concern for anyone who wants to improve their financial situation.
Fortunately, there are ways you can dig yourself out of debt. We’ll cover all the best options here in this extensive guide to credit card debt. So if you’re feeling stressed because you have tons of bills piling up and feel like you don’t know where to turn, stick around because this article will cover everything you should know.
An Overview of Credit Card Debt
When you get approved for a credit card, it’s an amazing feeling. Many of us start out with great aspirations of building a high credit score while saving money in the process with those handy cash-back awards just for using your card.
However, impulse purchases, emergencies, or major health issues, among many other things, can suddenly have us working in the wrong direction. The expenses start piling up, and you can’t make full payments on your card anymore. It doesn’t help that the average APR (annual percentage rate) on new cards is around 24%, further complicating the issue.
As you can see, it’s easy for debt to quickly get out of hand. With a 24% APR, your situation could look something like this:
Your car breaks down. To repair it, the cost will be $1,000. You need your car to be able to get to work, so you pay for the repairs. Then to make up for it, you have to put groceries, gas, childcare, etc. on your credit card.
When the monthly payment for your card comes up, you still haven’t recovered financially and can only make the minimum $25 payment. Unfortunately, the interest rate tacks on around $20 after you make your payment. Now, you’ve only made a $5 dent in paying that bill off.
Then the next month, your daughter gets really sick and needs to go to the doctor. That appointment ends up costing an additional $500 that you have to put on your credit card, putting you in an even worse situation.
It’s a spiral into debt like this that many Americans go through. That said, all hope is not lost if you are in this situation. You can make appropriate efforts to get out of debt. However, it will likely take some extra effort to get it done.
The Cost of Credit Card Debt
Let’s further break down the impact of credit card debt to illustrate how it works.
What Is APR?
APR (annual percentage rate) is the amount of interest you would pay if you carried a credit card balance for a full year. It’s typically broken down into a smaller percentage for the monthly interest you’ll see accruing on your credit card statements.
For example, if you have a 24% APR, your monthly interest on the balance carried over would be 2% (24% ÷ 12 months = 2% interest per month).
A 2% monthly interest rate doesn’t sound like a ton. After all, on a $1,000 balance, that’s just $20 extra. That’s how many people can get caught up in feeling ok about the accumulating interest. You may have even told yourself that it was alright and “you’ll pay it off next month.” Unfortunately, this has a compounding effect.
The Compounding Effect of Credit Card Interest
Credit card companies are sneaky. You see, they know that when they set up low minimum payments, it causes you to make a very small dent in your overall debt burden each month. Plus, you may continuously be spending on your card, accumulating more and more debt in a compounding way. Let’s take a look at what that could look like.
Example of Compounding Interest With Minimum Payments and Regular Expenses
| Month | Beginning Balance for the Month | Monthly Expenses | Minimum Payment | Balance After Payment | Interest Accrued With 24% APR (2% Monthly Interest) | Remaining Balance |
| January | $0 | $500 | $25 | $475 | $9.50 | $484.50 |
| February | $484.50 | $500 | $25 | $959.50 | $19.19 | $978.69 |
| March | $978.69 | $500 | $35 | $1,443.69 | $28.87 | $1,472.56 |
| April | $1,472.56 | $500 | $45 | $1,927.56 | $38.55 | $1,966.11 |
| May | $1,966.11 | $500 | $55 | $2,411.11 | $48.22 | $2,459.33 |
You can see from this example how debt can add up quickly. It took just 5 months for this person to rack up a credit card balance of nearly $2,500. It doesn’t take much.
And the interest really starts adding up. In this example, it’s around an extra $10 per month. It would be at over $100 in monthly interest by year’s end.
Not to mention if you’re late or miss a payment altogether, you get additional fees on top of that which add up.
The Impact on Financial Health
If building up debt isn’t enough of an impact on its own, it can also wreak havoc on your credit score. Particularly, the biggest effect is on your credit utilization, which is the percentage of debt out of your total credit limit. The higher this is, the more it will lower your credit score. It’s a big scoring factor making up 30% of your overall credit score.
When you have high credit utilization, it severely limits your financial opportunities. You’ll have a harder time getting approved for loans. If you do get approved, it will likely require a big down payment and still have high interest rates.
All of these impacts are why you want to solve credit card debt as soon as possible, or better yet, prevent it from happening in the first place. Let’s take a look at the options.
Strategies to Prevent Credit Card Debt
As the old saying goes, one of the best ways to avoid financial struggles is to avoid spending money you don’t have today. Unforeseen circumstances can make this hard to abide by, but it’s still a good idea to practice responsible credit card usage to avoid debt. Some ways you can do so are:
- Create a weekly or monthly budget: Creating a regular budget with your typical expenses, like gas, car insurance, groceries, etc., can be a great strategy. Try to plan for how many “extras” you can spend money on while still ensuring you have some funds you can save for a rainy day.
- Build an emergency fund: With that last point on saving for a rainy day, an emergency fund is an excellent idea. Depending on your personal situation, many people find that putting aside at least 5-10% of what they earn is a great strategy. It simply gives you a little bit of a cushion when emergencies or employment changes come up.
- Stay on schedule with your payments: When you spend on your credit card, you should be ready to pay it off. While there can be some merit to carrying a small balance to build your credit score, you should still aim to pay off the majority of your card balance each month or just pay the full thing off if you want to be safe.
Now that we have prevention down let’s look at how you can actually manage and pay off overwhelming credit card debt that has accrued.
Managing and Paying Off Credit Card Debt
So you have some credit card debt to tackle. How do you manage it and pay it off? Here are some great options.
Create An Effective Debt Management Plan
Unless you have a lump sum of cash lying around, the first step you should take is figuring out an effective plan to tackle your debt a little at a time. During this process, you’ll want to consider aspects like how much money you can pay on your credit card bill each month, your financial goals, and how soon you’d like to be debt-free. Here’s an example of how it might look.
Example of a Debt Management Plan
Randy has $7,000 in credit card debt that he’d like to pay off in the next year and a half. So he sits down to run the numbers.
His credit card has an APR of 22%, which means he’ll accrue about 1.83% in interest each month. When you calculate it out, that amounts to around $1,235.63 in interest accrued if the card is paid off in 18 months.
Having that number for total interest in hand, Randy knows that his payment plan will need to account for a total payment amount of $8,235.63. When you divide that by 18 months, you get roughly a payment of $457.54 each month.
Next, Randy looks at how much income he’s earning to see if that will be sustainable. He brings in around a $5,000 monthly salary. Given that $457 is just under 10% of what he makes, he finds that taking some measures to cut back, like limiting his nights out and cooking more meals at home, will leave him with enough money to execute the plan.
While plans like these do involve some sacrifices, it’s worth it to be debt-free and lower your overall stress levels. After these 18 months of consistent effort, Randy will have accomplished a great financial achievement that can change his entire situation for the better.
Debt Snowball vs. Avalanche Method
During the planning phase of your debt management plan, there’s another consideration you may need to make if you’re carrying debt on multiple cards with varying interest rates. It leaves many wondering if they’re better to tackle their high-interest or low-interest debt first. These two differing strategies are called the debt snowball method and the debt avalanche method.
The Debt Snowball Method
The debt snowball method involves paying off the lowest-interest debt first. It’s framed within the “snowball effect” that once you get rolling, things get easier and easier.
Your lowest-interest debt will be the easiest to pay off, so tackling that first can help someone build good habits that help them handle their other debt afterward. This is typically very useful for someone who struggles with spending issues and accrued debt from impulse purchases.
The issue with this method from a financial perspective is it doesn’t save as much money in the long term compared to paying off the highest-interest cards first. That said, if it’ll help you get on a roll toward good habits, then it’s well worth it to go this route.
The Debt Avalanche Method
The debt avalanche method takes the opposite approach. You’ll pay off your highest-interest debt first. As mentioned, this approach is best for saving money in the long run since it limits the amount of interest you accrue.
That said, high-interest debt is hard to take on, so you need to be prepared for the long haul with it. But when you’ll need to pay it off either way, taking it on right away isn’t a bad choice to get it out of the way.
Ultimately, whether you choose the snowball or avalanche method, there’s really no right or wrong as long as you get the debt paid off. So do what feels right for you. Plus, there are also options like trying to get a balance transfer card that can help equalize or minimize your interest rates to alleviate having to make this choice.
Debt Consolidation
Similar to balance transfer cards, debt consolidation involves taking out one loan to pay off individual credit cards. As mentioned, strategies like this can help to equalize your interest rates, or even lower them in some cases. But you do have to read the fine print with these options to ensure you get a good deal.
Debt Negotiation or Debt Settlement
Debt settlements or negotiations involve coming to agreements with creditors on debt where you’ve been struggling to make payments or when you have delinquent accounts. Typically, this comes in the form of negotiating to pay a lump sum of money that’s less than the total amount owed to remove the debt while allowing the creditor to get some payment.
While this can help alleviate debt burdens when you have delinquent accounts that you haven’t made payments on for a while, it does have a major impact on your credit score, which will take a bit to recover from. Plus, you actually have to be able to accumulate an appropriate lump-sum payment to have this option work in the first place.
Seeking Professional Help
When trying to manage an extensive amount of debt, a DIY approach isn’t always the best fit. It can be very helpful to meet with credit counseling agencies or debt management professionals.
These pros can take a look at your financial situation and help you create an effective payment plan that works within your needs. So while this service does come with a fee, it can be well worth it to invest in creating a plan that will be successful for you.
You can usually find a credit counseling agency by searching for “credit counseling near me” or something similar. Ideally, you want to look for agencies that are BBB-certified and have credentials like COA accreditation or HUD approval.
Is Bankruptcy Ever a Good Option?
Filing for bankruptcy will do severe harm to your credit score for 7 years, so it should always be considered a last resort. Those who may want to consider bankruptcy are when credit companies are suing for the debt owed, when your home is about to be foreclosed, or when you’re in a severely low-income situation where no payments are possible.
If you feel like bankruptcy might be the only choice, you should try to meet with a credit counselor, if possible, to discuss the details and ensure you aren’t missing any opportunities to alleviate the debt in other ways.
Helpful Debt Relief Options
If you feel like you’re at the end of your rope, but are still looking for other options other than bankruptcy, there are many services available that may be able to help. Here are some that you should look into:
- The National Debt Relief Program will provide you with a free consultation to see how they can help you navigate your debt problems in the best way. They can help with setting up payment plans and getting you on the right track toward success.
- Guardian Debt Relief provides a 5-step system that helps you get back on track with debt. They provide you with a free consultation to see if their services are right for you and can even help with debt consolidation in the process. They’re BBB-certified and trusted by the AFCC and IAPDA, so you know they’re a reliable service.
- CuraDebt can help with debt settlement, consolidation, negotiation, and tax debt struggles. They offer a free estimate to see if their services are right for your needs and can even work closely with organizations like the IRS to help get you out of any ongoing struggles.
Going with any of these organizations is a reliable choice for your credit card debt struggles. So if you feel like you have nowhere to turn and need a free consultation, they can provide you with some much-needed help.
Tips for Long-Term Financial Health
Once you get out of debt, or if you simply want to ensure you stay out of debt, you should use some best practices for long-term financial health.
- Maintain an ongoing budget: Staying on budget for the long term requires some willpower, but think about how much it’ll save you over time by avoiding debt struggles. Continuously plan for expenses and set aside funds for emergencies to stay on track.
- Build a positive credit history: Maximizing financial opportunities means you must optimize your credit score. Ensure you always make on-time payments, make efforts to lower your overall credit utilization, and avoid any unplanned impulse purchases.
- Identify ways to save money: You can make efforts to live more frugally. Think of ways to optimize, like cutting back on recurring expenses for things you don’t use, cooking more of your meals at home rather than eating out, or selling old items like tech products that you don’t use anymore for some extra cash.
With these efforts in mind, you will stay on the right track.
You Can Tackle Credit Card Debt to Live a Happier and Stress-Free Life
If you’re struggling with ongoing credit card debt, know that there are many ways out and resources that can help.
As discussed in this article, it will take some effort. After all, it’s easier to get into debt than to get out of it. But it’s like any good habit you want to build, putting the right pieces in place, like setting up a payment schedule and knowing the efforts it takes to save money, will help immensely.
If you need some extra motivation, it can be helpful to have a community behind you for support. You can feel free to leave a comment down below with your current situation and the efforts you want to make to get out of credit card debt. You can even come back regularly to give updates on your progress if you think it’ll help with accountability.
Our team at Refinement Fund will respond and give you encouragement along the way. We also encourage anyone who’s reading this to do the same and give positive motivation to anyone who comments below with their plans.
