7 Ways to Tackle Credit Card Debt in the New Year

Photo of a woman using smart phoneAccording to the Federal Reserve, the average American household has roughly $16,425 in credit card debt. While that’s a frightening number for many, some experts are paying closer attention to how many of those households are actually paying their bill each month.

A new report released by the Fed in November showed that 4.6% of all credit card debt had become at least 90 days delinquent during the third quarter of 2017. While this is well below the Great Recession, when it was as high as 11%, it’s up from 3.5% in the second quarter of 2016.

If you are one of the millions who carry credit card debt from month to month, then 2018 needs to be the year you kick the debt for good. Even though it might seem like an insurmountable task, it can be done. It takes a solid plan and some hard work.

To help you get started on the right path, here are some tips to help you eliminate your credit card debt and keep it away for good.

Consolidate Your Debt to a Single Card

According to Gallup, the average American has 2.6 credit cards. While this might not seem like a lot, it includes the 26% of all Americans who don’t carry any credit cards at all. If you are carrying debt on one card, the chances are high that you have debt on others as well. If so, one of the first things you can do is consolidate.

Consolidating your credit card debt can be done a few different ways, but the best option is to use a balance transfer card. These credit cards are specifically meant to help reduce the interest you’re paying each month and pay off your debt. By moving your credit card balances to one card, it will allow you to pay one monthly payment instead of several.

Balance transfer cards are pretty simple. Most will offer an introductory 0% APR period up to 21 months long. This will allow you to focus on paying down your balance without accruing additional interest. Just make sure you have a plan in place because once the introductory period is over, you will once again be subject to finance charges.

Pay Off the Card with the Highest APR

If you don’t feel comfortable taking on a new credit card, that is completely acceptable. Another strategy that people find useful is focusing on the credit card with the highest APR first. This is commonly referred to as the debt avalanche method.

Getting started is easy. List out all of your credit cards on a sheet of paper, starting with the card with the highest APR moving down to the lowest. Each month, pay the amount you have budgeted toward the card with the highest APR. Once the first card is paid off, move to the next card on the list. The debt avalanche method is the best way to minimize the amount you’re paying each month in interest.

Pay Off the Card with the Lowest Balance

Another popular method is the debt snowball method. Instead of focusing on the credit card with the highest APR, you’re going to focus on the lowest balance first. List all your cards starting with the lowest balance and working your way to the highest. The objective here is to pay off credit card debt while crediting yourself with small victories each time a card is paid down.

Many people find this tactic to be very helpful because it provides motivation to keep going. However, you will end up paying more in interest than you would with the debt avalanche method.

Ask Your Card Issuer for a Lower Rate

If you have been a cardholder for a lengthy period of time, then a phone call to your issuer could save you hundreds of dollars. Credit card companies are more than willing to work with customers who make timely payments and have a good credit score. Ask them if they would be willing to reduce your rate based on your past history. You might be pleasantly surprised.

“The credit card industry is extremely competitive, and card issuers are willing to go to great lengths to keep their valuable customers,” says Jason Steele, a credit expert with Offers.com. “You have nothing to lose by asking for a lower rate, and you are likely to get one if your credit has improved since you opened your account.”

Another angle that you could use as a negotiating point would be showing off a competitor’s offer. Most of us receive credit card applications weekly. If you find one that is offering a lower interest rate, use that to negotiate.

No matter which option you use, you should come away with a lower rate and more money in your pocket.

Understand How You Got to This Point

Paying off your credit card debt is only half the process. You also need to make sure you don’t find yourself back in the same position in the future. Before you can start making a change, you need to understand what habits and behaviors led you to this point. Credit cards can be a valuable financial tool, but they need to be used the right way.

Start Purchasing Only What You Can Afford

Most people find themselves with credit card debt because they didn’t stop to think about what they were purchasing. Instead, ask yourself if this purchase is something you can truly afford. If you needed to pay off the charge immediately, would you have the money in your bank account to do so? If not, then it might be a good time to rethink the purchase.

Don’t Miss Any Payments

Missing a credit card payment can be harmful in a couple of different ways. It can cause your credit score to take a hit. Payment history makes up roughly 35% of a person’s FICO score. Missing a payment can also start you down a path you don’t want to head. Now, instead of having just one payment due, you would need to pay two payments plus a late fee.

Know the Signs That Credit Card Debt Might Be Looming

Knowing what the warning signs were the first time around is the best way to make sure you avoid credit card debt in the future. One of the more common signs that a problem might be on the horizon is when you feel the need to use your credit card to start paying for necessities like rent, food and clothing. Other signs might include skipping a payment on one card so that you can pay another card. Or maybe you completely ignore the credit card statements when they arrive in the mail. These are all signs that you’re heading down the wrong path and need to take a quick step back.

As you start making your way through a new year, credit card debt should be a priority. But don’t stop once you pay off the last credit card bill. You need to understand why you were in that position to start with and what you need to do moving forward.