Making Your Money Last

Get a Handle on Your Credit Card Debt

Consider these smart strategies to eliminate or reduce what you owe.

Revolving credit, which includes credit cards, surged by 21.4% in March, according to the Federal Reserve. But at the same time that credit card debts are growing, rising interest rates have made carrying a balance more expensive.

After two years of pandemic-related restrictions, it's easy to understand the urge to spend more on experiences and make up for lost time. Some of us pay our credit cards in full every month and never carry a balance. However, that’s not the case for many millennials. If you’re carrying credit card debt, consider these strategies to eliminate or reduce what you owe—before it’s too late.

Take Stock of Your Debt

If you have balances on multiple credit cards, make a list that shows how much you owe on each card, the interest rate, and the minimum monthly payment for each. A spreadsheet provides a handy way to update your progress, but pen and paper work just as well. 

If you have a good credit score, a balance transfer could help you get out from under your debt. Many banks offer balance-transfer cards for new customers that come with an introductory 0% annual percentage rate for a limited amount of time—anywhere from 12 to 21 months, depending on the card. To avoid interest, pay off the balance before the introductory rate expires. Note that if you cancel your old card and the balance-transfer card has a lower credit limit, it could affect your credit-utilization ratio—the amount of your outstanding card balances reflected as a percentage of your card limits—which could lower your credit score, says Gerri Detweiler, author of The Ultimate Credit Handbook. 

This strategy only works if you resist the temptation to use the balance-transfer card to make new purchases, says Beverly Harzog, credit expert and author of Confessions of a Credit Junkie. You want to use the card to get out of debt, not add to it, she says. 

If your credit score isn’t high enough to meet the criteria for a 0% introductory rate on a balance-transfer card, you may qualify for a card with an introductory APR that’s lower than your current card’s rate, Harzog says. Another option is a debt-consolidation loan from a bank or credit union with a rate that’s lower than the rate you’re paying on your high-interest credit cards.  

Payoff Strategies

When you have balances on multiple credit cards, there are three approaches you can use to tackle the debt. The first is the “avalanche” approach. Begin with your cards that have the highest interest rates and the highest balances. Make the minimum payments on the lower-interest cards while devoting the rest of available funds to the high-interest cards. 

While the avalanche approach makes the most sense from a mathematical point of view, some people choose the “snowball” approach, paying off the low-balance debts first. Paying off your low-balance cards may give you the motivation you need to pay off all of your debts, even if it costs you more in interest.

Finally, there’s the “blizzard” approach, in which you start with the snowball and move to the avalanche. Begin by paying off one low-balance card so you have one success under your belt, then move on to those with higher rates.

Paying off your balances will make it difficult to save. But try to put aside enough in an emergency fund to cover three months’ worth of expenses. When you’ve paid off your debts, you can ramp up your savings so you’ll be prepared for unexpected expenses, which will reduce the risk of falling back into debt.

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