If you’re overwhelmed with credit card debt, you can kick-start your payoff plan today with these three counterintuitive strategies.
If you’re feeling the squeeze, and even a little bit of shame, you are not alone. About one-third of Americans carry credit card debt from month to month, up 6% from 2022, according to a January 2023 Bankrate survey of 2,458 U.S. adults.
February marked a record high $4.82 trillion for consumer credit in the United States, according to a new report from the Federal Reserve. With interest rates higher than previous years, you may notice that your balances are rising faster than you can pay them off, which can be disheartening, and even a little scary.
As a money coach, I see many people leaping into paying the debt aggressively, only to boomerang back into debt because they skipped three fundamental moves.
Gather Your Total Net Worth In One Secure System
I’ve taught thousands of students since starting my financial education company in 2020, and the vast majority could not answer this question: What is your net worth?
Before paying down credit card debt, it’s important to understand how this debt fits into your overall financial well-being as measured by your net worth. Your net worth is calculated by taking the monetary value of everything that you own and subtracting out the monetary value of everything that you owe, including credit card debt, car loans, mortgages, student loans and other forms of debt.
I teach all of my students to track all of their finances in one system, such as a Mint or Empower. These kinds of tools track most kinds of accounts securely and automatically, to reduce the busywork of updating manual spreadsheets.
By putting this whole financial picture together, you are better able to see how your credit card debt is impacting your overall worth, and its relative impact to your finances. For example $5,000 worth of credit card debt is more impactful to someone whose net worth is $50,000 versus $500,000.
Budgeting apps also help track transactions and show how much interest you’re paying each month in actual dollars, versus percentages. Once my students see the dollar impact of the interest they paid, and have a place to document the progress over time, it tends to motivate them to stick to their payoff plan longer.
Set Aside One Month’s Worth of Expenses As Buffer In A High-Yield Savings Account
Before I became a money coach, I assumed most people who had credit card debt were people who overspent or lived beyond their means. But as I met more and more diverse students, I learned that oftentimes, credit card debt built up after a stressful or traumatic event such as a job layoff, a medical emergency, a divorce or a mental health challenge. One-time charges built up over time versus constant overspending.
People also falsely assume paying off debt will be a straight-line journey and might feel dejected when an unexpected expense derails their payoff progress. Before paying off credit card debt aggressively, I teach students to pay the minimum balances, open a high-yield savings account, and focus on saving up one month’s worth of expenses in a contingency fund.
Temporarily Pause Your Credit Card Use
This sounds obvious, but I’ve been surprised by the number of students I’ve coached who continue to regularly use their credit cards, even though they’ve racked up debt, because of one thing — they don’t want to give up the points.
Credit card companies have done such a good job of marketing this fear missing out on points that it masks the simple truth: If you carried any credit card debt, even for a month at the current average interest rate of 24.20%, you’ve paid for your points.
This can be a scary move if you’ve been reliant on your credit cards to pay your bills. When I stopped using credit cards in order to pay down my student loan debt, I felt the fear of missing out on points. But after a month of using only my debit card, it became abundantly clear I was overspending, because I started to overdraw from my account.
Temporarily pausing the use of credit cards showed what my real cash flow looked like, and it was undeniable that I needed to change the way I spent. If you find yourself reaching for cards while paying off debt, you can cut them up without closing the accounts, and request a new credit card once your debt is cleared.
The Bottom Line
Credit card debt is nothing to be ashamed of if you choose to let it be a short-term solution versus a long-term lifestyle. Getting started on a debt payoff plan is the hardest part, but as someone who has now lived debt free since 2019, I can attest that the freedom you’ll feel on the other side of this challenge will be well worth the short-term discomfort.
Read the full article here
