Managing Credit Card Debt
Unfortunately, living under the shadow of debt is a way of life for most Americans. Overall, U.S. household debt has increased by 11% in the past decade, and today the average household with credit card debt has balances totaling $16,425. The average household with any kind of debt owes $135,924, including mortgages.
Now, it can be debated whether there is such a thing as “good debt” and/or “bad debt.” For example, some financial planning experts would say that home mortgages and home equity loans might be considered good debt because it's tax-deductible.
But you would be hard-pressed to find any financial experts who would say that credit card debt is a good thing. Living outside of your means has become the norm, and charging purchases on high-interest cards and then hoping that they can be paid back over time by making minimum interest payments is a struggle that a lot of Americans have found themselves in.
In most instances, credit cards feature relatively high-interest rates. The current national average interest rate for credit cards is over 15%. Therefore, many financial planning experts recommend paying down and eventually eliminating credit card debt as a core factor in financial wellness planning..
A Three-Step Plan to Get Rid of Credit Card Debt
Paying off credit card debt usually requires a certain amount of discipline, as well as a concrete plan. Consider these three steps for getting out of credit card debt:
1. No New Purchases
Commit yourself to pay cash for all future purchases or using a debit card. In other words, stay liquid. If necessary, give yourself some "plastic surgery" – cut up those credit cards to avoid the temptation to use them.
2. Set Priorities
If you have multiple cards with balances, prioritize. There are two schools of thought here. One is to concentrate on paying off the card with the highest interest rate first and then move on to the next-highest-rate card, etc. The other is to concentrate on the card with the lowest balance first, and then move on to the next lowest balance, etc.
The first strategy will likely result in your saving more on interest. However, the second strategy may provide a psychological boost. Paying off a card in full can be very encouraging and can help motivate you to stick with your overall debt reduction plan.
One way to accomplish both is to transfer all your balances onto one low-interest card.
3. Set Goals and Milestones
Determine to pay off all of your credit card debt by a certain date. Make the goal realistic—the sooner the better, of course, but if your goal isn’t realistic, you may become discouraged if you don’t achieve it.
The Next Step
Once your credit card debt is paid off, consider depositing the money you were putting toward paying off the debt into a savings account, so you can pay for future financial emergencies in cash instead of charging them. Then, once you’ve built up an adequate emergency fund, consider investing a portion of the money into a retirement plan.
IMPORTANT DISCLOSURES
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities.
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David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual's personal circumstances. Member FINRA & SIPC