Indications from the Federal Reserve show that in 2007 consumer debt in the U.S. remained fairly steady, averaging at approximately $8,500 per citizen. Roughly 37 percent of that consumer debt, according to the study, is revolving credit - defined as credit that is repeatedly available as periodic repayments are made. The most common type of revolving credit is credit cards. With nearly 164 million Americans toting credit cards (U.S. Census Bureau) on a daily basis, there's no denying credit is a way of life. But given unprecedented events in the economy recently, many Americans are also becoming more serious about paying off their credit card debt and padding their savings accounts.
Cutting credit card debt requires having a solid plan in place and a commitment to see it through. Here are six suggestions:
1. Limit credit card use.
Credit is convenient. That's why in a convenience-driven culture, it has proven to be so significant. But to eliminate the temptation of misusing a card, consider limiting card use. Before closing older credit accounts, keep in mind that doing so may hurt your credit score. Instead, store or cut up older cards but keep their accounts open. This is especially important for younger adults who are still establishing their credit history. Use cash as much as possible for everyday expenses. Paying with cash as you go will likely curb impulse purchases as well.
2. Pay more than the minimum payment. The actual amount of a minimum payment that goes to debt is minimal. For someone with a $1,500 balance on a credit card, a minimum payment mostly covers the interest or the privilege for carrying the card. Start adding more to each monthly payment and the life of the credit card debt starts to shrink quickly.
3. Use a lower interest card. There's no sense in paying 18 percent on a card when you could be paying half that. It's not a bad idea to contact the credit card issuer to negotiate a lower rate. Lowering the interest rate by several percentage points can help consumers emerge from debt more quickly. In a highly competitive credit card industry, most credit card companies will consider a request for a lower rate to those who pay their bills on time.
Over the term of a loan, paying a lower rate could save hundreds of dollars. For instance, a consumer with $10,000 in credit card debt and an interest rate of 20 percent will have to pay for 33 months to pay the card off with a $400/month payment. Assuming the same monthly payment, that debt would only take 30 months to pay off at 14 percent.
4. Use the snowball plan. For those who have balances on several cards, the snowball plan recommends attacking the smaller balances first and paying them off as quickly as possible. Once the accounts are paid off, the total amount paid on those accounts is applied to the larger balance cards. Each time a balance is paid, the consumer takes that additional money and rolls it into a larger payment to pay off the higher loans more quickly.
While paying off an account, it's important to continue to apply at least a minimum payment on all the other cards until the snowball can be applied to each one.
5. Pay bills on time. Forgetting to pay a bill one month could cause a credit card rate to jump significantly. Once that information is reported on a credit report, other creditors may also adjust their rates based on that information. This could be especially damaging for young adults who are just establishing credit. With limited information on a report, a 30-day delinquency can cause a credit score to tumble significantly.
6. Set up automatic payments. To ensure a payment is never late, consider setting up automatic transfers to a credit card issuer from a checking or savings account. While it's still the payee's responsibility to make sure accurate payments are being made each month, automatic payments help to create peace of mind. Why not set up an automatic deposit into a savings account as well? While paying off debts, you'll also be saving for the future - something every American needs to do.