Credit Card Debt and How to Fix It

  • Credit Card Debt

We’re living in a throwaway society hellbent on spending money we don’t have for things we rarely need, and this attitude has led to a lifetime of debt for millions of Americans. Credit cards are at the epicenter of this issue and have contributed billions of dollars to America’s rapidly escalating debt crisis.

The average credit card debt is between $5,500 and $8,000 and every year millions of Americans are crippled financially as a result of this debt. With that in mind, what can the average debtor do to clear credit card debt and get back on their feet?

How Credit Card Debt Works

190 million Americans have a credit card and the majority have at least 3. For many, a credit card is a rite of passage, a plastic permit that welcomes them into adulthood and all the responsibilities and obligations that go with it. But while most Americans have them, very few actually understand how they work.

  • Why have I paid $5,000 of interest on a debt of $20,000 when the interest rate is less than 20%?
  • Why am I being charged small amounts of interest when I clear my card every month?
  • Why is my debt high but my interest low?

These are very basic and common questions relating to credit card debt and we’ll answer them all in this guide.

How is Credit Card Interest Generated?

First, let’s tackle the big one, the question on the minds of many new credit card users but one that most are too embarrassed to ask: How does credit card interest work?

All interest is calculated as an annual percentage rate, known as an APR. This rate makes it easier for a user to compare cards, but the number itself isn’t exactly clear and obvious. After all, if you’re being charged a 20% annual rate on a $10,000 debt, you should pay just $2,000, but most credit cards charge much more.

That’s because the interest compounds and is calculated every single day. As an example, if you have an interest rate of 15% then you’re being charged .041% every day. If you have a balance of $10,000 on day 1, the interest will be added, and the balance will grow to $10,004.10. The 0.41% charged at the end of day 2 is levied against the new balance and this continues every day, which means the balance will have grown by $130 by the end of the month.

The greater your balance, the higher the interest rate and the faster your balance will grow. 

This is also why some users may find themselves paying very little interest despite having a large balance. If your balance is $20,000, but you repay $10,000 in week 1, add $5,000 in week 2, pay $15,000 in week 3, and add $20,000 in week 4, you have the same balance at the end of the month, but it hasn’t had 30 days to compound on the full $20,000.

That leaves one question: Why am I being charged interest if I repay my balance?

This is often the result of cash withdrawals. Not only do some credit card companies charge you a flat fee for making cash withdrawals, but they also charge high-interest rates, often up to 27%. Cash advance fees and cash withdrawal fees are levied when you withdraw money from your credit card using an ATM, but they are also charged on payments made in casinos, lottery ticket purchases, money orders, and some foreign currency purchases.

How Much Credit Card Debt is too Much?

There is no upper limit—it all depends on how much you earn and how comfortable you are with that debt. $10,000 is an insurmountable sum to someone who earns $2,000 a month and has a family of four to feed, but it’s insignificant to someone living alone and earning a 7-figure salary.

To estimate how much is too much for your financial situation, you can use the debt-to-income ratio. This calculates your total monthly income and compares it to your combined monthly payments. As an example:

Monthly Income:

  • Salary = $4,000 
  • Bonuses = $500
  • Investments = $500 

Monthly Debt Payments:

  • Credit Card 1 = $500
  • Credit Card 2 = $250
  • Credit Card 3 = $250
  • Mortgage = $1,000

Total Debt-to-Income Ratio = 40% ($2,000 is 40% of $5,000)

This ratio won’t directly impact your credit score, but it’s used by mortgage lenders and other lenders to determine your creditworthiness.

The ideal score is less than 20%, while anything above 50% is considered high. Some lenders will refuse anyone with a debt-to-income ratio greater than 43%, others set the bar much lower. 

This ratio is just as important for assessing your own financial situation because the higher it climbs, the closer you get to missing monthly payments and filing for bankruptcy. Many debtors struggle because they bury their heads in the sand—acquiring more debt even though their income remains the same—and never truly understand just how deep into the red they are until it’s too late.

How Does Credit Card Debt Affect Your Credit Score?

There are several ways that credit card debt can impact your credit score, some more damaging than others:

  • Applications: Every time you apply for a new loan or credit card, you run the risk of initiating a hard inquiry, which can reduce your FICO Score by as much as 5 points. Credit scoring agencies allow for something known as “Rate Shopping”, whereby all applications for the same credit type are bundled into the same inquiry if they occur within a fixed period. However, this doesn’t apply to credit cards and each one can trigger a hard inquiry.
  • New Accounts: Your score suffers every time you open a new account. 10% of your score is based on new credit accounts while a further 15% is based on credit length. A new credit card will directly impact the former and indirectly affect the latter.
  • Payment History: The more cards you have, the greater your risk of missing payments. Payment history is the single most important part of your credit score, accounting for more than a third of your total score, and this drops every time you miss a payment.
  • Credit Utilization: Your credit utilization score accounts for 30% of your credit score and compares all available credit against total accumulated debt. If you have two credit cards with limits of $10,000 each and balances of $9,000, your credit utilization will be 90%, which is poor. You can improve this score by clearing debt, increasing credit limits, and keeping cleared cards active.
  • Credit Types: 10% of your score is based on credit variety. If you only have credit cards, this aspect will suffer. 

Average Credit Card Debt in the US

The average credit card debt is somewhere between $5,000 and $6,000 per user and $10,000 per household, while the average user holds between 2 and 4 credit cards. The problem with the average credit card debt is that every survey, site, and credit agency arrives at a different figure.

According to a leading and highly quotable financial site, the average credit card debt is $8,000 per user and $16,000 per household. However, if you ask Experian, the figure is closer to $6,500 per user and $11,000 per household, and if you ask the Federal Reserve it’s a fraction under $5,700.

It’s all pretty confusing, to say the least, but that’s because everyone gets their data from different places. Financial sites use limited surveys that ask several hundred or several thousand consumers and then extrapolate. But ask yourself this, if a random person approached you with a clipboard and asked you how much credit card debt you have, would you be honest with them?

Probably not. And even if you were, just because you and 200 people have $20,000 worth of credit card debt doesn’t mean that everyone else in the country has the same.

Other average credit card debt statistics are built using credit report data. This is a little more reliable, but it’s not without its flaws. The average person considers credit card debt to be an unpaid, rolling balance, as opposed to one that is accumulated on day 1 and then cleared on day 30. Credit reports don’t differentiate between the two, which skews the results somewhat.

Needless to say, it’s hard to arrive at an exact figure for average credit card debt in the United States, but we can say with relative certainty that it’s one of the highest averages in the developed world and is enough to cause serious concern for every single debtor.

Consequences of Missing Credit Card Payments

What happens if you miss a payment? How long do you have before it hits your credit report and how costly will it be?

Let’s find out.

What Happens if you Miss a Single Credit Card Payment?

In the first instance, you will be charged a late fee, which can be around $30 to $40 and is charged even if you’re late by a single day. You may also incur a penalty rate, which typically maxes out at 29.99% APR, nearly 10% higher than the average credit card APR.

If you miss your payment by 30 days, it will show on your credit report as a derogatory mark, reducing your score by up to 100 points. The exact reduction will depend on how high your score is to begin with, but it’s enough to significantly reduce your creditworthiness at any level.

If you have missed a payment or are expecting to do so, contact your credit card company as soon as you can and discuss your options with them.

What Happens When You Stop Paying a Credit Card?

After a few months of missed payments, your account may enter collections. Debt collection agencies buy bulk debts of similar ages and types and then contact the borrowers to seek repayment.

They purchase debts cheaply, so their profit margin is huge, and they’ll often request a single, lump-sum settlement or several large monthly payments. They can contact friends, family, and even your place of work to track you down and they can also offer you settlement amounts and repayment plans. The agency may also sell the debt to another company, after which the process will repeat. 

However, they can’t divulge information to anyone but the debtor and there are strict rules governing what they are allowed to say and do. 

If you refuse to agree on a settlement or a repayment plan, they may sue you, although this is rare. They can also continue to contact you even after the statute of limitations has passed and if you agree to pay them then the debt may become valid again.

How Long Does Unpaid Credit Card Debt Stay on your Credit Report?

A credit card debt can remain on your credit report for 7 years from the date that it was charged-off. A charge-off means that the debt was officially declared as a loss by the creditor. The closer you get to that 7-year period, the less of an impact it will have on your score, and as soon as those 7 years are up then it will disappear.

Methods for Paying Off Credit Card Debt

As scary as your credit card balance may seem and as crippling as the debt may feel, it’s actually one of the more manageable debts and there are multiple debt relief options and pay off strategies. 

It sounds crazy when you consider how high the average credit card debt is in the United States, but it’s worth noting that this debt is unsecured, creditors are quick to sell it to debt collectors, and if you die or declare bankruptcy, they’re forced to form a queue behind pretty much every other type of debt.

Pay Off Strategies

Payoff strategies should always be considered before you look at debt management, debt settlement or a debt consolidation loan. They won’t reduce your credit score, charge significant fees or require you to obtain additional lines of credit or personal loans.

There are two main pay off strategies:

  • Debt Snowball Method: List your credit card debts from the smallest balance to the biggest and then focus your attention on clearing debts from the first to the last.
  • Debt Avalanche Method: List all debts based on interest rates, from highest to lowest, and then work your way down the list.

These methods require you to make extra payments while continuing to meet your monthly payments. This is easier said than done, but there are a few tips that can help you out:

  • Spend less and budget more.
  • Stop wasting money on luxuries.
  • Use cash from unexpected windfalls.
  • Sell unwanted items online or in a garage sale.
  • Ask for a promotion or raise.
  • Take on a part-time job.
  • Use your skills to enter the gig economy.

Debt Settlement

The debt settlement process was made for credit card debt and it works best when you have a lot of debt and derogatory marks.

As discussed already, your credit card company won’t wait around forever. If you don’t meet your obligations, they’ll give you a few months, report to the credit bureaus, and then sell your debt to a debt collector for cents on the dollar. 

This means that both the creditor and collector are inclined to settle your debt for much less, as it’s still more than they would get by selling or discharging it. A debt settlement company will use this knowledge to their advantage and settle for a fraction of the original balance, often saving debtors as much as 50%.

Their fees are charged as a percentage of the debt or a percentage of the money saved, but these fees are only taken when the settlement process has been finalized. This process can take 3 to 5 years and in that time you will be required to cover the settlement amounts, field phone calls from collectors, and deal with a lot of hassle, but at the end of it your debts will be cleared and you’ll have saved a lot of money.

A debt settlement program is one of the cheapest ways to clear credit card debt, but it’s not without its issues. The debt settlement company will ask that you stop making monthly payments, which reduces your credit score and increases your chances of being sued.

If you come into a sum of money and have had a few missed payments, you can try some personal debt settlement. Just contact your credit card company and offer a settlement amount. Start low and negotiate from there with the understanding that it may require multiple letters and phone calls and won’t happen overnight.

Debt Consolidation Loan

A debt consolidation loan uses one large loan to pay off many smaller ones. A debt consolidation loan company will give you a loan large enough to cover your debts at an interest rate small enough to reduce your minimum payments.

Sounds too good to be true, right? Well, there is one big issue.

While debt consolidation will reduce your monthly payment, it will do so at the expense of your loan term and total interest. You may pay several hundred dollars less per month, but you’ll be making that minimum payment for years to come

Balance Transfer

A balance transfer entails moving all your credit card debt (typically up to 5 credit card balances) onto a single credit card. There are specific balance transfer credit cards created for this process and they all offer a 0% APR introductory period that can last anywhere from 6 months to 18 months. In this time, you don’t pay any interest on your balance and only when that period ends will that interest start accumulating again.

The idea is simple: Use this trial period to clear your debt so that when it ends, you have a smaller balance, will accumulate less interest, and clear your debt quicker.

  • Balance transfer cards may charge a higher-than-average APR once the introductory period ends.
  • There may be additional fees.
  • You can transfer anywhere from 1 to 5 balances.
  • You can’t transfer balances to cards owned by the same credit card companies.

You need to pay a small transfer fee, often between 3% and 5%, but, in most cases, you’ll save much more than you’ll spend.

As an example, let’s imagine that you have a credit card debt of $20,000 split between several cards. The interest rate averages out at 25% and you have a combined minimum monthly payment of $800. In three years, you’ll clear this debt entirely but, in that time, you’ll pay over $8,000 in interest.

If you move the balance to a card with a 0% APR that lasts for 18 months and pay a 5% transfer fee, that balance will grow to $21,000. If you continue to make your minimum payment of $800, you’ll reduce that balance to just $6,600 once the introductory period ends. You can then clear it in just 10 months, paying less than $800 interest.

Debt Management

A debt management program can help you to consolidate your debt without adding many years to the term and many thousands to the balance. Its debt consolidation offered by nonprofit companies. They will assume control of your debts and agree terms with your creditors to make your payments more manageable. 

All future payments are processed via the debt management plan, after which they will be distributed to the relevant creditors, including credit card companies and loan providers. There are many benefits to debt management programs, but they’ll also ask that you close most of your credit accounts, leaving only one account open for emergencies. This will reduce your credit utilization ratio and could reduce your credit score significantly. 

Bankruptcy

It seems silly to place bankruptcy on a list of debt relief options. It’s a last resort, after all, and not something you should rush into. However, if you feel like your debts are getting the better of you and you have nowhere else to turn, it’s an option worth considering.

Chapter 7 bankruptcy will seek to liquidate your assets and use these to clear your debts. If you only have $10,000 worth of assets and $20,000 worth of debts, it doesn’t matter—they’ll still be discharged, and you can still move on. There are some debts that can’t be discharged, but credit card debt is not on that list.

Chapter 13 bankruptcy is less destructive and allows you to create a structured repayment plan, ensuring your creditors get what’s owed to them but in a way that doesn’t cripple you financially. Bankruptcy is expensive and will leave a negative mark on your credit report that remains for years, but it wipes the slate clean and allows you to carefully rebuild.

  • Bankruptcy can remain on your credit report for 7 to 10 years.
  • The process can cost up to $4,000 in filing fees and attorney fees.
  • You will be required to see a credit counselor.
  • Debts accumulated within 90 days will not be dismissed in bankruptcy.
  • Bankruptcy can seriously reduce your credit score.

If you need more help filing for bankruptcy, we have numerous guides covering the many aspects of this legal process, including Chapter 13 vs Chapter 7 Bankruptcy and How to Rebuild Your Credit After Bankruptcy.

Other Credit Card Debt Relief

The debt relief industry is huge and there are a multitude of ways you can pay someone to help you clear your debt and rediscover your financial freedom. But there are also a few ways it will clear on its own.

Circumstances in Which Credit Card Debt Can be Forgiven

Unlike student loans, the government doesn’t hand out a free pass for credit card debt just because you work in the public sector. However, there are a few ways it can be forgiven:

  • Debt Acquired as a Minor: If you accumulated the debt before you turned 18, then technically you did so illegally and are not obligated to repay it. This doesn’t apply, however, if it was co-signed.
  • Statute of Limitations: All debt has a statute of limitations and when this passes, you’re no longer legally responsible for it. This law changes from state to state and debt to debt.
  • Stolen Card: If the debt isn’t yours and was accumulated via fraud, you can have it forgiven as per the Fair Credit Billing Act.

What Happens to Credit Card Debt When You Die?

If you reside in a Community Property State, your spouse may be responsible for your debt when you die, but only if it was accumulated during the marriage. However, in every other state, the creditors will be forced to collect from your estate. If there is no money in that estate or it goes to debt with higher authority (such as tax debt or medical debt accumulated within 6 months of death) they won’t get anything.

Summary: Credit Card Debt isn’t as Bad as you Think

Debt is always bad. It can leave you stressed, anxious, and tired—it can impact your sleep, your confidence, your health. However, credit card debt is generally one of the easier debts to escape from. 

On the one hand, it comes with high-interest rates and can trap you in a cycle of persistent debt. On the other hand, there are a multitude of escape routes, creditors are more open to accept settlements, and if all else fails you can always file for bankruptcy or wait for the statute of limitations to pass.

Don’t let credit card debt get the better of you, fight back, use payoff strategies and debt relief programs, and regain your financial freedom!

Source: pocketyourdollars.com

Credit Card Debt in the United States: Trends and Issues

  • Credit Card Debt

The average American consumer receives their first credit card aged 20. For many, it’s an exciting time, further proof they have ascended into adulthood and are ready for financial independence. 

The delinquency rate is high on these cards, but the credit is low, often between $1,500 and $2,000, and it gives the borrower a way to improve their credit score.

It also adds another cog to the massive US debt machine, one that creates more debt, more delinquencies, and more problems than any other. But why is this, why is the average credit card debt so high, and can anything be done about it?

State of American Credit Card Debt

The average US debtor has over $6,500 worth of credit card debt and in total the country owes more than $1 trillion. The average credit card APR is around 18%, and if we plug these two figures into a monthly repayment calculator and suppose that the debtor seeks to clear the balance in 5 years, then the average minimum monthly repayment is close to $120 and they’ll repay over $14,000 in total.

That’s not great, but it’s not that bad either, at least not at first glance. The problem is, it supposes that the debtor will stop using all credit card accounts, accumulate no more debt, and meet all monthly repayments. If not, their credit score will suffer, that 5-year term will almost certainly be prolonged, and there will be serious financial implications.  

How Much Credit Card Debt Does the Average American Have?

The average credit card debt is said to be $6,506. According to data published by the Federal Reserve, store cards, which tend to have the highest rates, account for $1,901 of this total, while the average per account is $1,760. This data also tells us that the average amount spent on a card with no balance is $1,154, which means even individuals who clear their cards every month are spending in excess of $1,000 on them.

55% of Americans with credit cards have balances they don’t clear every month and credit card delinquency is increasingly common, accounting for around 2% of total credit accounts. 

Which States Have the Highest Credit Card Debt?

You might expect the highest revolving credit card debt to be in New York or California, but it’s actually in Alaska. Connecticut follows closely behind. New Jersey, Virginia, Maryland, and Hawaii are next.

It’s no coincidence that these 6 states are all ranked in the top ten for the highest household income. The cost of living is also higher than the national average. The honor of the lowest average credit card debt goes to Iowa, Wisconsin, and Mississippi, where the cost of living is around 10% less than the national average.

Which Age Groups Have the Highest Debt?

Every few years the Federal Reserve conducts a survey that looks at debt across the age groups. Generational differences seem to have been in the news a lot lately, with Millennials and Baby Boomers often occupying opposing sides. It’s true that these generations have experienced life very differently with regards to opportunities, income, and debt, but they’ll both be happy to know that they have much less debt than other generations.

In fact, the last survey conducted by the Federal Reserve found that those aged 65 to 74 ($66,000) have a similar debt to those under the age of 35 ($67,400). Adults above the age of 75 have close to half that amount Gen Xers have the highest, nearly twice as much as Millennials and Baby Boomers.

Of course, we don’t need the Federal Reserve to tell us that debt is much less likely in those aged 75 and up. They’re often retired, have paid off the mortgage and are also more likely to have been in receipt of life insurance policies and inheritances. It will come as a surprise to many, however, to know that Millennials, on average, have half the debt of the generation that came before.

US Compared to Rest of World

Americans love credit, there’s no denying that. It’s very easy to acquire large amounts of debt in this country, and it’s just as easy to find a balance transfer card, personal loan, or debt consolidation loan to help you tackle it. 

But why are things so different here when compared to the rest of the world? 

Why is this Problem Worse in the United States?

American debtors have it much worse than debtors in other countries. Debt is more common, it tends to be much higher, and it’s widespread across all demographics. 

It’s easy to understand some of the reasons behind this difference, but not all. As an example, take student loan debt, which accounts for a significant proportion of young adult debt. The average cost of education is just under $25,000 when accounting for all institutions (private schooling costs around $42,000 while public schooling is below $18,000). 

Scholarships are available and many American families save money throughout the child’s lifetime so they can cover these fees when needed. The vast majority, however, are forced to acquire student loans, which can hang over their heads for years. In many European countries, college is free, and while there are some universities that charge, the fees tend to be significantly less, and the student loan systems are also more forgiving.

It’s the same with healthcare, which is cheap or free elsewhere, but hugely expensive in the US. However, it’s a different story with credit cards, so why is America’s average credit card debt so much higher than it is in other countries?

Why Average Credit Card Debt is Higher

There are many reasons America’s average credit card debt is higher than it is elsewhere, but the main reason is actually quite simple: American credit cards are better.

And we don’t mean that in a patriotic, “U. S. A!” way. 

Take the UK as an example, as our cousins across the pond have a very similar financial system. They have balance transfer cards, reward cards, credit scores, credit reports—they even have many of the same credit card companies that we have.

But they don’t enjoy the same freedom that Americans have when it comes to choosing a credit card. Competition isn’t as high, and rewards average a mere 0.5% cashback. US credit cards, on the other hand, offer as much as 5% through introductory offers and 1% to 2% thereafter.

The average APR is also lower here in the US, clocking in at 24.7% in the UK and less than 18% in the US. What’s more, surveys in 2018 and 2019 suggest that Americans use cash for just 14% of purchases, while in the UK it’s closer to 40%, and we know that credit leads to more impulsive purchases.

Simply put, the US is more obsessed with credit and banks, card providers, and lenders are taking advantage of that. That’s why the average credit card debt is much higher. 

Household Income vs Debt

The median household income in the US is over $62,000, but if you include student loans, credit cards, and mortgages, the average debt is close to $140,000. Take mortgages out of the equation and it drops below $40,000, but only just. 

Discretionary income is over $1,700 a month on average, but once you consider interest repayments, unexpected bills, vacations, college funds, and additional living expenses, it doesn’t leave much to clear those household debts. 

The Biggest US Credit Card Companies

The average credit card user has three cards. For most, their first card and their main card is provided by the same company that they bank with. The additional cards are reward cards and store cards as well as ones acquired solely for a balance transfer.

If you’re an average credit card user, there’s a high chance you will have at least one account with one of the following companies:

Discover 

The first provider to offer a cashback scheme, Discover also has one of the best modern rewards cards. Known as the Discover It, this card rewards consumers with as much as 5% cashback.

Discover is mistakenly seen as a card that isn’t accepted in many retailer locations. However, while this may be true outside the United States, you shouldn’t have an issue using it domestically. A few years ago, a survey found that Visa and MasterCard were accepted in 9.5 million locations, while Discover was accepted in 9.3 million, just a fraction less.

American Express

American Express is one of the best providers of airmile programs and other rewards programs. It also has some of the most sought-after premium credit cards, which are offered to big spenders. 

AMEX is actually the card that is accepted the least of all major providers. The study mentioned above found just 6.9 million retailers had embraced AMEX. However, it is accepted in more international locations than Discover.

Although figures are constantly changing, the most recent estimates suggest that there are around 1 million more American Express cards than there are Discover cards in the United States.

Chase

The Chase Freedom card is the most popular credit card in the United States, offering consumers a reasonable APR as well as several perks. Chase also offers the Slate card and provides cards on behalf of several major airlines, including British Airways.

In most cases, these cards are offered only to consumers with above-average credit scores, but they are not necessarily considered premium or elite user cards.

Mastercard

Mastercard is not the most popular credit card in the United States. In fact, there are around 191 million users of this card and over 320 million users of the card in first place. However, it is a long way clear of the other providers on this list. If you combine all users of Chase, American Express, and Discover cards then the number you arrive at is only just higher than the number of Mastercard users.

These cards are accepted in locations across the United States and all over the world. It’s the second biggest in the US, but it’s also the second biggest pretty much everywhere else.

Visa

It’s probably no surprise to see that Visa is number 1, as this is the biggest provider not just in the United States, but all over the world. There are more Visa credit cards and debit cards in existence than any other type; it is accepted in more locations, and it’s a brand name that is as instantly recognizable as Coca Cola and Sony.

Pros and Cons of American Credit Cards

Pros

  • Multiple types of cards
  • Huge rewards
  • Many companies to choose from
  • Accepted in most outlets nationwide
  • Competitive rates
  • Options for no credit and poor credit

Cons

  • Can be too convenient
  • High-interest rates
  • Few options and high fees for consumers with bad credit

If you have a good debt-to-income ratio, a solid payment history, and you can meet your minimum payment obligations without issue, the US is a great place to acquire credit. Reward cards give you an incentive to spend, balance transfer cards allow you to move your debt around, and you get the feeling that every bank and lender wants your business and will trip over themselves to get it.

If you have none of those things, like so many millions of Americans, then it becomes a nightmare. There are debt counseling, debt settlement, and debt management services to help, but if you can’t meet your monthly payments, and you find yourself prioritizing debt repayments over food, clothing, and family days out, it can become depressing very quickly.

What Does the Future Hold?

Now we’ve looked at the current state of credit card debt in the US and have established that things look pretty bleak, that begs one question: How does the US government plan on approaching this issue?

The truth is, they’ll probably do very little. The only way to prevent those figures from rising is for American consumers to stop spending so much, but that hurts the economy. If you change the mentality of the average American consumer, focusing more on frugality and less on consumerism, the GDP takes a nosedive, the country’s biggest companies suffer, and America’s position on the world stage is notably weakened.

The world is moving away from cash and towards a completely digital payment structure. Cash will soon become a thing of the past and everything, from bills to bus fares and grocery shopping, will be purchased with credit, whether you’re using a credit card, a smartphone app, or some other new-fangled device. Once this happens, the issues facing credit card users become more pronounced and the country’s $14 trillion worth of consumer debt grows ever larger.

In simple terms, the situation will likely get worse for debtors and better for lenders, but if we continue down this road then maybe we’ll start seeing fewer punishments for credit card delinquencies and more options for struggling debtors.

There are over 100 million Americans crossing their fingers and hoping for just that.

Source: pocketyourdollars.com

Tips to Consolidate Credit Card Debt

How to Consolidate Credit Card Debt – SmartAsset

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Editorial Note: This content is not provided by the credit card issuer. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by the issuer.

If left unchecked, extensive amounts of credit card debt can cripple your finances. The good news is there are many ways to handle debt, though each requires a dedicated effort on your part. But if you can manage to consolidate credit card debt, you will reduce your burden relatively quickly. In the process, you’ll avoid the exorbitant interest rates that accompany most credit cards. Below we take a look at some of the most effective techniques you can use to make this goal a reality.

Find Out Your Credit Score

Before you can work on improving your credit and minimizing your debt, you have to know where you currently stand.

Many credit card issuers allow cardholders to see their FICO® credit score free of charge once a month, so check out if any of your cards include that free credit score. The three major credit bureaus – TransUnion, Experian and Equifax – also give out free annual credit reports. If that’s not enough, websites like Credit Karma™ and Credit Sesame provide a free look at your credit score and reports as well.

It is vital to review your credit report with a fine-tooth comb to ensure the accuracy of the information. If you find errors be sure to let the credit bureau in question know so the issue can be eradicated as soon as possible.

Zero Interest Balance Transfer Cards

Although it might seem counterintuitive to apply for another credit card to lessen your debt, a zero interest balance transfer card could really help. These cards typically include an introductory 0% balance transfer Annual Percentage Rate (APR) for six months or more. This ultimately allows you to move debt from one account to another without incurring more interest. However, once the introductory offer concludes, any leftover balances will revert to your base APR.

These offers aren’t totally free, though. Most cards also charge a balance transfer fee that’s usually between 3% and 5% of the transfer. Even with this initial payment, you will almost always still save money over leaving your debt where it stands currently.

If you want to consolidate credit card debt, here are three different balance transfer credit cards you could apply for, with varying introductory interest rates and transfer fees:

Balance Transfer Credit Cards
Chase Slate 0% APR for first 15 months; then 16.49% to 25.24% Variable APR, depending on your creditworthiness No fee for first 60 days; then $5 or 5% of each transfer, whichever is greater
Citi Double Cash Card 0% introductory APR for 18 months from date of first transfer when transfers are completed within 4 months from date of account opening; then 15.49% to 25.49% Variable APR, depending on your creditworthiness $5 or 3% of each transfer, whichever is greater
BankAmericard® credit card 0% APR for first 15 billing cycles; then 14.49% to 24.49% Variable APR, depending on your creditworthiness No fee for first 60 days; then $10 or 3% of each transfer, whichever is greater

Take Out a Personal Loan

The thought of taking out another loan probably doesn’t sound too appetizing to consolidate credit card debt. But a personal debt consolidation loan is one of the speediest ways to rid yourself of credit card debt. More specifically, you can use it to pay off most or all of your debt in one lump sum. That way, your payments are all merged into a single account with your lender.

The APR and length of the offered loan and the minimum credit score needed for approval are the main factors that should go into your final decision on a lender. By concentrating on these three components of the loan, you can map out what your monthly payments will be. As a result, you can more easily implement them into your financial life.

Applying for a personal consolidation loan can have a detrimental effect on your credit. Unfortunately, most institutions will run a hard credit check on you prior to approval. However, many online lenders don’t do this, which might ease your mind depending on the severity of your debt situation.

These loans are available through a wide variety of financial institutions, including banks, online lenders and credit unions. Here are a few examples of some of the most common debt consolidation lenders:

Common Debt Consolidation Lenders
Banks Wells Fargo, U.S. Bank, Fifth Third Bank
Online Lenders Lending Club, Prosper, Best Egg
Credit Unions Navy Federal Credit Union, Unify Financial Credit Union, Affinity Federal Credit Union

Auto or Home Equity Loan

If you own assets like a home or car, you can take out a lump-sum loan based on the equity you hold in them to consolidate credit card debt. This is a great way to reuse money you paid toward an existing loan to take care of your debt. When paying back your auto or home equity loan, you’ll usually pay in fixed amounts at a relatively low interest rate. Even if this rate isn’t great, it’s likely much better than any offer you’d receive from a card issuer.

Equity loans are technically a second mortgage or loan, meaning your house or car will become the loan’s collateral. That means you could lose your house or car if you cannot keep up with your equity loan payments.

Create a Budget

To build a budget, you first need to figure out your approximate monthly net income. Don’t forget to take into account taxes when you’re doing this.

You can then start subtracting your variable and fixed expenses that are expected for the upcoming month. This is where you will likely be able to identify where you’re overspending, whether it’s on food, entertainment or travel. Once you’ve completed this, you can begin cutting back where you need to. Then, use your surplus cash to pay off your debt one month at a time.

It shouldn’t matter if you’re dealing with substantial credit card debt or not. A monthly spending budget should always be a part of how you manage your finances. While this is likely the slowest way to eliminate debt, it’s also the most financially sound. At its core, it attempts to fix the problem without taking funding from an outside source. This should leave very little financial strife in the aftermath of paying off your debt.

Professional Debt Counseling

Perhaps since you’ve found yourself in serious debt, you feel like you want professional help getting out of it. Well the National Foundation for Credit Counseling® (NFCC®) is available for just that reason. The NFCC® has member offices all around the U.S. that are certified in helping you consolidate credit card debt.

These counselors won’t only address your current financial issues and debt. They’ll also work to create a plan that will help you avoid this situation again in the future.

Agencies that are accredited by the NFCC® will have it clearly displayed on their website or at their offices. If you’re not sure where to look, the foundation created an agency locator that’ll help you find a counselor nearby.

Borrow From Your Retirement

Taking money early from your employer-sponsored retirement account obviously isn’t ideal. That’s means borrowing from your retirement is a last-ditch alternative. But if your credit card debt has become such a handicap that it’s affecting all other facets of your life, it is a viable option to consolidate credit card debt.

Because you are technically loaning money to yourself, this will not show up on your credit report. Major tax and penalty charges await anyone who has trouble making payments on these loans though. To make matters worse, if you quit your job or are fired, you’re typically only given 60 days to finish paying it off to avoid incurring a penalty.

Tips To Consolidate Credit Card Debt

  • If you take the time to come up with a budget, don’t let it go to waste. While you might find it tough to stick to, especially if you’re trying to cut back, it is the best way to manage your money correctly. Even if a budget becomes habit, stay vigilant with where your money is being spent.
  • Although a financial advisor will cost money, he or she might be able to help you keep your finances in check while ultimately helping you plan for the future as well. However, if this isn’t an option for you financially, stay on track with your NFCC® debt counselor’s plan.
  • There are so many ways to gain access to your credit score that there’s virtually no excuse for not knowing it. It doesn’t matter if you do it through one of the top three credit bureaus, FICO® or one of your card issuers. Just remember to pay attention to those ever-important three digits as often as possible.
Chris Thompson, CEPF® Chris Thompson is a retirement, savings, mortgage and credit card expert at SmartAsset. He has reviewed hundreds of credit cards and loves helping people find the one that best matches their financial needs. Chris is a Certified Educator in Personal Finance® (CEPF®) and a member of the Society for Advancing Business Editing and Writing. He graduated from Montclair State University where he received the Journalism Achievement Award. Chris’ articles have been featured in places like Yahoo Finance, MSN and Bleacher Report. He lives in New Jersey and is a Mets, Jets and Nets fan.
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