Credit card balances hit $443.96 billion in September 2019, according to NerdWallet’s annual analysis of U.S. household debt. Credit card debt has increased almost 6% in the past year and more than 34% in the past five years. The average U.S. household has about $16,000 in credit card debt.
These numbers are problematic for several reasons. The biggest one being just how difficult it is to get out of debt. High interest rates plus low minimum payments means borrowers barely touch their actual debt, with the majority of their payments going towards interest.
For example: You have a high rate 20% interest credit card, with $10,000 balance and you make the minimum payment each month (this can vary but let’s say it’s $200). Of your yearly payment of $2400, $1900 is going to interest! Only $500 each year is actually paying the debt. At this rate it will take you over 9 years to pay it off, and your interest paid will be $11,680 – above your original debt balance.
Look at the same example, but increase payments to $500 each month. It will only take you 2 years to pay off, and the total interest accumulated is $2,266.
The moral is, find the extra money wherever you can to pay your debt off quicker. There is nothing that can hurt your finances more than being over your head in debt. Which is why you must look anywhere and everywhere for extra payments. Here are a few places to look:
Cut From Your Budget:
I tell my clients that just about everyone can cut 20% from their budgets if it’s an emergency. If you have $10K or more in debt, and would like to someday be debt free…think of it as an emergency. Create your budget and split all expenses into fixed and discretionary. Your discretionary expenses, like clothing, travel and entertainment, can be easily cut. Once you’ve reduced these, look at your fixed. Everyone can reduce that insane cable bill. Or turn off their lights to cut the power bill. Remember that every little bit helps. And if cutting your budget just seems too torturous, keep in mind that it’s for the short term. Don’t look at it as if you’ll never be able to travel again. You are just taking some time off to prioritize your spending.
As a parent of young kids, I can say that after my mortgage, this is easily my next largest expense. Daycare and nannies are expensive, so consider other options. Can you share a nanny with a neighbor or friend? What about family in the area? If your mom or MIL can watch the kids for just one day, that’s cutting 20% off childcare. If you and some friends have flexible schedules, try rotating who watches the kids throughout the week.
Are you financing or leasing a vehicle? Ryan Luke, of ArrestYourDebt.com proposes selling that car and buying a cheaper car as an option. Or if you and your spouse have 2 cars, could you get rid of one and carpool?
Transfer Your Balance:
There are people who make transferring credit card balances a full time job. I don’t recommend making a habit of it, because you’re not really solving the problem. But if you have a high interest card, it’s worth looking at your options. First check any existing cards you have to see if they are offering 0% transfers. If not, consider opening up a new card that’s promoting a balance transfer offer. Here are some of the top deals out there now. Before you make a transfer, be sure to look carefully at the details. What is the fee? Is it worth it – meaning, is the amount you will save in interest more than the fee? How long is the interest at 0%? What does it go up to after the offer period expires? Just be sure this deal will help you pay off your debt quicker, not just prolong the problem.
Put All ‘Extra’ Money Towards Debt:
And don’t even think of it as extra. Just because it’s new money you didn’t count on, doesn’t mean it doesn’t count. Put any bonus or tax refund immediately towards your debt.
You know what I mean by stuff: all those clothes in your closet that you don’t wear, the never used wine glass set you got as a wedding gift, the Christmas toy you bought your child 2 years ago that’s still in the box. You can make legitimate cash off these items. For clothes in good condition, try ThredUp. Use Facebook and Craigslist for miscellaneous items. If it’s just sitting in your house collecting dust and using up space, you might as well get some money for it.
Automate Your Payments:
Now that you have some additional money to put towards debt, make it official. Automate your debt payments each month to come straight out of your bank. Don’t get overly-aggressive here…you don’t want to risk sending your checking account into the negatives. Automate the amount you’re comfortable with each month, then make extra payments whenever you’re able to.