As the average credit card balance surpasses $6.5K, here's how to tackle debt on a budget

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As the average credit card balance surpasses $6.5K, here’s how to tackle debt on a budget

woman looking at credit cards with bills in the background

Americans’ average credit card balances grew to $6,501 in 2023, according to Experian data from the third quarter of 2023. That’s a 10% increase from 2022. Paying off credit card debt on a tight budget can be a challenge, especially with additional interest charges accruing each month you carry a balance.

If you’re being stretched thin financially, it’s possible to pay off credit card debt by using strategies that trim your expenses, lower your monthly payments and up your income. While making a big dent in your debt balance might seem tough when you have little cash left over each month, there are many options available to you. Make a plan, stay motivated and choose payoff methods you’re most likely to stick to. Use the tips below to start paying down your debt.

1. Evaluate your debt and finances

Your first step should be to create a clear picture of your debt and current income. This process can feel overwhelming, but it’s also possible that seeing your balances listed in one place will give you a sense of control over the process.

Log in to your credit card account dashboard or check your most recent paper statements, then list your balance, APR and minimum monthly payment for each card. The average credit card APR is about 23%, according to November 2023 Federal Reserve data, which means the average $6,501 balance would accrue about $112 in interest each month. For many cardholders, making just the minimum payment is unlikely to make a dent in their credit card balances.

Take a look at your checking account and calculate how much money you have to work with after all bills are paid each month. Use this information to create a monthly budget that provides an overview of your income, fixed and variable expenses and how much you can put toward debt.

You might find you have more to contribute to debt than you thought, or that you’d like to take steps to free up more cash.

2. Limit new credit purchases

Switch to using only cash or your debit card for purchases, and stay aware of your checking account balances so you don’t overdraw your account. This will ensure you don’t spend more on credit cards than you can pay off. It will be much more difficult to tackle debt if you continue adding to the amount you owe, since more interest will also accrue as the balance grows.

If you made a budget in the last step, you’ll have a way of keeping track of new purchases and holding yourself accountable to your goal of paying off debt. If you’re struggling to cut expenses, pick a budget plan that will help you identify just how much you should spend per month while paying off debt.

3. Look for ways to increase your income

You may discover that it’s just too difficult to reach your debt payoff goals within your current budget. Add to your income in big ways—by asking for a raise, changing jobs or taking on freelance work—or small, by selling your used clothes or renting out your car. Choose an amount from this extra work that you’ll contribute to your debt and set up an automatic transfer each month to your credit card account.

4. Consolidate or reduce your monthly payments

If you have good credit, you may be able to reduce your interest rate and your monthly payment using a debt consolidation loan or a balance transfer credit card.

A debt consolidation loan is a type of personal loan that lets you bundle debt from multiple credit cards together into one loan, giving you a single monthly payment at a new interest rate. Ideally, you’ll qualify for a rate that’s lower than the average of your previous credit cards’ rates, which will save you money.

A balance transfer credit card is similar, in that it allows you to transfer an existing balance to a new card at a lower rate—often at 0% APR for a period of time. But you may pay a balance transfer fee of 3% to 5% of the balance transferred, and you’re best positioned to get a good deal if you have strong credit.

5. Select a debt payoff strategy

When you’re ready to start putting extra money toward credit card debt, there are a few ways you can do so based on your goals and your motivation style.

Debt avalanche method: If you carry balances on multiple credit cards, the debt avalanche method recommends making bigger payments to the account with the highest APR first, which can bring the most interest savings. Make sure to pay at least the minimum due on all other accounts to avoid late payments. Once the highest-rate card is paid off, you can move on to the card with the next-highest interest rate and repeat the process.

Debt snowball method: Perhaps your balances with the highest interest rates are also the largest. It could take a long time to make what feels like real progress on your debt when you’re paying only a little extra per month. That’s where the debt snowball comes in: Using this method, you’ll pay off your smallest balances first, rather than the ones with the highest rates. You won’t save as much money on interest (though the difference could be minimal), but you may feel more motivated as you see each debt disappear.

Debt management plan: If you’re not sure where to start with paying off debt, set up a free consultation with a certified credit counselor at a reputable nonprofit credit counseling agency. A credit counselor will look at your debt and budget picture and suggest strategies that may help you.

One of these strategies is a debt management plan, which has a credit counselor negotiate directly with your creditors to potentially get you a lower interest rate or monthly payment. You’ll pay the credit counseling agency each month, and the agency will pay your creditors. The plan comes with a modest setup and monthly fee, and you’ll have to close the credit cards included in the plan, so it may not be the right choice for everyone.

6. Keep track of progress

As with any goal, watching your progress not only helps you understand how your approach is working, but it can also encourage you to keep going. You might use a spreadsheet or keep a note on your phone to track the following for each credit card account:

• Payment due dates
• Payments you make each month
• Your current account balance
• Your interest rate
• Target payoff date and how much you’ve saved on interest, using a credit card payoff calculator

Noting payment due dates is crucial, since payment history is a key factor in your credit scores. Even one late or missed payment can cause scores to drop. Regularly monitor your credit report and credit scores to see your up-to-date account information as creditors report it. You’ll also be able to see if your credit scores change as you pay down debt.

7. Learn how to use credit cards responsibly in the future

Once your debt is gone, you’ll likely feel so accomplished that you’ll want to prevent debt from accumulating again. You’ll have more tools and a greater understanding of debt to draw from, and perhaps you’ll be more likely than before to use credit cards responsibly. Here’s how:

• Check your credit report regularly, even when you’re debt-free. With an improved credit score, it’s important to protect it from issues like payments your creditors incorrectly report as late or identity theft. You can ensure you’re safe from these concerns by keeping an eye on the accounts listed in your credit report.
• Avoid relying on credit cards for nonessential purchases. Make sure you can pay off whatever you spend on your cards every month to avoid paying interest charges. You might decide to use a rewards credit card that earns you cash back or points or miles for travel, but do so only if you plan to bring your balance back to zero each month.
• Prioritize building an emergency fund. An emergency fund is a savings account for covering unexpected expenses so you don’t have to rely on credit cards. Experts recommend you save at least three to six months’ worth of expenses in your emergency fund, but even saving one month’s worth is a good start.

The bottom line

Once you’re out of credit card debt, you can go back to using your credit cards—but with more sensitivity and awareness. Using a credit card for purchases can have many benefits, including travel rewards and purchase protection, as long as you’re cautious about building up debt again. Let your experience paying off credit card balances remind you of how hard you worked to be debt-free, and motivate you to stay that way.

This story was produced by Experian and reviewed and distributed by Stacker Media.

 

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