Dealing with consumer debt
If you’re overwhelmed with debt, you’re not alone. As of the third quarter of 2024, the average credit card debt among U.S. cardholders with unpaid balances was $7,236, an increase from $5,330 in 2019. Additionally, more than half of credit card users—51%—do not pay off their balance in full each month, allowing interest to accrue on revolving debt. This is before considering other forms of debt, such as auto loans, student loans, and mortgages.
When the debt monster is eating away at your finances, it’s hard to get ahead. Worse yet, it makes it difficult or even unwise to invest money in the markets, where it can actually do you some good! Here are some steps to take to start chipping away at the problem.
- Start paying off your credit card balances in full every month. Because credit card interest rates are extremely high compared to other financing sources, this is key.
- Create a system. Many experts recommend paying off the highest interest rate debts first. Others say you should pay off the smallest balance first, in order to create momentum. No matter which route you choose, the first step is to enumerate all of your debts, with balances and interest rates, to see what you’re dealing with.
- Dedicate funds toward becoming debt free. That might mean tapping into your emergency fund, but let’s face it: Anything is better than paying interest rates of 18% or even higher. You can also set up automatic payments from checking that go straight toward your debt on payday—before you have the temptation to spend the money on something else. If you have a windfall from a tax refund, inheritance, or bonus, use at least part to decrease your debt load.
- Decrease your interest rate. There are tons of options to do this with credit cards, starting with calling the company to find out if they can decrease your rate—they want to keep your business. Alternatively, 0% balance transfers, for example, may give you a year or even 18 months’ worth of breathing room. For debts such as car loans, make sure you’ve shopped around for alternative deals—shortening the term may increase your monthly payment, but you can probably get a better rate and decrease the amount spent over the term of the loan.
- Consolidate debt. If you’re a homeowner, consolidating debt into a home equity line of credit may be a good option. Otherwise, investigate options such as peer-to-peer loans or personal loans.
