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Five Strategies to Help Shrink Credit Card Debt

Practical strategies to help keep your credit account balances low.

Young woman seated on floor with her laptop, looking happy after paying off credit card debt.
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If used responsibly, credit cards offer a great way to build credit, conveniently pay for purchases and even earn rewards in the form of cash back and free flight miles. However, if not carefully monitored, credit card balances can accumulate quickly, impact your credit health and limit your ability to reach long-term financial goals. Below are some practical strategies to help keep your credit account balances low, and reduce them before they threaten your financial well-being.

1. Pay off high-interest credit cards first.

When you don’t pay off the entire balance of your credit card statement each month, the amount you owe grows with accumulated interest. This interest, often expressed as an annual percentage rate (or APR), is the price you pay to a financial institution for borrowing money. The higher the APR, the more interest builds each month on your unpaid balances. According to recent statistics from credit gurus at Experian, the average American household now has a $6,354 balance on credit card accounts.

If you continue using credit cards for purchases without a game plan to pay off balances, you’ll likely feel the sting of a rising “Amount Due” each month. If your credit card account balances continue to climb, try focusing your efforts to repay the cards with the highest APR first. For example, let’s say you have two credit card accounts, each with a $3,000 balance and $100 minimum payments each month. The first card charges you the average APR of 17.4 percent, while the second card charges 20 percent. Which should you pay off first?

The difference in APR may not seem significant until you break down the numbers:

  • Option 1 – Pay only the minimum $100 payment on each card. The 17.4 percent APR card takes 40 months to pay off entirely with around $950 covering interest costs alone. The 20 percent card takes 42 months to pay off and costs you nearly $1,200 in accumulated interest.
  • Option 2 – Pay $200 each month to the higher rate card ($100 minimum payment and $100 extra) and your minimum payment on the lower rate card. Reduces your repayment timeline on the higher interest, 20 percent, card to 18 months and saves over $700 in interest.
  • Option 3 – Pay $200 each month to the lower rate card ($100 minimum payment and $100 extra) and your minimum payment on the higher rate card. Also repays the balance in 18 months on the 17.4 percent card, but only saves around $550 in interest costs.

In this example, paying off the higher rate card first with your extra $100 a month payment saves $150 over an 18-month repayment window. Use a credit card payoff calculator to find the best repayment strategy for your unique situation and see how much you could save by targeting higher interest cards first. 

2. Establish a monthly budget.

Budgeting is an essential step in the debt reduction process. Budgets not only track current spending but also help identify areas where you can cut costs. If you currently have credit card balances to pay off, consider making your purchases with cash, check or a debit card instead of using a credit card, in an effort to help get your budget under control.

Establishing a basic budget is as simple as opening a spreadsheet and populating it with financial data including your monthly:

  • Income from primary and part-time employment
  • Rent or mortgage payments
  • Utility costs
  • Auto or student loans
  • Insurance costs
  • Credit card payments and other recurring financial obligations

Then, break down your remaining funds into additional expenditure categories including:

  • Groceries
  • Gas, tolls and car maintenance costs
  • Entertainment
  • Savings
  • Debt payments and more

By adhering to a monthly spending plan, you can identify areas to allocate money to eliminate credit debt faster.

3. Eliminate unnecessary spending.

Eliminating unnecessary spending puts more money in your pocket each month to devote to reducing your credit debt. When fine-tuning your budget, look for opportunities to scale back “extra” expenditures, like: gym memberships, magazine subscriptions, expensive coffees, alcohol and cigarettes, TV and music-streaming services, dining out and more. 

4. Find creative ways to earn extra income.

Today, the side hustle enjoys explosive growth thanks to a wide range of new apps available through your smartphone. Boost your income, and pay down the balances on your credit cards, through flexible part-time employment options in creative ways, like:

5. Build an emergency fund.

Emergency funds help cover costs associated with life’s unexpected events without resorting to the use of credit cards, which can drive account balances higher. From flat tires to roof leaks, broken washing machines, sick pets and root canals, it pays to have easily accessible funds for a rainy day.

How much should you keep in your emergency fund? Many financial advisors recommend tucking away three to six months’ worth of living expenses. This number factors in worst case scenarios such as extended periods of unemployment, deaths in your immediate family and other catastrophic events.

If tackling credit card balances is your current financial focus, you may opt to start small. Tuck away just $20 a week and build your rainy-day fund up to over $1,000 within just a year. Access a savings calculator and learn more about how much you could set aside with small savings contributions and avoid the temptation to swipe a credit card to cover the next curveball life throws your way.

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CUNA 2023 diamond award trophy icon

CUNA 2023 Diamond Award Winner

Financial Education

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