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In Hard Cash, Venessa Wong answers your questions about money.
This column is intended to provide helpful and informative material. But I'm not a financial, investment, accounting, tax, or professional adviser. Every situation is different and you should consult with a competent professional regarding your own situation. This column contains my opinions and ideas. The strategies I describe may not be suitable for every individual, and are not guaranteed or warranted to produce any particular results. Also, relevant laws vary from state to state.
I can’t seem to shake credit card debt. I have $3,799.34 in credit card debt between two credit cards. One has an interest rate of 23.74% and the other is 14.49%. As hard as I try to save my money and stop spending, it's almost like my payments aren't putting a dent into it. Is it the interest? I've had this debt for almost a year now. I've always had some sort of credit card debt; this is the highest it’s ever been. What's your advice to eliminate credit card debt fast, but still enjoy life?
I’ve tried all of those “snowball” strategies, paying off the one with the smallest amount or the highest interest rate, etc. They work in the beginning, but then something happens — I was in a wedding, my cat was sick — and I’d be back in the same boat as before. I got the second credit card to pay for my subscriptions at a lower interest rate while I tackled the debt on my first card, and well, look where I am now. I literally put a sticky note on my card one time that said “life vest,” as in for emergencies only. It prevented me from taking out the physical card, but this is a difficult tactic considering cards can be saved in online accounts and mobile wallets, which I use frequently.
I make $40,000 a year and I don’t have a budget because I live paycheck to paycheck. Sometimes I have $50 or less in my checking account the day before payday. I don’t have a good relationship with my money — I see concert tickets and think, “$75? I can put that on my credit card and pay it off in two weeks,” forgetting I already have debt on the card. I struggle with ordering takeout and saying no to things with friends. But last weekend, my roommate asked if I wanted to join her and a friend to Chipotle, and before I could say no, she went, “Nope! Never mind! You don’t need it, save your money. Invitation has been taken away!” I thought it was actually super nice of her to acknowledge that I’m trying to stop spending extra money. I’m not great with money, I am in debt, and I’m trying really hard.
—Em, Boston
So many people are in the same boat as you. While credit card debt in the US fell in the first year of the pandemic, it’s been rising quickly as the price of goods goes up. By mid-2022, credit card balances were up by 15% year over year to $930 billion, the largest increase in more than 20 years.
Credit card debt is especially tough to tackle because the interest is typically compounded daily and rates are high. It’s getting worse as interest rates rise across the board. The average interest rate on credit cards in late 2022 was 19.07%, compared to 14.51% a year earlier, according to data from WalletHub. This is very expensive debt — the average 30-year mortgage rate is about 6.13%, and the average rate on student loans is 5.8%.
“Many credit cards are variable rate credit cards, so your rate changes based upon the interest rate environment we're in,” said Cory Moore, a financial planner in Oklahoma City. If you don’t pay your card in full, the balance can easily mount because of this high interest, he said.
It sounds like you already suspect high interest to be the culprit. You also seem familiar with the popular strategies often recommended to those with credit card debt: the so-called snowball approach (make minimum payments on all cards, then tackle the balances from smallest to largest) and the “avalanche” approach (make minimum payments on all cards, then pay off the card with the highest interest rate first before moving down to the cards with lower rates). There’s a lot written about these strategies, and the benefits of each — people who prefer the snowball approach find it motivating to see the balances wiped out one by one, but the avalanche strategy usually saves the most money, according to the Consumer Financial Protection Bureau. People also transfer their debt onto new cards that offer a promotional zero or low interest rate for a period, or take out personal loans at lower rates to pay off their high-interest credit cards. As you found, the lower interest rates can help, but these strategies can only help if payments are large enough to chip away at the balance.
Paying off credit cards quickly will likely require charging fewer to zero expenses to the cards while also putting a few extra hundred dollars toward the balance every month. It could take months, possibly years, depending on how much less you charge and how much more you can pay. I suggest looking at a repayment calculator to help you see how long it could take based on your spending and repayment goals — you’ll see how small adjustments can have big impacts with credit cards.
There’s a lot of pressure for people with credit card debt to drastically cut expenses, but it can be hard to figure out how. As you mentioned, income can be tight, life gets in the way, and there are things we want to do even when we don’t have the money to cover the costs.
Often, the problem is framed as consumers using their credit cards like piggy banks when they don’t actually have the money, but the reverse is true as well: Credit card companies use consumers like piggy banks when consumers don’t have money. If credit card debt is considered a moral failing, it’s worth rethinking whose. Credit cards are the most prevalent form of debt in the US, and they exist to make money for the issuers (the banks that provide the credit) and payment networks (the companies that facilitate the transactions, like Mastercard and Visa). Americans paid about $120 billion per year in credit card interest and fees from 2018 to 2020.
It sounds like you want to stop being a piggy bank.
To do this, I think it’s very important to limit new transactions on your credit cards. “If you're trying to get out of a hole, you have to stop digging deeper,” Moore said. It’s much harder to pay off your cards when new charges show up every month. Let’s look at a hypothetical example, using a repayment calculator like this one. If someone with $5,000 in credit card debt stopped charging things to their card and committed $250 each month toward the balance, they hypothetically could pay off their card in about two years. But if they continued to charge $75 to the card each month, and still pay $250 toward the balance, it could take more than three years to pay it off.
If your credit cards are stored as payment methods, including for bills and subscriptions on autopay, Moore suggests switching to a prepaid debit card. This is different from a debit card attached to your checking account, which risks exposing your bank account to data breaches. You can control how much money gets loaded onto it, which limits your ability to overspend, and many won’t allow you to overdraft. Prepaid cards also don’t charge interest.
Of course, prepaid cards also exist to make money for financial companies, so just make sure you understand the costs of a prepaid card: Check if there are monthly fees, fees to load money onto it (and how long it takes for the money to be accessible after loading), transaction fees, fees for checking your balance, or overdraft fees — and consider shopping around for one with lower or fewer fees.
You mentioned you don’t budget, but I believe it really is critical to understand exactly how much income you have coming into your bank account every month and to plan out how much you need for living expenses. Then see how much is left over for wants. No guessing or estimating. If you’re consistently blowing your budget, you might be ignoring the limits you’ve set for yourself and counting on money that hasn’t come in yet, which can lead to more debt. If you want to pay off your credit cards, it usually means deliberately paying more each month toward the balances before that money is spent. “I would do an inventory of what is coming in, what is going out, then try to make some adjustments,” said Jennifer Kang, a financial planner in New York. It’s no fun, but if you’ve already tried several strategies and it’s still not helping, there’s nowhere else to go, she said. “When people ask about credit cards, my tip is always that we've got some cash flow and budgeting work to do.”
You still want to enjoy life, and I think you can! People with means aren’t the only ones who should be able to do so. But a budget will make it clearer what you can afford to enjoy. If you really want that $75 concert ticket and it’s not in the budget, you may have to find ways to reduce your spending in other categories by $75 that month — perhaps less takeout or asking your friends to help you say no to expenditures, as you mentioned — and think about paying for it using a prepaid debit card.
My husband and I recently started tracking our expenses again, because I noticed there was less money in the bank than I expected, and I wondered if it was due to inflation. We logged every single purchase into a spreadsheet for a couple of months — every $2.75 subway ride, every $3 cup of coffee, every supply needed for our kids — and realized that we were spending hundreds of dollars more than we knew each month on takeout and other to-go food (not including groceries). Colds, flu, and COVID circulated through our household from October through December, wearing down our will to cook every day. We relied on inexpensive, unremarkable takeout to fill our stomachs when we were tired or sick, but the $20 here, the $35 there, and occasional stops at the bakery all added up. I had assumed this was a minor contributor since it wasn’t a daily habit. We still order out to make our lives easier — but we decided to do it less often, and we track it.
Sometimes, there are no more expenses you can cut. What you’re spending might be what you need to live. In that case, the issue may not be spending, but income, and you do live in an area that costs more than the national average. “Expenses can only come down to zero. Income can go up to infinity, hypothetically speaking,” Moore said. Consider a side hustle (you can always stop once you’re done paying off your credit cards), or, if applicable, talking to your manager about the possibility of a raise.
Once you have a grasp of how your expenses or income need to change, a repayment strategy may help. Make it realistic and feasible so you don’t quit, include exactly how much you’ll put toward paying off your credit cards every month, and stick with it until each credit card is completely paid off, said John Pak, a financial planner in Los Angeles. “The key is to maintain that fixed dollar amount until the very end, so that once you pay down one card, you can roll over and add the payment to the next card.”
Other measures that may help, depending on your circumstances:
- If your credit card has cash back rewards, you can apply them toward the balance, Moore said.
- People can call their credit card companies — use the phone number on the back of the card — and ask if they will reduce your interest rate, Moore said. They might not, but it’s worth asking.
- If you’re going through a hardship such as unemployment, a loved one’s death, or some other unforeseen circumstance, you can call the credit card company and ask to speak with the department that handles its hardship program, said Alajahwon Ridgeway, a financial adviser and owner of A.B. Ridgeway Wealth Management in Lafayette, Louisiana. They might place your interest payment down to 0% APR to help you catch up, but he warns that there’s a high likelihood they will freeze your account (so you can no longer use it) or lower your credit limit once you’re on a plan, which could impact your credit score. “The goal is to be placed on a special payment plan without it impacting your credit score too drastically,” he said. “You need to follow the guidelines, such as paying the minimum on the card, or risk being kicked out of the program.” Some companies will require that you write a hardship letter, he said, so have one ready that includes the factors that lead to the hardship and what solutions you seek (lower interest rate, terms of the payment plan, lower monthly payment, or temporary interest suspension).
- For people who struggle to budget, using the cash envelope method gamifies the process, which can help, said Curtis Crossland, a financial planner in Scottsdale, Arizona. “I did this years ago when I was working to build good budgeting habits. But mainly I did it because I was working with a tight budget and had barely anything extra each month,” he said. Crossland went through three months of recent bank statements, itemized every expense in a spreadsheet, and identified the ones he couldn't avoid or alter, ones he could alter, and ones he could avoid entirely. Each category got an allowance. Unavoidable expenses went on autopay, if possible. The rest would be paid for in cash. He went to the ATM each week to withdraw the cash amount, separated the cash by category, and that was all he had to spend for the week, period. “I began saying no to buying more things because I didn't want to see the money go down in my wallet. I still ate out and went out, but I was a lot more conscious of what I would spend,” he said. “When the money is tangible, you tend to make decisions because you can see the real result immediately of having less or more depending on what you choose.” Credit cards aren’t designed to provide you with this sense.
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