Millions of U.S. households have credit card debt, and thanks to a series of interest rate hikes by the Federal Reserve over the past few years, carrying credit card debt has become significantly more costly. In fact, the average credit card APR in the United States is nearly 18%, up from just over 15% two years ago. Because of this, now is a great time to finally get your credit card debt under control. Here’s a four-step checklist to do some spring cleaning with your credit card debt and to make sure your efforts produce the best possible results.
Step 1: Keep the mess from getting any worse
It doesn’t matter how effectively you consolidate and pay down your credit card debt if your balances keep increasing due to excessive spending. Try this exercise. Print out the last few months’ worth of statements for each of your credit cards. Highlight anything that was an unnecessary expense, including recurring charges that you could probably do without. For example, when I did this a few months ago, I realized that I was paying for a few newspaper subscriptions I wasn’t reading, a landline phone I wasn’t using, and an app that I hadn’t used in years. Add up all of these expenses and you may be shocked at the amount of financial leakage you find. The first thing to do when spring cleaning your finances is to stop as much money as possible from flying out of your pockets unnecessarily.
Step 2: Not all messes are equal
Now that you’ve addressed the root cause of the problem, the real cleaning can begin. However, when you’re doing any type of spring cleaning, not all messes belong in the same category. Credit card debt comes in many varieties and should be treated accordingly. In other words, a $2,000 balance on a store credit card at 29.99% APR is a completely different type of problem than $2,000 you owe on a card that is still in its 0% APR introductory period for another year. It’s important to make a list of your credit card debts from the highest interest rate (APR) to the lowest. If you don’t know your APRs, you’re not alone — this is a common occurrence. In fact, I’m not sure that I could recite the current APRs on my credit cards without looking them up. If you aren’t sure of your credit card APRs, you can typically find them on your latest statement.
Step 3: Dust away those high interest rates
As you probably guessed, the general strategy is to attack the credit cards with the highest interest rates first. Continue making your required payments on all of your credit cards, but focus the majority of your effort on knocking out the high-interest debt first. One strategy to consider is to transfer your high-APR balances to cards with 0% APR introductory offers for balance transfers. You can find balance transfer credit cards with zero-interest periods of 18 months or more, and this can make a big difference when it comes to paying down the debt. Now you’ll avoid paying interest, and every penny you pay toward your credit cards will reduce the principal. It’s also worth mentioning that although I’m discussing this in the context of your highest-APR credit cards, if you can manage to get all of your credit card debt moved over to cards with 0% intro APRs, go for it.
Step 4: Scrub away your debt
So far you’ve plugged your financial leaks, prioritized your debt repayment, and lowered your interest expense. Now it’s time to get aggressive. I realize that paying extra toward your credit cards is easier said than done. However, if you have your interest expense temporarily under control, it’s the perfect time to divert all of the money you can to paying down your debts. Try cutting back on expenses such as dining out and use the savings toward your credit cards. Or maybe even pick up a temporary side hustle. As mentioned, prioritize your repayment by focusing on your highest-interest debt in order to maximize your efforts.
A different approach to consolidate your debt
As an alternative approach, a personal loan can be a smart way to get credit card debt under control. If you aren’t familiar, a personal loan is an unsecured loan that you obtain through a bank or other lender. These typically come with fixed interest rates, and unlike credit cards, personal loans are installment loans. That means by making your payment each month, you’ll pay off the entire debt in a set amount of time. As an added bonus, consider that installment debts like personal loans are generally considered more favorably in the FICO credit scoring formula than revolving debt like credit cards. So not only can a personal loan lower your interest rate and give you a clear path to freedom from credit card debt, but it can give your credit a boost as well.