According to a report from CNBC, the average credit card debt has reached a record high of $6,375 — up 3 percent from last year. The average household with credit cards is estimated to owe close to $17,000 in debt. The total amount of credit card debt in 2017 totaled over $1 trillion.
In a certain sense, this is all good news, as it shows that American consumers aren’t reluctant to making purchases. However, carrying credit card debt does have its pitfalls. For instance, there’s the credit utilization ratio that consumers have to be aware of.
A credit utilization ratio is essentially your debt-to-credit ratio. Generally, you can expect to have a higher credit score if you keep this at or under 30 percent. So, for example, if you have a credit card with a limit of $10,000, you want to be sure to keep your debt at or below $3,000 to have a higher credit score. Two, the longer you carry a credit card balance, the more you pay in interest. In fact, it’s estimated that the average American household with credit card debt pays nearly $1,300 in credit card interest each year.
Then, of course, there are other pitfalls to worry about, such as the toll that a poor debt management strategy can have on your relationships and the fact that the Federal Reserve is expected to hike interest rates soon. As of this week, the Fed plans to increase short-term interest rates from 1.50 percent to 1.75 percent, and many are predicting more rate hikes throughout the rest of 2018. That is just going to make that average credit card interest paid per year increase even more.
Noting all of this, if you’re among those that are in significant credit card debt, now could be a good time to rethink your debt management strategy. Here’s a closer look at some tips and suggestions for eliminating that pesky credit card debt:
Take stock of your debt:
Analyze the credit card accounts that you’re carrying a balance on and sort them based on the interest rate, from high to low. You’ll want to commit to paying off the higher interest rate credit cards first, as those are the accounts that are going to cost you more in interest rates long-term. That’s called the “avalanche method,” as you’re paying off the high interest accounts, working your way down to the low interest accounts.
Another method you may elect to administer is the “snowball method,” which sorts your credit card debt by amount. Under this method, you commit to paying off your smallest debts first, working your way up to your larger debts. The thinking is you can gain momentum and create a snowballing effect toward eliminating debt.
Consider consolidating:
Depending on the transfer offer you can get, consolidating your debt may be an attractive, viable option toward zero balance. Consolidating essentially works to restructure your debt and make it more manageable to reduce. It also makes things easier to manage, as all of your debt is essentially in one account, not several.
Consider a home equity loan:
While this option isn’t ideal, it can be an option for consumers that are unwilling to change their lifestyles and purchasing habits to get out of debt. Though interest rates for home equity loans are currently around 5 percent, taking one out to pay off your credit card debt and then making monthly payments per the loan’s terms can prove to be a manageable way for some to eliminate credit card debt.
Make some lifestyle adjustments:
Think about the things that you’re paying for now that you can live without. Things like cable TV, restructuring your mobile phone plan and taking your lunch to work instead of buying out can all increase your monthly disposable income.
Another thing to take into consideration is the new tax law. Talk with your financial advisor about how many allowances you should claim on your taxes. There’s a good chance you may be able to increase your allowances and not get burned for it when it’s time to file your annual return, thereby putting more money in your pay check.
Regards,
Ethan Warrick
Editor
Wealth Authority
