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By Shiv Nanda
Special to the Financial Independence Hub
Credit cards can be a saving grace in time of financial need, but if abused can ruin your financial health. Most Americans have a love-hate relationship with their credit cards and the stats seem to agree.
Total US credit card debt is over $830 Billion.
Of the more than $1 Trillion of revolving debts, Americans are carrying the vast majority of debt in 2018.
Let’s break down these troubling credit card debt statistics by category:
Studies have found an average of 39% of credit cardholders pay their credit balances in full. And only 29% make low or minimum payments. This is an alarming finding because cardholders who make the minimum payments 20% of the time are the ones with a credit score of 800 and above. While cardholders with credit score of 700 and above are more likely to make full payments towards their credit-card balance. However, there are other factors that contribute to the credit card payment pattern:
1.) Income and Employment
It is quite surprising that high income doesn’t guarantee freedom from debt. Ironically, the debt seems to be increasing with increase in annual income. And the highest credit card balances are seen with people with the highest income.
2.) Age and Gender
Studies reveal that older customers are more likely to pay their credit-card balance in full whereas middle-aged consumers may pay in full or pay the minimum amount due. Middle-aged consumers have high home expenses as they have dependents to take care of. Gender of the consumer is also a contributing factor of credit card debt. Data shows that men and women have a revolving debt of 29.9% with women having 3.7% less than their male counterparts.
3.) Region
Location has proved to be an interesting influence on credit-card debt. The Midwest and the Great Lakes regions seem to have responsible credit cardholders. They have the highest average credit score and lowest average credit card debts: while Alaska seems to have the highest credit card debt and average credit score stuck somewhere in between the high and the low.
6 smart ways to clear credit-card debt ASAP
1.) Have a plan and stick with it
It is essential that you take a stock of the situation. Track each credit card – the debt, interest rates, monthly minimum payment, credit limit, etc. This will give you a clear understanding of where you stand and where you should be. Although this task is overwhelming, it can help you create a strategy to plan your next move.
2.) Pay off the highest interest rate Card first
To save yourself from finance charges and to keep your debts from growing, it is best to pay off the credit card with the highest interest rate first. Pay twice or thrice more than your minimum monthly payments while you continue to make minimum monthly payments on your other credit cards. Once you pay off the credit card with highest interest rate, then move on to the next high interest credit card.
3.) Curtail extravagant expenses
If you are on a mission to clear your credit-card debt, re-evaluating your budget and expenses makes sense. Find out where you are spending on the most. Be frugal and cut down the expenses you can do without.
4.) Make use of personal Line of Credit
Taking a personal loan to pay off your credit card balances is the best way to go about credit card debt consolidation. By making use of your personal line of credit to pay off the credit balances of all your credit cards:
- Making just one monthly payment towards all the credit cards
- You get a much lower interest rate on your personal loan
- You have flexible repayment option
5.) Consider a balance transfer Credit Card
52% of people with more than $6,000 in credit card debt have consolidated.
Yes, debt consolidation is a great option. If you are carrying a high-interest credit card, balance transfer to another credit card with 0% introductory APR can be a lifesaver. However, such kinds of balance transfer usually involve a transfer fee.
6.) Pay more than the minimum monthly payments
It’s almost always a good idea to pay more than the minimum on your credit card debt for three reasons:
- You pay off your credit card balances faster and save money
- You reduce your credit utilization ratio
- You improve your credit scores
For example, if your credit card balance is $5000, which accrues an interest of 18.9%, you are paying off only the minimum monthly payment of $200 will only thousands of dollars to your total credit card bill. To pay off the entire credit card balance with only the monthly minimum payment will take almost three years, with interest of $1410.23 on the total credit balance of $5000. However, if you pay more than your minimum monthly amount, say $460.54, you would be able to pay the balance off in 1 year and you would wind up paying only $529.69 in interest, thus saving $880.54. Paying more than the minimum reduces the ratio of your credit card balances to credit limits.
You need to put a stop to this vicious cycle. Take a long hard look at spending habit and your budget and consider the options given here.
Shiv Nanda is a financial analyst who currently lives in Bangalore (refusing to acknowledge the name change) and works with MoneyTap, India’s first app-based credit-line. Shiv is a true finance geek, and his friends love that. They always rely on him for advice on their investment choices, budgeting skills, personal financial matters and seek his approval when they want to apply for a personal loan or any other type of loan. He has made it his life’s mission to help and educate people on various financial topics, so email him your questions at shiv@moneytap.com.
