Most Americans owe money on credit cards. If you're one of them, here's what you need to do to get out of debt. Image source: Getty Images.
Being in credit card debt is the American way. In fact, a recent study conducted by The Ascent found as many as 6 in 10 Americans owe credit card debt. While millennials were slightly less likely to have a balance on their cards than older generations, 56.7% had at least some credit card debt. Older generations were more indebted, with 65.6% of baby boomers and and 67.6% of Gen Xers reporting they owed their card issuers money.
Unfortunately, those who are in debt don't owe just a small amount: The average balance for cardholders among all generations was $6,000, with millennials carrying average balances of $5,500 compared with $6,600 for Gen Xers and $6,800 among baby boomers.
If you're one of the 6 in 10 Americans who owe money on credit cards, it's important to come up with a plan to get your debt paid off ASAP and stop carrying a credit card balance in the future. Here are the steps you should take.
Consolidate your credit card debt
One of the big problems with credit card debt is that cards carry high interest rates. As a result, a significant portion of every monthly payment goes to interest.
To compound the problem, credit cards only require a small minimum payment each month, and many people are happy to pay that amount and no more. This could leave you indebted for years, paying hundreds or thousands of dollars in interest.
One solution is to consolidate your credit card debt to get a lower interest rate. This can be done by using a personal loan to pay off some or all of your cards or by getting a balance transfer card and transferring the balances owed.
Personal loans have big advantages, such as lower interest rates than credit cards, a fixed monthly payment, and a clear repayment time frame. But balance transfer cards come with 0% interest for a period of time. While some of them charge you to transfer the balance from your old cards, others don't -- and you could transfer a balance and score around 12 months or more to pay down debt with no interest.
If you use a personal loan or balance transfer card to pay off multiple cards, then not only could you lower your interest rate, but you'll also combine all of your debts into one. That means you'll only need to make one payment per month instead of several, simplifying the repayment process.
Follow a debt payoff plan
Whether you consolidate your debt or continue paying down your existing cards, you should make a detailed plan to pay off what you owe. Ideally, this plan will involve making big extra payments each month so you can become debt-free ASAP.
If you owe multiple debts, you'll need to decide which ones to prioritize as you dole out extra payments. There are two popular approaches to take:
- The debt snowball method, which involves making all your extra payments to your debt with the lowest balance first. Once that debt is paid off, all extra payments go to the next-smallest debt, and so on. Through the snowball method, you can quickly wipe out your smaller debts and get those creditors off your back. These quick wins also help you stay motivated and gain momentum -- like a snowball rolling downhill.
- The debt avalanche method, which involves putting all your extra payments toward the debt with the highest interest rate. It may take longer to wipe out individual balances, especially if your high-interest debts are the biggest, but in the end you'll save the most money in interest.
Whichever method you select, the most important thing is that you put as much money as you can toward the debt each month until it's paid off. Making a budget can help you free up cash to allocate toward debt so you can pay enough extra each month to make real progress.
Make a plan to stay debt-free
Once you're out of credit card debt, you don't want to fall back into it. That means you need to continue living on a budget if you have one already -- or start living on a budget if you don't. Living on a budget ensures you won't overspend and reach for the plastic, and it also allows you to allocate funds to financial goals.
Budgets can be busted by financial emergencies, though, so saving up an emergency fund is also essential if you're serious about being one of the 4 in 10 Americans who are free from credit card debt. This fund should ideally be enough to cover three to six months' worth of living expenses, and it should be kept in a savings account separate from your regular accounts but accessible if you need it.
Aim to be in the minority when it comes to credit card debt
While the majority of Americans have credit card debt -- and the average credit card debt is high -- that doesn't it's OK. In fact, carrying a credit card balance is one of the biggest financial mistakes you can make. But if you follow the steps in this article, you could soon join the minority of Americans who aren't wasting hard-earned money on credit card bills.