How to deal when you’re stressed out about credit card debt

Few things cause more financial distress and anxiety than a large slug of high-interest rate credit card debt.

Millions of Americans of all income levels carry large balances on credit cards that charge very high interest rates. According to Federal Reserve data, the average annual percentage rate on cards issued by commercial banks was 16.45% at the end of last year, and rates charged by store credit cards can be well over 20%.

While card balances fell significantly from a peak of $927 billion at the end of 2019, they remain high at $841 billion at the end of the first quarter and could continue to grow.

“Credit card debt is still a big issue,” said Rachel Gittleman, financial services outreach manager at the Consumer Federation of America. “There were some pay-downs at the beginning of the pandemic, but I think balances may start to rise again with the increases in the cost of living.”

If you are struggling to make minimum payments on credit card balances, there are options to help you reduce the amount you owe and/or minimize the amount of interest you pay on the debt.

There is no silver bullet for high debt, however. The solution begins with changing your own behavior.

“The only long-term solution is to fix your spending habits,” said Summer Red, a financial counselor and senior education manager at the Association for Financial Counseling and Planning Education. “Nothing will be successful unless you stick to a reduced spending plan.

“You must get your spending below your income level.”

A $10,000 credit card balance with a 20% interest rate costs you $167 per month and that only ensures that your balance won’t grow larger. To begin paying down the debt balance, you’ll have to do more.

There are two key aspects to getting control of your spending; not using your credit cards and drafting a sustainable budget that includes paying down card balances.

On the first front, Red suggests people cut up all but one of their credit cards. Don’t cancel the accounts because your credit score will suffer

If you still wrestle with the itch to use your card, put it in the freezer. “It takes about three hours for a credit card to thaw and be ready to use,” said Red. “That gives you time to think about your purchases.” Only use the card for purchases you’re able to pay off at the end of the month.

On the second front, you will have to make some sacrifices to begin reducing debt balances. It could mean downsizing a house or apartment, selling a car or cooking at home more. It’s essential that you draft a budget itemizing all your expenses and income to determine where you can cut spending and pay down the debt.

Gittleman recommends getting help. “Every consumer’s financial situation is different,” she said. “They have different debts, different spending habits and different things of value to them.

“Working with a certified financial counselor can help you figure out your best options.”

As far as strategies to pay down the debt go, there are two basic repayment models. The first — called the snowball method — pays off the smallest debt balances first to give consumers some momentum. The idea is to pay the minimum amounts on all debt balances to avoid late fees or higher interest charges, then apply the remainder to your smallest debt balance.

When you pay off that balance you shift to the next smallest balance. “The motivation of paying off a debt is very valuable,” said Red. “Being able to see that can be a powerful incentive for people.”

If you don’t need the positive reinforcement, you can focus on the highest interest rate debt first. In the long run, the so-called avalanche method —  from highest rate to lowest — will save you the most on interest charges.

While changing your spending patterns is the only thing that will sustainably get you out of a debt hole, there are other steps you can consider that may reduce the amount you owe or decrease the interest you’re charged. Here are four actions to consider:

1. Call your credit card company to see if you can reduce the amount that you owe or lower the interest rate on the debt. Don’t lead with the possibility of declaring personal bankruptcy but explain that you’re unable to pay your current balance on the existing terms. Credit card companies want to get paid and they may offer some relief to ensure that they do.
2. Credit card balance transfers to other cards that offer no interest for a period may make sense, but they aren’t free. They may offer 0% interest for a six- or 12-month period, but they typically charge 3% to 4% of the balance upfront. If you don’t pay the debt off during that grace period, you won’t be much better off at the end of it.
3. Consolidating your high interest credit card debt and paying it off with a lower rate personal loan can dramatically reduce your interest expenses. Most likely, it would have to be a home equity loan if your credit profile is poor. The downside is that if you don’t get your spending under control, your home could be at risk down the road.
4. If your debts are simply too great — very often because of medical expenses, which are a key factor in 60% of personal bankruptcies — bankruptcy may be your best option. If most of your debt is unsecured, such as credit card balances and medical bills, bankruptcy can give you a fresh start. Speak to a financial counselor and bankruptcy attorney before taking this step.