Crippling Credit Card Debt? Regain Control with These 3 Strategies.

Image Source: Till Lauer, The New York Times

Let's face it: today's society has made high consumer debt a taboo, a reflection of lack of willpower and an inability to properly manage money. While a student loan can be seen as "good" debt, generating long-term value through e.g. increased employment opportunities, credit card debt continues to be seen as "bad" debt, costing you hefty amounts of interest with no long-term benefits. And if you've picked up this blog post in the hopes of finding strategies to lower your high credit balance, this is a reminder you're not alone. According to a 2022 study conducted by Experian, one of the three national credit rating agencies, credit card average balances rose by 13.2% in 2022 to an average balance of $5,221 per person. However, accumulating debt is normal - and dare I say healthy - if properly managed. I hope this post helps remove some of the shame or stigma you might feel towards your credit card balance and remind you that with patience, diligence, and a strategy that speaks to you, you can regain control of your debt. Below I share 3 main frameworks to attack your consumer debt.

Option I. Debt Avalanche

The debt avalanche method is the mathematically fastest way to get you out of credit card debt, but also the method that requires the most self-discipline. The protocol is as follows:

1/ List off all your debts, starting with the one with the largest APR and ending with the one with the the smallest APR. You can find this information on your monthly credit statement.

2/ Take time to run the numbers and organize your budget (and take inspiration from our "Son of a Budget" post) to determine how much you realistically have to pay towards consumer debt each month. This is the amount you would ideally be able to contribute to your debt after budgeting away money for rent, bills, transportation, and investing. For this example, let's assume that your number is $340. 3/ Calculate the sum of all your minimum payments. Then, find the difference between the number you calculated in step 2 and that sum. The difference will be how much you will be contributing monthly to the balance with the highest APR above the minimum payment. In our example, the sum of your minimum payments is $256. That means that we have an additional $84 ($340 - $256 = $84) to contribute towards repaying the debt with the highest APR, Card 1.

4/ Follow this strategy recursively until the debt at the top of the list get knocked out. When it does, combine the monthly payment you set for yourself with the next minimum payment due. For the sake of simplicity, let's assume your other debts stayed the same despite making the minimum payments. You would now be contributing an additional $174 ($340 - $166 =$174) towards the next highest APR card above the minimum payment.

5/ Follow this protocol recursively through all the outstanding balances you have and take a shot when you are debt free!

Option II. Debt Snowball

The debt snowball method has you paying more interest in the long run, but with little victories along the way to keep you motivated, thus making it the preferred method among personal finance enthusiasts.

1/ List off all your debts, starting with the one with the smallest balance and ending with the one with the largest balance.

2/ Take time to run the numbers and organize your budget (and take inspiration from our "Son of a Budget" post) to determine how much you realistically have to pay towards consumer debt each month. This is the amount you would ideally be able to contribute to your debt after budgeting away money for rent, bills, transportation, and investing. Again, let's assume that your number is $340.

3/ Calculate the sum of all your minimum payments. Then, find the difference between the number you calculated in step 2 and that sum. The difference will be how much you will be contributing monthly to the balance with the smallest account balance above the minimum payment. In our example, the sum of your minimum payments is still $256. That means that you have an additional $84 ($340 - $256 = $84) to contribute towards repaying the debt with the smallest balance, Card 2.

4/ Follow this strategy recursively until the debt at the top of the list get knocked out. When it does, combine the monthly payment you set for yourself with the next minimum payment due. For the sake of simplicity, let's assume your other debts stayed the same despite making the minimum payments. You would now be contributing an additional $109 ($340 - $231 = $109) towards the next smallest account balance above the minimum payment.

5/ Follow this protocol recursively through all the outstanding balances you have and take a shot (or two) when you are debt free!

Option III: Balance Transfer

I would be remiss to not mention the balance transfer method, which allows you to transfer your account balance from one card to another card that has a 0% APR intro offer. 0% APR means that you'd get the opportunity to avoid paying interest for some time and all your payments would go towards lowering your principal. However, though I am not completely writing off this option, banks ultimately offer balance transfers because they want to win your debt business as they are betting on you continuing to be in debt, which is highly profitable for them. This option is best suited for those with a high credit score (700+) and for individuals who do not have issues overspending. If you do consider a balance transfer, here are 5 questions to ask yourself:

1/ Are you a new customer? Banks will often only offer a 0% APR intro offer to new clients only; there's no real incentive for them to offer this attractive interest rate if they hold your debt already.

2/ How soon can you complete your balance transfer? Banks will often give you a time frame within which the balance transfer must be completed, e.g. 60 days. However, it's worth noting that the clock on the APR offer starts from the moment you agree to a balance offer, so it's best to complete the transfer ASAP.

3/ Can you pay on time? Making a late payment could cause you to lose the 0% APR promotional offer and incur a penalty APR (>20% ).

4/ Is your interest waived or deferred? Read the fine print to understand if your interest during the intro offer period is waived (i.e. you will have no obligations) or deferred (i.e. you will have obligations at a later time). Store cards, for example, are notorious for having deferred interest offers. Deferred interest could mean that even if you have a small balance left at the end of the promotional period, you will still owe back all of interest the from the beginning.

5/ Do you have an actionable debt repayment plan? Yes, a balance transfer helps alleviate your interest obligations for some time, but it doesn't make the debt go away. Make sure you have a plan/methodology to repay your debt (e.g. debt avalanche, debt snowball). Additionally, do not use this new card to incur more credit card debt (i.e. do not put new purchases/debt on this card)! Do not consider a balance transfer if you know you'll be tempted - even for a moment -- to do so.

Final Commentary

Change starts with you! I hope you are able to lean on these tips/resources from WealthOnThe7 to start your own consumer debt repayment journey. Connect with me privately if you'd like to create a plan together. As we believe here at WealthOnThe7, the next stop is -- financial freedom!

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