Credit card debt is a big problem in the U.S. How big is it, exactly? According to the results released by the Federal Reserve Bank of New York, our total credit card debt hit $1.129 trillion at the end of 2023. Yes, that’s right: in a trillion, there are 12 zeros. So $1.129 trillion is $1.129 multiplied by $1,000,000,000,000. This shocking figure is the highest it has ever been since the Federal Reserve Bank of New York began tracking in 1999. And let’s face it, by the time you read this post, there will likely be a new record.
We love using credit cards, and credit card companies are absolutely thrilled by it. To keep us engaged, they design and churn out products loaded with all sorts of rewards. Cash back? Sure! Extra airline miles and airport lounge access? Great idea! Free hotel nights? You bet! These rewards are ours for the taking as long as we use their credit cards. Lest we forget, they run commercials with catchy taglines: “What’s in your wallet?”, “Don’t leave home without it.”, “It pays to Discover”, “Your Choice. Your Chase”, to name just a few.
Shakespeare once said, “All that glitters is not gold.” The aphorism describes our love affair with credit cards to a T. If we manage to pay off the entire balance each month, we rip the maximum benefits: ease, convenience, and promised rewards. If we cannot, we get the ugly side effects: fees and interests for carrying balances forward, plus many sleepless nights stressing over how to stay afloat financially.
Let’s say we find ourselves in this precarious state of carrying credit card balances from one month to the next. What should we do?
Understand where our money goes. Sit down and comb through the credit card billing statements. How much do we spend on necessities? How much do we spend on feel-good stuff? Groceries, commute fares, gas, household items like toilet papers are examples of necessities. Vacations (especially many of them), dining out everyday, using rideshares exclusively for the pure convenience of it are examples of feel-good stuff. Categorizing these activities would help us figure out where we overspend so we could start curtailing it. Yes, there would be many expenses that could go either way. Deep in our heart though we know when we are being excessive and what we could cut. Follow it.
Budget and build an affordable debt repayment plan. Once we figure out what expenses we could go without, we could set aside that amount toward paying down our credit card debts. List out how much we owe to each credit card company. What is their required minimum monthly payment amount, and what interest rate (annual percentage rate) they are charging us. If you can find a credit card company offering balance transfer with much lower interest rate for an extensive period of time, take advantage of it. Now that we are fully aware of the situation we are in, it’s time to formulate a game plan. We can start with the credit card debt with the smallest balance, or we could start with the one with the highest interest rate. There is no right or wrong order. Only thing that matters here is to see a meaningful decrease in our credit card debts each month.
Be very wary of companies who claim they can help us wipe clean credit card debts. In the U.S. there are many companies who run commercials over radios or televisions promising they can negotiate on our behalf with credit card companies over the debts we owe them. Already feeling anxious, their pledge offers a ray of hope so we happily sign up with them. That, unfortunately, could be the beginning of a long nightmare. These companies care about their bottom line. They don’t have our best interests in mind. Using them could ruin our credit. Plus, we could go broke even sooner thanks to the service fee they charge us. Where things get confusing and murky here is that there are benevolent organizations (mostly non-profit) who offer credit counseling services without destroying our credit. Finding them is easy. Every credit card company is required by law to provide a phone number in the ‘Minimum Payment Warning’ section of its monthly credit card billing statement. We can call this number to find a credit counseling services outfit, which specializes in offering sound personal finance advice and assisting us in creating customized debt repayment plans.
Creditors and collections agencies are willing to work with us. We keep on making minimum payments, which barely chisel away the mountainous debts we have. Or we are already late in making payments so we stop answering phone calls fearful that they are collections related. The common theme here is that we are reluctant to deal with the problems head-on. Creditors can be understanding and willing to negotiate. Even if we find ourselves being contacted by someone from a debt collections agency, don’t be overly anxious about interacting with them. The U.S. has strict regulations on debt collections practices. Yes, there are a few bad apples out there, but the same can be said for every business. Don’t let pride, fear, or shame hold us back. Call each creditor we owe money to. Answer debt collections calls. Find out what they can do for us. For example: they could enroll us in payment plans with lower monthly payment requirements. Or if we are looking to settle the debt by repaying less than owed, we can negotiate directly.
About 50% of Americans carry credit card balances. Some pay them off every month, some need several months, but the rest could struggle for years. If we are in the third camp, take the bull by the horns. We will come out stronger and wiser.
It always seems impossible until it is done.
Nelson Mandela
