The challenge of credit card debt and six ways to fix it

Acting financially responsible in America today has come to mean “borrow and repay,” says Barbara Kiviat, economic sociologist at Stanford University. 

“It sort of crowds out the idea that maybe not borrowing in the first place is also a good idea,” Kiviat follows in an article by NPR. “But we’re now living in a world where so much hangs on that credit.”

We’ve bought into this financial structure. Literally. 

Collectively, Americans owe nearly $1 trillion in credit card debt. In fact, total credit card debt remained at $986 billion at the beginning of 2023, unchanged from the record reached from the end of 2022, according to a new Federal Reserve Bank of New York report on household debt.

And that lack of change in the first half of 2023 is worrisome because, typically, balances tend to fall at the start of the new year as borrowers begin to pay down their debt after the peak holiday shopping season. According to Federal Reserve researchers citing inflation and a higher cost of living, “This is the first time in 20 years we are not seeing a decrease” between the first and fourth quarters since the end of 2000 and 2001. That was a recession marked by the bursting of the dotcom bubble. 

In addition, credit card balances are up 20 percent from a year ago, according to a separate report from TransUnion. The average balance was found to have risen $5,733 over that same period. 

In many ways, the U.S. runs on borrowed money: mortgages, financial aid, auto loans, and credit cards for everything else. Think of it: in just two years, American consumers went from record levels of savings to 2023-level records of personal debt. “As inflation rose to near-40-year-high levels, many consumers have used credit to manage their budgets, leading to record- or near record-high balances,” said Michele Raneri, TransUnion’s vice president of U.S. research and consulting. 

Damned if you do, damned if you don’t

Credit scores have essentially become shorthand for how financially solvent or “trustworthy” certain people believe you to be – landlords, car dealers, insurance companies, and even employers. The three-numbered figure is decided by a formula that calculates one’s debt payment track record. By its standards, handling one’s debt is rewarded, while not having debt at all is actually a flaw. 

To make this make sense, Yazmin Lopez told NPR she had to reconfigure in her head what she had been taught at home. 

“Like, my dad – he had all his money under the mattress,” said Yazmin, who immigrated to the U.S. from Mexico as a teenager. “ Distrusting banks and the financial system in their entirety, “He did everything in cash. He never wanted us to have a credit card.”

“It’s such a cultural shift,” says Adina Appelbaum, a financial counselor and lawyer who works with immigrants. “In many countries, they don’t have this culture of debt . . . and there can actually be shame around having debt or a credit card.”

Following another interest rate hike earlier in May by the Federal Reserve, the average credit card rate is now more than 20 percent, an all-time high. Again, is this a good thing?

Obscene APRs make credit card debt one of the most costly methods of borrowing money month-to-month, and yet millions of American consumers continue to pile on ever-increasing levels of debt. While balances may be higher, almost half of credit card holders carry credit month-over-month, according to Bankrate research. Additionally, CBS News found that it’s widely predicted credit card debt will continue to rise in the near future. 

“I see several worrying trends here,” says Ted Rossman, senior industry analyst at Bankrate. “Credit card debt is something that is easy to get into and hard to get out of. More people carrying balances at higher rates for longer periods of time is definitely a bad combination. We’re seeing more people financing day-to-day essentials on credit cards.”

Six ways to fight credit card debt

Fortunately, there are always strategies to combat high-interest credit card debt. CNBC highlighted the following five ways:

Reevaluate how and on what to spend your money

Most finance experts advise beginning with establishing a basic budget. “The truth is that you cannot make a meaningful plan to tackle debt if you don’t know exactly how much money is coming in and going out of your household each month,” says credit analyst Matt Schultz. “You may not like what you see, but it’s better to deal with the reality of the situation than to bury your head in the sand.”

Creating a spreadsheet or signing up for any number of online budgeting programs can only help consumers streamline their budgets and know exactly where their money is being spent and how to better distribute those funds. 

Choose a plan to pay off the credit card debt

According to Russell Nelson at Navy Federal Credit Union, there are two ways one can address repayment: pay off your debt from the largest to smallest amount, or prioritize the highest-interest debt. 

The “avalanche method” lists your debts from highest to lowest by interest rate. This method ensures you pay off the debt that racks up the most interest first. Then again, prioritizing your smallest debts first regardless of interest rate, the “snowball method”, accrues momentum as the debts get paid off. 

Either way, the consumer will be making the consistent, minimum payments every month on all their debts while placing any extra cash toward accelerating repayment on one debt of their choice. 

Utilize small-dollar loans with your local credit union

A small-dollar loan for debt consolidation may assist a member in paying off their credit card while saving on interest. A loan from a local credit union may offer a lower interest rate than the member’s current debt and a smaller chance of missing another payment.

 It may even help improve the member’s credit score in the long run due to the member’s successful paying down of the loan (while  not taking on new debt!). Paying off debt helps reduce members’ credit utilization, which has a larger impact on members’ scores. Lower credit utilization helps boost credit scores. 

By giving the member time and the financial space to pay off their credit debt, with a favorable loan payment schedule they can plan a financially healthier future.

Get a 0 percent balance transfer credit card

Credit cards that offer up to 21 months with no interest on transferred balances remain one of the most powerful financial resources American consumers have in their fight to overcome credit card debt. 

To maximize the effect of a balance transfer, the consumer needs to go all out in paying down the balance during that first introductory period. If they don’t, the remaining balance will have a new APR applied to it – about 23 percent, on average – which roughly aligns with the rates for new credit. 

Simply inquire about a lower credit card rate

If a member is carrying a balance, it may be as easy as calling their credit card issuer to ask for a lower APR. Schultz adds, “You really have nothing to lose.”

Research has found that 76 percent of consumers who asked for a lower APR on their credit cards in the past year were successful. A reduced annual fee may also be in the cards, maybe even a higher credit limit or a waived late fee. 

Capitalize on high-yield savings accounts

To pair with paying down debt, members should consider placing some funds aside to build up a savings reserve, which helps to keep consumers from building up more debt while they’re working to pay off the existing balance. 

Regardless, it’s still an ominous time to be carrying credit card debt, especially when the long-predicted recession is supposed to be on the horizon. “Credit card debt is an expensive cycle and it’s hard to break,” says senior analyst Rossman. “It could get harder, unfortunately, as the cumulative effects of high inflation and high interest rates continue to take a toll, and especially if and when the job market takes a turn for the worse.”

What about Yazmin Lopez, you ask? While she still dreams of owning a home of her own, after years of using a credit card issued from her local credit union, Yazmin started a small business with its own credit line. She’s also the very parent she once read about in self-help books: she added her two children, ages eight and 14, to her credit card – building their credit histories and the family’s generational wealth.