“A rise in credit card debt indicates consumers are beginning to feel more confident about the economy and their personal finances,” said Trey Loughran, chief marketing officer of Equifax, in a recent statement.
A CardHub study suggests that the average American household now holds about $7,126 in credit card debt. While defaults are at a six-year low, the rise in debt is coming closer to the $8,300 level that CardHub has flagged as unsustainable.
Of course, what’s considered unsustainable for your individual budget depends on your income, expenses, and other personal circumstances. Here are some everyday steps that might help you better control your finances and get your budget under control:
1. Know where you stand.
It can be tough to get a handle on your financial situation if you don’t know where you stand. Start by collecting your financial documents, bills, and credit reports. You can access a free credit report once a year from each of the three credit reporting agencies (CRAs) through AnnualCreditReport.com, or you can purchase your credit report directly from one of the CRAs.
Make a list of all your debts and the balances, monthly payments, and interest rates for each account. The list should include student loans, auto loans, credit cards, and any other personal debts that you may have. You can make the list with a pen and paper, a spreadsheet, or a template provided by a personal finance expert.
2. Understand income vs. debt.
After you tally up your debts, it’s time to see what you can do to knock them out. Evaluate your monthly budget and subtract from your income your fixed daily living costs, such as rent, utilities, insurance, childcare, commuting costs, and groceries.
Compare the amount of money that you have left with what you usually pay toward your debts. For example, if there is $750 left after subtracting your fixed costs, and you usually put $120 toward a credit card payment each month, that leaves $630 that you are spending on non-fixed expenses. If your credit card debt is near the average of $7,000, you could consider changing your spending in order to knock it out in a little over a year (as long as you don’t add to it).
Of course, it may not be possible for you to put the entire $630 toward debt reduction, but perhaps you’ll find you’re able to pay an additional $400 each month. You’ll still have $230 for expenses—and you might be able to increase your normal payments.
3. Set a strategy.
There are many ways to approach debt. Here are a few options:
- The “snowball” strategy. This strategy involves paying the debt with the smallest balance first. Focus all of your allotted debt payment money on this goal until you have paid it off. Then, move on to the next largest debt. Paying off the smaller debts may give you the incentive to face your larger obligations.
- High-interest debt. This strategy start by paying the debts that carry the highest interest rate first. Your highest-interest debts will cost you more the longer that you take to pay them. This strategy may work best if you carry debts with interest rates that are above 5 percent.
- Extra income for a specific debt. You may find that your budget doesn’t allow for a substantial debt payment each month. In this case, you may want to take on a second job, such as working at a grocery store or babysitting. In order for this strategy to work, however, you should commit to dedicating all of your income from the additional job toward your debt.
4. Negotiate fixed costs.
If credit card spending is your biggest debt issue, you may be able to negotiate with your creditors to get a lower interest rate or create a reasonable payment plan. Refinancing your mortgage or automating your student loan payments may lower interest rate.
This concept can apply to your other monthly payments as well. For example, by shopping around, you may be able to get a better insurance rate or lower the cost of your Internet or cell phone service.
There’s no quick fix for reducing debt; it takes hard work and dedication. Get started by making a plan and sticking to it. Getting out of debt is possible; it just might take some time to get there.
The information contained in this blog post is designed to generally educate and inform visitors to the Equifax Finance Blog. The blog posts do not give, and should not be assumed to provide, personalized tax, investment, real estate, legal, retirement, credit, personal financial, or other professional advice. Before making any financial decision, you should always consult with the appropriate professionals who can explain your options, rights, and legal responsibilities, and advise you on any tax, legal, credit, or business implications that may result from those decisions. The views and opinions expressed by the authors of blog posts are their own views and may not be the views or opinions of Equifax, Inc. and/or its affiliates.