What to Do If You Are Drowning in Credit-Card Debt

Article origianlly posted to Bloomberg.com.

Americans are struggling to keep up with their credit-card debt.

Consumers typically pay down debt at the beginning of the year after spending big during the holidays. But balances held flat at about $986 billion in the first quarter of 2023, according to a report from the Federal Reserve Bank of New York. It was the first time in at least 20 years that balances didn’t drop in the first three months of the year, according to Bankrate.

With balances elevated and interest rates high, more consumers are falling behind. The report found 4.6% of credit-card debt transitioned into serious delinquency, which means a borrower failed to pay for 90 days or more. That’s up from 4% in the final three months of last year. Younger consumers are being hit hardest, with 8.3% of balances held by credit-card holders aged 18 to 29 in serious delinquency, according to the report.

It can be daunting to figure out how to start paying down your debt. But Harrison Hinz, a financial planner with Spark by First Pacific Financial, reminds borrowers “to take a deep breath.”

Here are some other tips for dealing with your credit:card debt, according to financial advisers:

Dive Deep

An important first step is getting a “full picture” of  your outstanding debt, said Zack Hubbard, director of financial planning at Greenspring Advisors. He recommends listing all of your credit-card accounts — including balances, minimum payments and interest rates — in a spreadsheet.

Once you understand the severity of your problem, advisers say its important to establish positive cash flow — to have more money coming in than being spent.

Kris Carroll, an adviser at Wealth Enhancement Group in North Carolina, recommends tracking your spending habits with a budgeting app that automatically categorizes spending. Once you identify areas where you may be overspending, create a strict budget so you can free up more money to pay down credit cards.

“If you don’t fix a fundamental spending problem, it doesn’t matter,”  Carroll said. “You’ll just dig yourself further in a hole.”

Hunt for Lower Rates

It may be possible to negotiate with your credit-card company to reduce interest rates, waive fees or work out a payment plan that is more manageable. Alternatively, borrowers can ask their creditor to transfer their balances to a card with a lower rate.

“Finding a lower rate can save them money on interest payments and help them pay down their debt faster,” said Blaine Thiederman, a financial adviser at Progress Wealth Management.

Those who don’t have luck negotiating with their lender should consider debt consolidation, which can simplify the payment process and lower the overall interest rate.

If you have the assets, it’s worth considering a collateralized loan, such as a home equity line of credit or a title loan against your car, to secure a lower interest line of credit to pay off debt with a higher interest rate, Carroll said.

Pay Down Strategically

Once you’re ready to tackle your ballooning credit-card balance, there are useful strategies to consider, Hinz said. For those who want a quick win to get motivated, he recommends taking the “snowball” approach by paying the lowest balance first.

Those hoping to save more money in the long run should use the “avalanche” method by paying off their highest interest rate balances first, though it can take longer to build momentum.

Thiederman also advises allocating any extra cash — whether it’s a tax refund or a bonus— towards paying off your balances.

Don’t Swipe

Financial advisers stress that credit-card holders should resist swiping plastic if possible. For those who have a tendency to overspend, Greenspring’s Hubbard advises consumers to “go old” and carry cash.

“Take out just enough cash to cover your expenses,” Hubbard said. “Cash is a great way to force yourself to stick to your budget.”

Seek Help

If you can’t manage on your own, seek professional help.

Borrowers falling behind on payments can get free debt-counseling services from a number of non-profits like the National Foundation for Credit Counseling or any number of local debt-counseling services in your area.

If you have the funds, hiring a financial adviser can “help you determine your next best step and provide a calming voice when you are feeling overwhelmed,” Hubbard said.