What are you using your credit card for?
Inflation rates are higher than it's been in forty years! But that does not seem to stop people from spending. Interest rates have also soared, but credit is still widely used and not always paid off every month.
According to the latest statistics from credit bureau agencies, credit card users in the US owe $841 billion on their credit cards. The average American credit card debt is $5,221. This isn’t comforting because the average interest rate on credit cards is 16.4%.
If you spent another dollar and all you did was pay the minimum each month — which is 3%, it would take you 39 months to pay off. It would cost you an estimated $1547.00 in interest payments for that duration.
The photo above is a breakdown of what expenses are put on a credit card. How does yours compare? If a credit card is a good indicator of where their money goes, Americans appear to spend as much eating out as they do eating at home. What about you?
The 20/30/50 Rule
If you want to get out of debt or achieve financial independence, you may want to try the 50/30/20 rule. Spend 50% of your income on necessities — shelter, heating, and food costs: 30% to go towards lifestyle — eating out, gym membership, and entertainment. And 20% of your income should go towards savings and investing.
How to reduce credit card debt
Use your credit card sparingly — only to book flights and hotels.
Make a plan to pay off the balance on your credit card by trimming your budget. Reduce spending where you can.
Your credit card is a form of revolving debt, making it hard to pay it off. Keep only one card and get rid of the rest.
As much as possible, prepare home-cooked meals instead of eating out.
If your credit is clean, consider transferring the balance on your credit card to one offering a lower interest rate. Don’t be tempted to rack that up.
If you have a substantial amount of revolving debt, consider getting a consolidation loan. They have a fixed payment amount and length of time for which to pay it off.
Negotiate a lower interest rate on your credit card with your bank.
If you find it challenging to pay off your credit card due to extenuating circumstances such as job loss or illness, seek credit counseling.
Bringing it all together
Keeping a balance on your credit card is a drain on your finances. Not to mention that missing payments can impact your credit score. And in a rising interest environment, this can only get worse. Debt robs you of your financial future.
Pay off your credit cards and cut them up. Keep only one or two at the maximum for emergencies — if you’re stranded in another country. And for booking flights and hotels. As much as possible, use cash for all purchases.
An excellent resource for getting out of debt is Gail Vaz-Oxlade’s “Debt-Free Forever: Take Control of Your Money and Your Life.”