The year 2020 has changed the lives of families around the world. Amid major adjustments like working from home, virtual education, and new health care precautions, there was another area in which Americans experienced change. The Covid-19 pandemic has changed the credit card habits of consumers across the country.
In a year when millions of people were stranded at home and unemployment rates hit an all-time high, credit card debt took an unexpected turn down. According to Experian, consumers reduced their credit card debt by an impressive 14% in 2020.
Read on to find out how your credit card management habits measure up to others. You’ll also find tips on how to reduce your credit card debt and tools you can use if your debt currently seems overwhelming.
Average debt of credit card holders
In an ideal world, consumers would pay off their credit card balances in full each month. When you pay off your statement balance before the due date, you can enjoy all the benefits of your credit card without the added cost of high interest charges.
Unfortunately, many Americans do not follow this sound financial rule. Experian reported that 75% of credit card holders have a balance in their accounts. As a result, the average amount of consumer credit card debt in 2020 was $ 5,315.
While this figure remains high, average credit card debt was down in 2020 compared to the previous year. In 2019, the average credit card debt was $ 6,194.
Average credit card debt by age group
Different generations carry different amounts of credit card debt. According to statistics from Experian, the average credit card balance is highest among consumers aged 40 to 55. Meanwhile, consumers between the ages of 18 and 23 have the lowest amount of credit card debt on average.
States with the highest credit card debt
Consumers in different parts of the United States have different credit card debt. Some states, like Iowa, have an average number of credit card debt ($ 4,289) well below the rest of the country. At the same time, consumers in states such as Virginia, New Jersey, and Maryland each have an average credit card balance of nearly $ 6,000.
Here’s a look at the 15 states with the highest credit card debt.
Cardholders who pay their cards monthly
A report from the American Bankers Association indicates that the number of credit card holders who paid off their monthly balances rose to 33.7% during the third quarter of 2020. This figure represents an all time high. However, there were still 40.7% of credit card holders who were renewing a balance month-to-month.
According to the Federal Reserve, the average credit card interest rate was 16.28% in the fourth quarter of 2020 (for credit card accounts that assess interest). So when you carry a balance on your credit cards from month to month, it can cost you a lot of money.
Here’s an example of how much a 16.28% APR could run you on a $ 5,313 credit card balance if you only paid $ 110 per month (approximate minimum payment).
- Balance settlement period: 78 months (6.5 years)
- Total interest cost: $ 3,218
Too much credit card debt can also hurt your credit rating, even when you pay your bills on time. Credit usage (the relationship between limits and your credit card balances) is largely responsible for 30% of your FICO score.
5 ways to reduce your credit card debt in 2021
By looking at the numbers above, it can help you understand how the amount of credit card debt you carry measures up to other consumers. Yet even if you owe less than the national average credit card debt of $ 5,313, that doesn’t mean you should relax. If your carried over credit card balance is over $ 0, you probably have some work to do.
Saving money and potentially improving your credit rating are two great reasons to pay off your credit card debt. Ready to start? Here are five debt elimination strategies that could help you reduce your credit card debt this year.
1. Create a credit card debt repayment plan
Even if you can’t pay off your debt in full, reducing your credit card balances by any amount is usually a smart financial move. Gradually reducing your account balance can be an effective way to get debt free in the future.
In addition to making small payments, you may also want to pay off your credit card debt in a specific order. The following credit card debt reduction strategies could take your efforts to the next level.
- The Debt Snowball: List your credit card balances from highest to lowest. Make the minimum payment on each account. Then focus all of your extra funds on the card with the lowest balance until you pay it off in full. Switch to the card with the next lowest balance and repeat the process.
- The avalanche of debt: List your credit card debt based on the interest rate on each account, from highest to lowest. Make the minimum payment on each card. From there, apply any additional funds to the account with the highest interest rate until you pay it off in full. Then repeat the process on the account with the next highest APR.
2. Use your stimulation test
On March 11, President Biden signed the third stimulus package into law, initiating a third round of stimulus checks for millions of Americans. Before the first stimulus payment, about 35% of Americans planned to use their relief funds to help pay their bills.
If you’re among the 85% of Americans who receive a third stimulus check, you might consider using some of those funds to pay off your credit card debt. You can pair your payments with your favorite debt reduction strategy above and make even more progress.
3. Use your tax refund
As the 2020 tax filing deadline approaches, millions of Americans expect tax refunds in the months to come. For many people, a tax refund is one of the biggest inflows of money they receive throughout the year. You can make good use of any refund you receive from the IRS by applying it to your high interest credit card debt.
4. Reduce expenses and expenses
Many Americans have significantly reduced their spending and spending over the past year. A recent survey by digital bank One reveals that 46.54% of respondents had reduced their spending habits in response to the Covid-19 pandemic.
Some of the ways survey participants saved money included spending less on:
- To eat
- Online shopping
- Grooming services (nail salon, hairdresser and hair salon)
- Home entertainment (subscription services)
When you find ways to cut your monthly spending and cut back on your spending habits, it can help you avoid new credit card debt. At the same time, you can use the extra money freed up by your new lifestyle to reduce the debt you already have.
5. Consolidate your debt
Will it take a long time to pay off your credit card balance? If so, you may want to consider consolidating your debt while working to eliminate it. Debt consolidation has the potential to lower the amount of interest you pay and help you get out of debt faster.
Two of the most common ways to consolidate credit card debt are:
- Balance Transfer Credit Card: A balance transfer credit card usually has a low introductory APR or 0% for a limited time. You can use the new account to pay off your existing credit card balances. Be aware that many balance transfer offers come with additional balance transfer fees to move your debt. So you’ll want to do the math to make sure you’re saving enough money in interest for the offer to make sense.
- Debt Consolidation Loan: A debt consolidation loan can combine the balances of your existing credit card accounts into a single new account. If you qualify for a lower interest rate than what you are currently paying, the new loan may reduce the amount you pay overall and could also shorten your repayment schedule. As an added bonus, these loans are installment accounts rather than revolving accounts (like credit cards). So, you could drastically reduce your credit utilization rate when using a consolidation loan and possibly improve your credit scores.
Keep in mind that you generally need at least fair to good credit to qualify for any of the consolidation options above. However, good to excellent credit usually opens up the best interest rates and terms. If your credit is in bad shape, you may want to try rebuilding it before you apply for new financing.
It is also essential to avoid recharging your credit cards once you open a new account to consolidate debt. If you make the mistake of continuing to overspend after debt consolidation, you are paving the way for financial and credit disaster down the road.
At the end of the line
Credit cards offer many benefits that can simplify and improve your financial life. They can help you build a positive credit history when you manage them responsibly. They come with strong fraud protections that are hard to beat with any other payment method. And many credit card accounts offer rewards that you can take advantage of when choosing the account to pay for a purchase you needed to make anyway.
But it is important to break the habit of credit card debt. Otherwise, your credit card might be getting in the way instead of helping you.
Are you currently struggling with credit card debt? Consider if any of the above strategies could help you out. It is usually possible to pay off your debts and correct bad habits without giving up credit cards altogether.
If your financial situation is dire and you have so much debt that you can’t keep up with your bills, you may need to seek professional help. A credit counseling service or bankruptcy lawyer can look at other debt solutions that may be better for your situation.
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