U.S. consumers racked up $89.2 billion in credit card debt during 2016, pushing outstanding balances to $978.9 billion, which is roughly $3 billion below the all-time record set in 2007, according to WalletHub’s latest Credit Card Debt Study, based on Federal Reserve data released yesterday afternoon. As a result, WalletHub projects that in 2017 we will surpass the current record by at least $100 billion.
Given that the average indebted household now owes $8,377 to creditors, some advice clearly is in order. With that in mind, here are some tips that consumers should follow to reach debt freedom as quickly and inexpensively as possible:
- Make a Budget & Stick to It – Rank-order your expenses – including debt payments, emergency fund contributions and other savings – and trim the fat until the amount you earn exceeds the amount you spend. It doesn’t take long for luxuries to begin to feel like necessities, so cut liberally.
- Build an Emergency Fund – Your goal should be to gradually save about a year’s worth of after-tax income through monthly contributions to an emergency account. And you should actually start the process before getting serious about paying off debt. Otherwise, you’d simply be too vulnerable.
- Improve Your Credit & Do a Balance Transfer – A higher credit score will help you save on everything from loans and lines of credit to insurance policies. You also need at least good credit to score a decent 0% balance transfer credit card. You can check your latest credit score for free on WalletHub.
- Try the Island Approach for Better Card Terms – Using the same card to make everyday purchases and carry a balance from month to month is a mistake. It increases the amount that accrues interest and forces you to settle in terms of either rewards or low rates. The Island Approach – designating multiple cards for specific types of transactions – solves both problems.
- Pay Off Debt with the Snowball Method – Devote the majority of your monthly debt payment to the balance with the highest interest rate, while making minimum payments on any other balances you may owe. Then repeat the process when your most expensive debt is gone.