5 ways to reduce credit card debt ahead of the holiday shopping season

About half of holiday shoppers have already started making purchases or plan to begin by Halloween, according to a recent Bankrate survey.  Most of them will use credit cards to pay for at least some of their purchases, the survey shows.

“A couple of years ago, early holiday shopping was all about the supply chain mess,” said Bankrate senior industry analyst Ted Rossman. “Now, I think the motivation is more financial.”

Many consumers are anticipating the effect of inflation on what they’re buying, he said, and they’re stressed about the cost of holiday shopping. But it’s also important to consider the rising cost of carrying credit card debt.

Overall, credit card debt in the U.S. has reached a staggering record high of $1.03 trillion, according to the Federal Reserve Bank of New York. The average consumer carries about $6,000 in credit card debt — a 10-year high.

Many Americans are also carrying more card debt month to month.

“Part of what’s pushing debt higher is people struggling to make ends meet in the midst of high inflation,” said Matt Schulz, senior credit analyst at LendingTree. “They look at their credit card as a de facto emergency fund.”

But consumers are paying an exorbitant price for having that credit. 

The average credit card rate is now about 21%, according to the Federal Reserve Bank of St. Louis. Yet Lending Tree finds the average interest rate on new card offers is 24.45%, the highest level since the firm started tracking credit card rates in 2019. Additionally, 1 out of 3 of the 200 cards it has reviewed has a rate of 29.99% or higher. 

Here are five strategies to start paying off credit card debt before you begin holiday shopping: 

First, get a handle on your debt and what you owe. Find out the interest rate you’re paying on the total balance on each credit card. If you know how much you owe and what you’re paying to borrow that money, it will be easier to come up with a plan to reduce your debt. 

You can get free access to your credit reports online from each of the three major credit rating agencies — Equifax, Experian and TransUnion — at annualcreditreport.com to help you regularly manage your finances. 

Check for errors, including accounts that aren’t yours or that you didn’t authorize, or incorrect information on credit card limits or loan balances. You can dispute these errors directly online on the credit agency’s websites.

While the free credit reports on annualcreditreport.com will not include your credit score, many credit card companies offer their customers a free look at their credit scores. Often when you get your score, it also will give you the risk factors that are affecting your score and what you can work on to improve it. 

Paying your credit card bills on time and using 10% or less of the available credit are important factors in raising your score. Higher scores can help you qualify for lower-rate cards or cards with promotional offers of 0% interest.

One of the best ways to get rid of credit card debt is to consolidate it by using a 0% interest balance transfer card, but you may need to already have a credit score of 700 or higher to get one. 

A 0% interest balance transfer card offers 12, 15 or even 21 months with no interest on transferred balances. You may be charged a 3% to 5% fee on the amount that you transfer, so crunch the numbers to make sure it is worth it. 

For many consumers, it’s the “best weapon” for reducing credit card debt, Schultz said. “The ability to go up to 21 months without accruing any interest on that balance is really a game changer,” he added. “It can save you a lot of money. And it can dramatically reduce the time it takes to pay that balance off.”

If you get a 0% interest card, be aggressive about paying off as much of the balance as you can with no interest during that introductory period. Generally, after that, it will adjust to a much higher interest rate.

Another way to consolidate debt is with a personal loan. Currently, such loans come with an average annual percentage rate of about 12%, although a good credit score could garner you a rate as low as 8%. Only borrow enough money to pay off your credit card debt, not to spend more. 

“You work with a lender,” said Rod Griffin, senior director for public education and advocacy at Experian. “They give you a personal loan that pays off those credit card debts that are a relatively low interest rate, usually over a long, longer term, but it can reduce your payments.

“And all those credit card account payments would then be paid and reported as paid in full,” he added. “That’s key.” 

If you don’t qualify for a 0% card or personal loan, contact your card issuer and ask for a lower credit card rate.

Just make the call. A recent Lending Tree survey found about three-quarters of consumers who asked the issuer for a lower interest rate on their credit card in the past year got one — and they didn’t need a great credit score to get it. 

If you’re really cash strapped, you could also try working out a debt settlement directly with the creditor. Your goal is to get the creditor to agree to settle your account for an amount that is less than what is owed because at least some payment is better than none. However, there may be some negative consequences, like a tax hit on the amount of debt that you don’t pay that has been forgiven. 

Be wary of using debt settlement programs offered by outside companies. With a debt settlement company, instead of paying your creditor, you make a monthly payment into a separate bank account set up by that company.

Once there is enough money in that account, that company will use the funds to negotiate with creditors for a lump sum payment that is less than what you owe. These programs can take years and you can wind up paying hefty fees, experts say.  

“So you may be better off using those payments toward your existing debts and reducing those credit card payments yourself as opposed to paying a debt settlement firm,” Griffin said.

Once you have lowered the interest you’re paying on your credit card debt, you need to figure out how much you can truly afford to pay every month, every two weeks or every pay period. 

Figure out how much you must pay for committed expenses such as rent or mortgage, utilities, food and transportation, as well as debt payments, including student loans and credit card bills. 

Commit to putting a certain amount of your pay toward paying down your credit card debt — at least the minimum balance due on each card.

If you have multiple cards to pay off, figure out whether you are going to prioritize paying off the highest-interest debt, known as the “avalanche method,” or paying off the smallest to largest balances, known as the “snowball method.”

If you still prefer to use a credit card for daily expenses, make sure to pay it off in full every month while you’re paying down the balance on other cards. That’s known as the “island approach:” using different cards for different purposes with the goal of getting the lowest possible interest rate, rewards or cash back on each of them, for example. 

One repayment strategy isn’t necessarily better than the other, but you need to have a plan — and stick to it.

“There’s no quick fix,” said Griffin. “It takes time to get into debt; it takes time to dig your way out of debt.” The best solution “is usually the slow and steady, have a plan, pay it off over time and change your behaviors,” he added.

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