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How to Get Out of Credit Card Debt Faster and Smarter

Updated on October 16, 2017
Gregory DeVictor profile image

Gregory is a financial adviser and author. He writes e-books on consumer finance topics and specializes in the U.S. grocery industry.

Overall Debt and Savings Statistics for the Average U.S. Household

The average American household has over $155,000 of debt. Liabilities include mortgages, car loans, student loans, credit card balances, medical bills, signature loans, back taxes, and overdraft charges. More than a third of the country is in trouble when it comes to paying bills on time. Recent studies have found that the average American household saves about 3.5 per cent of their annual income while the average Asian family saves over 30 per cent of their yearly earnings. Whether the annual income for an American family is $20,000 or $200,000, they are likely to spend most, all, or more of what they earn.

According to Money-zine, consumer debt in the USA works out to $11,140 of debt for every man, woman and child who lives in the United States. And this does not include debt associated with a mortgage.

Why are Americans so deep in debt? According to a recent study by NerdWallet.com:

The rise in the cost of living has outpaced income growth over the past 12 years. While median household income has grown 26% since 2003, household expenses have outpaced it significantly — with medical costs growing by 51% and food and beverage prices increasing by 37% in that same span.

Only three of the major spending categories haven’t outpaced income growth: apparel, recreation and transportation. But apparel and recreation are relatively immaterial expenses; they don’t make up a large portion of the typical consumer budget.

If you're an average American, you spend $1.26 for every $1.00 that you earn. For example, if your annual income is $50,000, you spend $63,000, a difference of $13,000. If your annual income is $75,000, you spend $94,500, a difference of $19,500. If your annual income is $125,000, you spend $157,500, a difference of $32,500. And so forth. According to CreditDonkey.com, "An estimated 38 million households in the U.S. live hand to mouth, meaning they spend every penny of their paychecks. Surprisingly, two-thirds of them earn a median income of $41,000, which puts them well above the federal poverty level."

Which generation and the best at saving? According to CreditDonkey.com:

Baby boomers tend to do better when it comes to hanging on to their extra money. Adults aged 55 and older have a positive personal savings rate of about 13%.

Millennials, on the other hand, meaning adults who are 35 and under, have a personal savings rate of negative 2%. Between high student loan debt and stagnating wages, saving anything at all proves to be impossible for many of them.

Credit Card Debt Statistics for the Average American Household

  • Over 70% of American consumers have at least one credit card.
  • The average U.S. household has over $16,000 of credit card debt.
  • Over half of American families carry credit card balances from month to month.
  • The average USA household with credit card debt is paying almost $1,300 in interest every year.
  • Nearly 10% of American households have over $20,000 in credit card debt.
  • Someone with a $5,000 credit card balance and a high 25% APR who makes a $125 payment each month would need over seven years and $5,800 in interest to pay off the balance.
  • The average consumer has over $7,500 of debt on a credit card that usually carries a balance.
  • According to NerdWallet.com, "Households that bring in more than $157,479 per year pay almost four times more in credit card interest than households that make less than $21,432." They add that a low-income household owes $3,611 in credit card debt, or 18% of its annual income. A high-income household has a card balance of $10,036, or less than 7% of its income.
  • One in three U.S. adults have debt in collections. This includes credit cards, personal loans, unsecured lines of credit, car and payday loans, medical bills, child support payments, and even parking tickets.
  • The states with the highest credit card debt per person include Alaska, New Jersey, Hawaii, Maryland, Virginia, Connecticut, California, New York, New Hampshire, and Massachusetts.

Ask Your Bank for a Lower Interest Rate

This hub will teach you how to get out of credit card debt faster and smarter. Just to clarify, what you are about to learn does not involve debt consolidation, debt settlement, or filing for bankruptcy protection.

Here's the credit card debt strategy:

Instead of enrolling in a debt consolidation or debt settlement program, why not ask your bank for a lower interest rate and also increase your monthly credit card payment(s). Here are some examples of how well these two strategies work:

First, did you know that a five-minute phone call to your credit card issuer could save you hundreds or even thousands, of dollars in interest charges? Courtesy of PBS.org, here is an example of how well this approach can work:

When was the last time you called your credit card company and asked them to reverse a late fee or lower your interest rate?

If ‘never’ is your answer, you’re in the majority. Only one in five respondents to a new survey by CreditCards.com said they had ever made such a request. And yet, 89 percent of those who had bothered to call about a late fee succeeded in having it reversed, and 78 percent were able to get a lower APR.

‘Most people don’t ask for breaks for one reason,’ CreditCards.com lead analyst Matt Schulz said. ‘They don’t think it will work. But people have more bargaining power than they realize. They just need to be willing to use it.’

It’s a buyer’s market. Credit card companies are competing with one another to gain and retain customers. And, adds Schulz, it’s a lot less expensive to retain customers you already have.

Business.HighBeam.com adds that rising delinquencies and default rates have made credit card issuers more inclined to cut deals with their cardholders. You might be able to lower your interest rate or monthly payment, get penalties waived, or even reach a settlement for substantially less than what you now owe.

Even if your bank lowers a credit card’s APR by only a percentage point, you could potentially save hundreds or even thousands of dollars in interest over the long-term and get out of debt faster.

Here are some examples of how well this strategy works:

Let’s say you have $25,000 of credit card debt with a 21.5% APR. Assuming that you make no additional charges or cash advances, it will take you 128 months to become debt free if you make a fixed monthly payment of $500. You will pay $38,890.29 in interest and a grand total of $63,890.29 (principal + interest). Summarizing:

Fixed monthly payment: $500

Number of months to become debt free: 128

Total principal paid: $25,000

Total interest paid: $38,890.29

Total amount paid (principal + interest): $63,890.29

First, suppose that your credit card company lowers your interest rate from 21.5% to 20.5%, a difference of one percentage point. Assuming that you continue to make a fixed monthly payment of $500, you will get out of debt 14 months sooner and save $6,923.13 in interest charges. Summing everything up:

Fixed monthly payment: $500

Number of months to become debt free: 114 (14 months sooner)

Total principal paid: $25,000

Total interest paid: $31,967.16

Total amount paid (principal + interest): $56,967.16

Total amount of interest saved: $6,923.13

Next, suppose that your credit card issuer lowers your interest rate from 21.5% to 19%, a difference of 2.5 percentage points. Assuming that you continue to make a fixed monthly payment of $500, you will get out of debt 27 months sooner and save $13,878.86 in interest charges. Summarizing:

Fixed monthly payment: $500

Number of months to become debt free: 101 (27 months sooner)

Total principal paid: $25,000

Total interest paid: $25,011.43

Total amount paid (principal + interest): $50,011.43

Total amount of interest saved: $13,878.86

Finally, suppose that your credit card company lowers your interest rate from 21.5% to 17%, a difference of 4.5 percentage points. Assuming that you continue to make a fixed monthly payment of $500, you will get out of debt 40 months sooner and save $20,042.24 in interest charges: Summing everything up:

Fixed monthly payment: $500

Number of months to become debt free: 88 (40 months sooner)

Total principal paid: $25,000

Total interest paid: $18,848.05

Total amount paid (principal + interest): $43,848.05

Total amount of interest saved: $20,042.24

Increase Your Monthly Credit Card Payments

Now it’s time for you to see how increasing your monthly credit card payment can dramatically cut down the time it takes to pay off your debt, along with the total interest paid:

Let’s say you have $15,000 of credit card debt with a 17.5% APR. Assuming that you make no additional purchases or cash advances, it will take you 88 months to become debt free if you make a minimum monthly payment of $300. You will pay $11,281 in interest and a grand total of $26,281 (principal + interest). Summarizing:

Fixed monthly payment: $300

Number of months to become debt free: 88

Total principal paid: $15,000

Total interest paid: $11,281

Total amount paid: $26,281

By increasing your monthly payment from $300 to $305, you will get out of debt 3 months sooner and save $427 in interest. Summing everything up:

Fixed monthly payment: $305

Number of months to become debt free: 85

Total principal paid: $15,000

Total interest paid: $10,854

Total amount paid: $25,854

Net savings: $427

By increasing your monthly payment from $300 to $310, you will become debt free 5 months sooner and save $820 in interest. Summarizing:

Fixed monthly payment: $310

Number of months to become debt free: 83

Total principal paid: $15,000

Total interest paid: $10,461

Total amount paid: $25,461

Net savings: $820

By increasing your monthly payment from $300 to $325, you will get out of debt one year sooner and save $1,838 in interest. Summing everything up:

Fixed monthly payment: $325

Number of months to become debt free: 12

Total principal paid: $15,000

Total interest paid: $9,443

Total amount paid: $24,443

Net savings: $1,838

By increasing your monthly payment from $300 to $350, you will become debt free 21 months sooner and save $3,142 in interest. Summarizing:

Fixed monthly payment: $350

Number of months to become debt free: 67

Total principal paid: $15,000

Total interest paid: $8,139

Total amount paid: $23,139

Net savings: $3,142

By increasing your monthly payment from $300 to $400, you will become debt free 34 months sooner and save $4,885 in interest. Summing everything up:

Fixed monthly payment: $400

Number of months to become debt free: 54

Total principal paid: $15,000

Total interest paid: $6,396

Total amount paid: $21,396

Net savings: $4,885

By increasing your monthly payment from $300 to $500, you will become debt free 49 months sooner and save $6,795 in interest. Summarizing:

Fixed monthly payment: $500

Number of months to become debt free: 39

Total principal paid: $15,000

Total interest paid: $4,486

Total amount paid: $19,486

Net savings: $6,795

MoneyChimp.com tells us that "Even a small monthly sacrifice--buy a little less, reduce your debt a little more--can make a big difference." They add:

The ultimate is to become a deadbeat, which is what credit card companies call people who pay off their balance every month, avoiding finance charges completely. If you're a deadbeat, credit cards are a beautiful deal - in fact, they're a short term interest-free loan. Life is sweet, for deadbeats.

How a California Couple Became Debt Free by Using this Strategy:

By March, 2010, Michael and Jennifer (not their real names) had racked up nearly $40,000 of credit card debt. After years of using plastic to finance everything from home improvements to wedding expenses for their daughter, they were barely able to make the minimum monthly payments on five credit cards. Michael and Jennifer did not keep a budget and were living beyond their means. Calls and letters from creditors along with constant worry motivated them to get help from a consumer credit counselor.

Michael and Jennifer did not feel comfortable about filing for bankruptcy or by using debt settlement. Instead, they decided to change their careless spending habits and use the extra money to reduce their credit card debt. Here is a summary of Michael and Jennifer's extreme financial makeover.

Demographics:

Names: To protect anonymity, the couple I interviewed does not want their real names to be used. I am referring to them instead as Michael and Jennifer.

Location: San Francisco Bay Area

Current ages: Michael is 59 and Jennifer is 55.

Marital status: Married for over 25 years with no dependents.

Rent or own their home: Michael and Jennifer own a home and have a monthly mortgage of $1,737.00.

Employment status: Both spouses are working at full-time jobs.

Number of years free of credit card debt: 3

Financial profile before reducing their debt:

Combined annual income: About $150,000

Amount of credit card debt: Nearly $40,000

Number of credit cards: 5

Combined interest rate on all five cards: 16%

Total minimum monthly payments on all cards: Approximately $600

By continuing to make the minimum monthly payments, it would have taken Michael and Jennifer 13 years and 3 months to get out of debt. They would have paid $55,000 in interest and a grand total of $95,000 (principal + interest).

Michael and Jennifer's debt reduction plan:

After six months of careful financial planning, Michael and Jennifer began to see light at the end of the debt tunnel. By saving money on everything from transportation to taxes, they doubled their monthly credit card payments from $600 to $1,200. Michael and Jennifer become debt free in 44 months and saved over $40,000 in interest.

Here are some of the cost-cutting measures they put into action:

1. Both spouses changed cell phone plans and saved over $50 a month.

2. They trimmed their annual grocery bill by about $1,200.

3. Instead of eating out several times a week, they ate out once or twice a month and saved over $2,000 a year.

4. They trimmed over $3,500 from their annual tax bill. For example, Michael increased his annual 401(k) contribution from 6% to 15% and Jennifer increased her amount from 7% to 10%.

5. Michael took BART (Bay Area Rapid Transit) from the East Bay to his job in San Francisco's Financial District and saved over $4,000 a year in gas, parking, and bridge tolls.

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