How much debt is in your wallet? According to Nerd Wallet, the average U.S. household owes $7,281 in credit card debt. If you’re anywhere near the national average, simply making minimum monthly payments will hardly make a dent.
To really move the needle when it comes to your credit card payment strategy, you need a plan that takes into account the type of debt you hold. The following tips are designed to help put you on the right path.
Understand the debt type
There are multiple types of debt a person can have. Secured debt represents debt tied to collateral, such as a home mortgage or car loan. Unsecured debt, like credit card debt or personal loans, is not tied to an asset. Unsecured credit card debt can also take the form of revolving debt, which means the debt’s interest rate and monthly payment can vary. Managing revolving debt takes patience and discipline since it’s easy to get and very easy to abuse.
Start with defining your objective
Your strategy for tackling debt should be based on your financial needs. For example, if you’re aiming to lower your cost of debt, focus your payments on the loans or credit cards with the highest interest rates. On the other hand, if your goal is to improve your credit score quickly, pay off revolving debt first. In many cases, your revolving debt will be your highest interest rate debt. If that’s the case, you will kill two financial birds with one stone.
Save the best cards for last
If you own and frequently use multiple credit cards, things can get tricky when it comes to selecting which card comes first in your payment plan. As mentioned above, it’s a standard best practice to start paying off the card with the highest interest rate first. If you own any cards that are carrying special offers of 0% interest, save those for last.
Don’t replace it!
As you start making progress and paying down your debt, it’s important that you do not replace it with new debt. If you replace what you pay down, you’ll find yourself in an endless cycle.
Dealing with credit card debt can be tough, but there is a light at the end of the tunnel. Create an action plan and stick to it. That way, your credit card debt will eventually melt away.
By Michael Poulos, President/CEO of Michigan First Credit Union