The New Year is a good time to focus on paying back credit card balances that have accumulated over the past few months, especially during the holidays, even if, like many Americans, you have less credit card debt than you did before the pandemic.
Overall, American credit card balances declined 13 percent from late 2019 to the third quarter of 2020 as, according to federal data, consumers spent fewer and fewer card debt during the pandemic.
According to Money Management International, a nonprofit credit counseling agency, requests for help with credit card debt typically increased early in the year, but “we haven’t seen the normal increase we would have seen,” said Thomas Nitzsche, a spokesman for the agency .
The pandemic has stopped vacation and eating. Americans who had not lost their jobs had more money to pay off card debt. And the federal government’s pandemic relief efforts, including payments for monetary incentives, have further strengthened their finances, said Ted Rossman, industry analyst at CreditCards.com. The Federal Reserve Bank of New York found that people who received the first round of stimulus payments mostly saved the money or used it to pay off debts.
Of course, not everyone was so lucky. According to a survey conducted by financial website NerdWallet, 42 percent of Americans said their financial situation has worsened since the pandemic began due to job losses or loss of income. Almost half of those affected said they had borrowed to pay bills and meet needs. This comes from the Harris Poll conducted in November of online interviews with more than 2,000 adults.
“The pandemic has turned everything on its head when it comes to household finances,” said Sara Rathner, credit card expert at NerdWallet.
Some Americans are most likely in survival mode, using their credit cards to cover lost income and make minimum monthly payments, Nitzsche said. His agency is increasingly taking calls for help with housing issues like paying rent and mortgages, he said. The federal moratoria on evictions will expire in the coming weeks.
Experian credit bureau found that the average card balance was down 11 percent year-over-year by mid-year but was still a whopping $ 5,900. The average balance at the end of 2020 was $ 5,800. With average credit card rates of around 15 percent, the interest can add up quickly if the remaining amount is not paid in full every month. Households with credit will pay an average of nearly $ 1,200 in interest this year, according to NerdWallet.
So, if you ran up card debt over the vacation, perhaps as a reward for a challenging year, it makes sense to work out a plan to begin repaying – if not during “frugal February,” then as soon as finances allow.
Card debt is usually the most expensive way to borrow because it is not backed by an asset like a car or house. “It’s one of the worst types of debt a person can have,” said Karla McAvoy, elected chair of the National Association of Personal Financial Advisors, a group dedicated to paid financial planners.
The federal government is now handing out a new round of stimulus checks, this time for $ 600. Of course, if you need the money for the basics, these come first. But if you can, it’s wise to use some to pay off debts and set some aside as a cash reserve.
“You should do both if you can,” so you can start building a savings bag, said Matt Schulz, chief credit analyst at LendingTree, an online lender.
Having cash on hand gives you more payment flexibility – few landlords accept credit cards – and will have to use fewer cards in the future, said Jeremy Shipp, financial planner and spokesman for the Certified Financial Planner Board of Standards, an industry group.
According to an online survey by Bankrate.com and YouGov of 1,203 adults, a quarter of Americans said they wanted or expect to use the money to pay off debts. About 30 percent said they would save at least part of the check.
Here are some questions and answers about dealing with credit card debt.
What’s the best way to pay off credit card debt?
If you have multiple cards – and most people do – Ms. McAvoy recommends paying out the card with the highest interest rate first.
Other financial planners suggest paying out those with the least credit, which can give you a sense of accomplishment and encourage you to move on.
You can also consider consolidating credit card debt, possibly with a cheaper personal loan, to make payments more manageable, Ms. McAvoy said. Just paying a bill could be less stressful, she said.
If you can find a card with an interest-free offer, you can transfer your balance and pay off the new card over time. But banks have been making less interest-free transfer offers lately, and those that are available tend to have shorter withdrawal terms and higher transfer fees, Rossman said.
Can I use a home equity line of credit to pay off my card debt?
Many homeowners with mortgages have seen their home equity grow over the past year – the difference between the value of a home and the amount owed. If you qualify, a line of credit secured by your home will generally offer a much lower interest rate than what you would pay with a credit card. However, remember that the home loan is secured by your home. So if you can’t pay you can lose your home.
“It’s still debt so you want to be careful,” said Ms. McAvoy.
Can I ask my card issuer to lower my interest rate?
Yes. Even before the pandemic, banks from time to time offered to cut interest rates temporarily, usually for customers with good credit. But even if you are not addressed with an offer, you can apply for a discount.
“It is always worthwhile to ask the issuer whether he will lower your interest rate,” said Schulz.
During the pandemic, some banks offered to lower monthly payments or waive interest fees for those in financial difficulty.