New data from the Federal Reserve Bank of New York shows credit card debt is on the rise again. Americans now have a total of $986 million in debt, a record high. But there are strategies to keep your own credit card debt under control.
Reducing debt and increasing credit scores is the most popular service atSyracuse’s Financial Empowerment Center, or FEC. Their counselors helped reduce more than $1 million in non-mortgage debt for its clients in 2022.
Counselor Audriana Ortega knows it can be overwhelming and emotional dealing with debt.
"It's very daunting to figure out how to change things. I know. And turn things around. I know there can even be a lot of shame and embarrassment and even depression associated with being in this situation and when you get yourself into a hole," Ortega said.
But Ortega said there are paths forward. And some of the initial steps should be evaluating your spending and habits and monthly payments. Ortega said it's easy to lose track of what you’re spending money on because so much of commerce is digital now.
One of the first things she does with her clients to reduce debt is look over statements. She said more often than not, they’ll notice a purchase they don’t remember or a subscription they thought they cancelled.
"Even just the very basic thing of like opening your statement, your bill, and looking at it could really kind of wake you up and snap you into reality of how much you're paying for [and] how much you're being charged," Ortega said.
Ortega said possible solutions include working with credit card companies to reduce interest rates or a debt consolidation loan. Debt consolidation loans are one of Ortega's favoritetools to manage debt. Ortega outlines how a debt consolidation loan could differ from paying off credit cards on your own in the situation below:
A person has $10,000 in credit card debt.
- They keep their cards open and try to pay them off.
- They qualify for a debt consolidation loan with a 9% interest rate.
- They qualify for a debt consolidation loan with a 5% interest rate (a better credit score will receive a lower rate).
For scenario 1, say the credit card interest rate is 27.99%. If they were making a payment of $300 per month, it would take 66 months to payoff and they would pay approximately $9,554 on top of the original $10,000 that they spent.
For scenario 2, with a loan with a 9% rate, their payments would be approximately $207.58 per month, and they would have the loan paid off within 60 months. This is a savings of $92.42 per month for 60 months, plus the entire $300 for an additional 6 months. When we compare the interest being paid over the life of the loan/credit card payoff, this is a savings of $7,345.20 compared to scenario 1.
In scenario 3, with a loan with a rate of 5%, monthly payments would be just $188.71, which leads to a monthly savings of $111.29. That is going straight to interest when making credit card payments, or $8,477.4 overall.
In order to stay in good credit standing, Ortega stresses the importance of understanding and controlling your credit utilization. That’s the amount of credit that you use compared to the amount of credit you have available to you. It makes up 30% of your credit score, but Ortega says it’s not something most people are aware of.
She said the old rule of thumb is not spending more than 30% of the credit that’s available to you. However, Ortega encourages her clients to use even less.
"To have the optimal score, and to protect yourself to the point where you're not like overspending, you really don't want to have utilization over like 10%."
This doesn’t mean you can use credit cards. Ortega says to try and use credit cards as tools to earn rewards rather than a primary way to pay for things.
She adds that setting up spending notifications on credit cards and setting payment reminders are other easy ways to avoid falling into debt.
