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How to Get Out from under the Burden of Credit Card Debt

It is a very unusual person who has never experienced credit card debt. According to 45.4% of American households in 2021 had revolving credit card debt, up from 37% in 2019. That means that almost half of households do not pay the balance of their credit card every month and start racking up interest payments.

That same report had a lot of other interesting statistics. You might think that credit card debt would be primarily in the hands of the poor. But you’d be wrong. Check out this chart that shows percentage of people who have credit card debt against income. Up to a certain point, the more you make, the more credit card debt you have. This makes sense when you think about it as we all know that the credit card companies often won't provide credit to those with limited means.

The first part of this post was intended to make you feel better about yourself. If you have credit card debt, you are in good company. Even those people who look like they are doing well have that look because they are in debt.

So, what’s the cost of having that debt? The average American family credit card debt is $6,270. The average interest rate on that debt is around 15%, which works out to an average payment per month of $78/month. That doesn’t seem like a lot, but that adds up to almost $1,000 in a year. And no one wants to throw away $1,000.

Credit card debt seems to chip away at your earnings every month. But happily, you can also use that approach for getting out of debt. It’s just a matter of making a small dent in the total balance each month.

Obviously, the first approach is to keep the balance from getting bigger. Let’s say you’ve managed to do that and are paying the average credit card payment every month - $78, just keeping your balance the same. That’s the situation shown in Figure 1 below.

So, in month 20 you still owe what you did in month 1 and are continuing to pay the credit card company $78.38 of your hard-earned money every month.

Figure 1: Treading water.

But let’s say the next month you manage to find an extra $100 to put on your credit card in the first month. By the magic of compound interest working in reverse, knocking $100 off the balance of your card drops the principal and interest you are paying. Plus, you can use the savings in interest to increase your payment on the principal every month. By the end of 2 years, you’ve reduced the principal by $180, simply by reducing the principal by $100 immediately and using your savings in interest to continue to pay down the balance over time.

Figure 2: $100 immediate payment

Of course, if you can make more of a payment, the effects are even greater. What if you applied $250 to the principal in the first month? Not surprisingly, the benefits are a lot greater and that $250 converts to a $441 reduction in the principal after two years.

Figure 3: $250 Immediate Payment

Getting out of debt isn’t complicated and there are no easy ways to do it. But by paying more than the minimum payment will help you get out from under credit card debt – and we all want to do that!

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