Just when you thought 2020 was devoid of good news for Americans – here is a small financial reason to smile! U.S. consumers paid down a record amount of credit card debt this past year.
However, that does not mean American consumers now harbor less credit card debt. According to a report from the Federal Reserve, Americans began 2020 with $1.09 trillion in credit card debt – an all-time high. That number came about from a $76.7 billion net increase during 2019, according to a WalletHub study.
Surprisingly, the global pandemic did not cause a continued dramatic increase of credit card debt. In fact, a downward trend was almost immediate. A slight paydown of consumer credit card data is normal in the first quarter of any year, according to the WalletHub study. However, in the first quarter of 2020 consumers paid down $60 billion in credit card debt – the biggest paydown ever.
The WalletHub study found that consumers continued paying off credit cards throughout 2020. In Q2 and Q3 combined, consumers paid down $58.8 billion more in credit card debt. That is the first time in more than 30 years that credit card debt has dropped from April through September in the U.S.
It is not that Americans stopped using credit cards in 2020, they simply reprioritized their household budgets. According to a Money.com study, 70% of U.S. consumers said they have no plans to cancel or close existing credit cards because of the pandemic. Instead, Americans have begun reducing discretionary spending during the pandemic, taking advantage of lifelines offered through the federal CARES act, like stimulus checks and additional unemployment compensation , to pay down credit card debt.
Whether you are interested in reworking your budget or simply want to reduce debt in 2021, there are a few immediate benefits to lowering credit card debt:
1. Reduce stress – Finding room in a budget to pay bills on-time can keep a person up at night. Paying down, and eventually, paying off that debt will alleviate additional stress.
2. Start next year debt-free – Beginning a new year with a fresh outlook can be liberating. Set an appointment now to meet with a credit counselor and get the guidance you need to start next year debt-free.
3. Reduce the number of bills you pay – Less bills to pay means your hard-earned money can go toward other things, like saving for a new home, a new car, or a special gift.
4. Take that much needed vacation – Paying down or paying off debt can make taking that trip you have always wanted a guilt-free reward.
5. Pay less interest – Paying your credit card debt down can save you excessive interest payments, reducing the total amount you owe over time.
As you are paying down debt, it is important to remain realistic. While it can be tempting to throw as much money as possible at outstanding credit card debt, it is important to properly budget for daily, weekly, and monthly necessities (food, clothes, rent, etc.). Be realistic about how much you can put toward your credit card debt each month by deploying the helpful tips below.
Tips to paying down credit card debt
Paying off credit card debt can seem daunting – especially if you have compiled quite a bit. Getting out of credit card debt is not a sprint – it is a marathon. With determination and some solid advice, living credit card debt free is possible. Here are some tips from Credit.com to get started in the right direction:
• Get organized – Gather all the information for every card with a balance. Make a list of the amounts, interest rates, due dates, and minimum payment for each card. Add up all the minimum payments on each of your credit cards to determine how much you must pay each month just to stay on top of credit card bills.
• Create a budget – You can follow every tip for paying down credit card debt, but if you are not spending within your means, you will likely settle into the same repetitive cycle. Create a budget that works for you, leaving wiggle room to pay down that credit card debt.
• Paying off the card with the highest APR first – Paying off the highest interest rate first makes the most monetary sense because it cuts out spending on a larger chunk of interest. Try boosting your payments on the card with the highest APR and paying the minimums on the remaining cards. Once that card is paid off, move on to the card with the next highest APR.
• Paying off the card with the lowest balance first – This method may not make as much monetary sense as paying off the highest interest rate card first. However, this may be a method that is easier to stick to for those who have a difficult time staying motivated without quick gratification. Enjoy the endorphins that come from paying off that lowest balance – then keep paying off from there!