With the possibility of unemployment claims reaching 30 million soon, millions of people are struggling to pay bills in April, the first full month since most of the country went into lockdown. Now we’re heading into May, and we’ll probably see another month – possibly more – where many of us will struggle with paying bills and putting food on the table. Some people have never been in this situation with typically secure jobs that they’ve been in for most of their work life.
According to a Wall Street Journal report, many Americans are unable to pay their credit card debt. Some of them have been relying on that debt as a means to survive while waiting out this pandemic. Many have contacted their banks and credit card companies to see if they can skip a month or two. Creditors are working with consumers to find a painless solution until everyone can get back to work. Depending on which report you believe, everyday life may resume soon, but it’s certainly not going to look the way it was pre-COVID-19.
However, some of you may have been struggling with credit card debt long before this pandemic hit the country. Even if you are fortunate enough to be gainfully employed, you may still be in over your head in debt. If you are earning enough money, you may just need a little help readjusting your priorities and consolidate your debt.
Do you think you have time to wait to pay off this debt? If your goal is to live debt-free and grow your wealth exponentially, you do not have time to wait – even during a pandemic.
The Real Cost of Your Credit Card Debt
What’s the real cost of credit card debt if you wait? Let’s say you have $10,000 on your Visa card. If you pay just the minimum each month of $300, you will pay a total of $19,421 for your debt, including $9,421 in interest charges. For the cost of delaying debt repayment, you will make monthly payments for 20 years. (This assumes the minimum monthly payment is 3% of your outstanding credit card balance, with your first payment at $180, 18% nominal annual interest rate-1.5% per month. If you don’t charge more, your payments will decrease each month.)
Pay More Each Month and Save a Lot
Of course, if you pay more than the minimum, you’ll expedite your payoff date. If you double your monthly payment to $600 (6% of the balance), you’ll reduce those years in debt to 8 years, with only $3,226 in interest paid. That’s $6,195 that you will save. This assumes you don’t add more purchases to your credit card.
Get more strategic
Did you know the average us household has over $53,000 in credit card debt and student loan debt? American’s hold over $444 billion in credit card debt, with interest rates as high as 19%.
While this may feel unbearable, you must remind yourself that it’s not. Once you get to the point where you are uncomfortable with the way your debt is controlling your life, you will realize you need to change the outcome. Set reasonable goals and take small manageable steps.
The first step to paying off debt
You’re going to diagnose where you are spending your take-home pay. Track your income and spending. All of it. (DebtMD’s free Smart-Debt Analyzer™ tool can help you determine which debt relief option is best for you.)
Then divide your spending into two categories: wants and needs. The items in your needs category should be rent, gas, utilities, etc. Yes, I know, it’s the boring stuff. These items should account for 50% of your take-home pay. Now, for your wants, this is the fun stuff. You need to trim it down to 20% of your take-home pay. Truth be told, you really need to take a long look at what you define as a want. The rest – 30% – need to go to savings.
This formula helps you live below your means without sacrificing. And you’ll pay off debt faster.
Next 5 steps to paying off debt
- Get your fixed bills lowered, if possible. Call the utility company and the cell phone company. Tell them you are about to leave for a competitor and see what deal they will give you. You’ll be surprised by how much people will provide you with a discount.
- Put your bills on autopay because this automates the process, so you know your bills are being paid on time. And this also helps keep your credit score up. Another bonus: some companies offer lower interest rates if you set up autopay with them.
- Quit adding more debt to your credit cards. This is a tough one. It’s nearly impossible to pay down debt when you keep adding to it. You need to go cold turkey. If you have to cut up your cards or put it in a safe deposit box or hide in a drawer or give it to your parents for safekeeping, do it.
- Stack your credit card debt from highest interest to lowest. You’ll want to start chipping away with the highest interest rate credit card debt first.
- If you have savings, take a chunk of it and put it towards your debt. I know what your question may be. What about my emergency fund? Yes, you should have one. I recommend leaving about $1,000 in your savings account. Plus, you should leave one credit card open and available. You can dare I say always use that credit card if you’re in a jam. For what you are earning in savings, interest won’t make up for the interest paid on those credit cards.