How To Cut Your Credit Card Debt In 5 Simple Steps

I’m not usually focused on numbers without wondering about people behind the numbers. One ongoing concern is household debt, which means millions may be under water. In the most recent Federal Reserve report, total household debt rose by $212 billion to reach $17.5 trillion in the fourth quarter of 2023.

Credit card balances rose by $50 billion to $1.13 trillion over the 4th quarter, while mortgage balances rose by $112 billion to $12.25 trillion. Auto loan balances rose by $12 billion to $1.61 trillion, continuing an upward trajectory seen since 2011.

Yes, more Americans are getting into debt for everything from restaurant meals to major appliances. In a superficial analysis, one can conclude that the pandemic austerity is over.

More troubling though, is that an increasing amount of this new debt is delinquent, meaning it’s not being paid back. In Fedspeak, “delinquency transition rates increased for all debt types except for student loans.”

Swiping a credit card has never been easier, particularly for online purchases. In most cases, there is no swipe at all. It’s just too easy.

What can you do to go on a debt diet, improve your credit rating and recover from oppressive debt? I asked Monique White, head of community at Self Financial , for her advice:

1. Establish a budget: Sometimes financial recovery means starting from square one. Creating a budget not only requires organization, but it forces you to take a wider look at your finances to understand your savings and spending habits. For example, using the “50/30/20/” method, you dedicate 50% of your income to your needs, 30% to your wants, and 20% to focus on your short term and long term savings. The 50/30/20 rule is only a guideline for budgeting and can be adjusted for specific goals. For example, if you have high interest debt or need to rebuild your emergency fund, you can increase your percentages to fit your goal.
2. Make on-time payments - This is one of the most important parts of ensuring that your credit score doesn’t experience a further dip. Payment history makes up about 35% of your credit score, so it is important that each month you are able to make your payments on time. Set reminders on your calendar or phone with the due date, or consider using auto pay to ensure timely payments. And if you are experiencing financial difficulties, keep an open line of communication with your card issuer so you can figure out a payment plan. This is better than avoiding and defaulting on your payment - and you can still have your on time payments reported to the credit bureaus.
3. Continue to build - When you have significant debt, you want to make sure you’re protecting your credit score. If your credit has already taken a hit it can feel overwhelming, but regardless if you are starting from scratch or rebuilding, you have options. Consider a credit builder loan that enables you to build credit while saving. For renters, building credit using rent payments - your biggest bill- is another solution. Self Financial recently launched a new free rent reporting service that enables renters to report their rent payments to all three bureaus for free.
4. Make sure you are constantly reviewing your credit report - Many errors can severely damage your credit score. So it’s important to identify these errors straight away and file a dispute claim to get them fixed. Checking your credit report is crucial for understanding where your credit score stands, and what could be impacting your score. For example, you may need to think about creating new trade lines to diversify your credit report and generate more on time payments - which is the biggest factor of your score.
5. Keep an eye on your credit utilization - Staying below 30% of your available credit limit not only helps you keep your credit score in a strong place, it can also help you stay within your budget. Overspending on your credit card means you may have to make extra payments to pay down your balance quicker and avoid interest fees.

Like all diets — and I hate this word — you’ll need to monitor how you spend and keep to a plan. You can recover, but it will take some focus.

By John F. Wasik, Contributor