How much do you owe? How Credit Card Debt Changed in 2020 – Forbes Advisor

The year 2020 has changed the lives of families around the world. Amid major adjustments like working from home, virtual education, and new healthcare precautions, there was another area where Americans experienced change. The Covid-19 pandemic has changed consumer credit card habits nationwide.

In a year when millions of people were left homebound and unemployment rates hit an all-time high, credit card debt has taken an unexpected drop. According to Experian, consumers reduced their credit card debt by an impressive 14% in 2020.

Read on to find out how your credit card management habits stack up against those of others. You will also find some tips on how to reduce your credit card debt and tools you can use if your debt seems overwhelming right now.

Average debt of credit card holders

In an ideal world, consumers would pay off their credit card balance in full each month. When you pay off your statement balance on the due date, you can enjoy all the benefits of your credit card without the added cost of high interest charges.

Unfortunately, many Americans do not follow this sound financial rule. Experian reported that 75% of credit card holders have a balance on their accounts. As a result, the average amount of consumer credit card debt in 2020 was $ 5,315.

While this figure is still high, average credit card debt is down in 2020 compared to the previous year. In 2019, the average credit card debt was $ 6,194.

Average credit card debt by age group

Different generations carry different amounts of credit card debt. According to statistics from Experian, the average credit card balance is highest among consumers aged 40 to 55. Meanwhile, consumers between the ages of 18 and 23 owe the lowest amount of credit card debt on average.

States with the highest credit card debt

Consumers in different parts of the United States have different amounts of credit card debt. Some states, like Iowa, have a much lower average credit card debt count ($ 4,289) than the rest of the country. At the same time, consumers in states like Virginia, New Jersey, and Maryland each have an average credit card balance of nearly $ 6,000.

Here’s a look at the 15 states with the highest credit card debt.

Cardholders who repay their cards every month

A report from the American Bankers Association indicates that the number of credit card holders who paid off their monthly balances rose to 33.7% during the third quarter of 2020. This figure represents an all time high. However, there were still 40.7% of credit card holders who rolled over a balance from month to month.

According to the Federal Reserve, the average credit card interest rate was 16.28% in the fourth quarter of 2020 (for credit card accounts that assessed interest). So when you carry a balance on your credit cards from month to month, it can get very expensive.

Here’s an example of how much a 16.28% APR could earn you on a credit card balance of $ 5,313 if you paid only $ 110 per month (approximate minimum payment).

  • Balance repayment period: 78 months (6.5 years)
  • Total cost of interest: $ 3,218

Too much credit card debt can also hurt your credit rating, even when you pay your bills on time. Credit usage (the relationship between limits and your credit card balances) is largely responsible for 30% of your FICO® score.

5 ways to reduce your credit card debt in 2021

By looking at the numbers above, it can help you understand how the amount of credit card debt you carry is measuring up to other consumers. Yet even if you owe less than the national average credit card debt of $ 5,313, that doesn’t mean you should relax. If your credit card balance you’re carrying is over $ 0, you probably have some work to do.

Saving money and potentially improving your credit rating are two great reasons to pay off your credit card debt. Ready to start? Here are five debt elimination strategies that could help you reduce your credit card debt this year.

1. Create a credit card debt repayment plan

Even if you can’t pay off all of your debt, reducing your credit card balances by any amount is usually a smart financial move. Systematically reducing your account balances can be an effective way to free yourself from debt in the future.

In addition to making small payments, you may also want to pay off your credit card debt in a specific order. The following credit card debt reduction strategies could take your efforts to the next level.

  • The Debt Snowball: List your credit card balances from highest to lowest. Make the minimum payment on each account. Then focus all of your extra funds on the card with the lowest balance until you pay it off in full. Switch to the card with the next lowest balance and repeat the process.
  • The avalanche of debts: List your credit card debt based on the interest rate on each account, from highest to lowest. Make the minimum payment on each card. From there, apply any additional funds to the account with the highest interest rate until you pay them in full. Then repeat the process on the account with the next highest APR.

2. Use your stimulation control

On March 11, President Biden enacted the Third Stimulus Package, launching a third round of stimulus checks for millions of Americans. Before the first stimulus payment, about 35% of Americans planned to use their relief funds to help cover their bills.

If you are among the 85% of Americans who receive a third stimulus check, you might consider using some of those funds to pay off your credit card debt. You can pair your payments with your favorite debt reduction strategy above and make even more progress.

3. Use your tax refund

As the 2020 tax filing deadline quickly approaches, millions of Americans expect tax refunds in the months to come. For many people, a tax refund is one of the biggest inflows of money they receive throughout the year. You can make good use of any refund you receive from the IRS by applying it to your high interest credit card debt.

4. Reduce expenses and expenses

Many Americans have significantly reduced their spending and spending over the past year. A recent survey by digital bank One reveals that 46.54% of those surveyed have reduced their consumption habits in response to the Covid-19 pandemic.

Some of the ways survey participants saved money included spending less on:

  • To eat
  • Trip
  • Clothing
  • Online shopping
  • Grooming services (nail salon, hairdresser and hair salon)
  • Home entertainment (subscription services)

When you find ways to reduce your monthly spending and spending habits, it can help you avoid new credit card debt. At the same time, you can use all the extra money your new lifestyle frees up to reduce the debt you already owe.

5. Consolidate your debt

Will it take a while to pay off your credit card balances? If so, you may want to consider consolidating your debt while you work to eliminate it. Debt consolidation has the potential to lower the amount of interest you pay and help you get out of debt faster.

Here are two of the most common ways to consolidate credit card debt:

  • Balance Transfer Credit Card: A credit card with balance transfer typically has a low introductory APR or 0% for a limited time. You can use the new account to pay off your existing credit card balances. Be aware that many balance transfer offers come with additional balance transfer fees to move your debt. So, you’ll want to do the math to make sure you’re saving enough money in interest for the offer to make sense.
  • Debt Consolidation Loan: A debt consolidation loan can combine the balances of your existing credit card accounts into a single new account. If you qualify for a lower interest rate than what you are currently paying, the new loan may reduce the overall amount you pay and could also shorten your repayment schedule. As a bonus, these loans are installment accounts rather than revolving accounts (like credit cards). So, you could drastically reduce your credit utilization rate when using a consolidation loan and possibly improve your credit scores.

Keep in mind that you generally need at least fair to good credit to qualify for any of the above consolidation options. However, good to excellent credit usually results in the best interest rates and terms. If your credit is in bad shape, you may want to try rebuilding your credit before applying for new financing.

It is also essential to avoid recharging your credit cards once you open a new account to consolidate debt. If you make the mistake of continuing to overspend after debt consolidation, you are paving the way for financial and credit disaster in the future.

Final result

Credit cards offer many benefits that can simplify and improve your financial life. They can help you build a positive credit history when you manage them responsibly. They come with strong protections against fraud which are hard to beat with any other form of payment. And many credit card accounts come with rewards that you can take advantage of when choosing the account to pay for a purchase you needed to make anyway.

But it is important to break the habit of credit card debt. Otherwise, your credit card might be in the way instead of helping you.

Are you currently struggling with credit card debt? Ask yourself if any of the above strategies might help you out. It is usually possible to pay off your debts and correct bad habits without giving up credit cards altogether.

If your financial situation is dire and you have so much debt that you can’t pay your bills, you may need to seek professional help. A credit counseling service or bankruptcy lawyer can look at other debt solutions that may be better suited to your situation.

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