Recent consumer research by PYMNTS and Elan Financial Services found that 45% of credit card consumers carry a month-to-month balance. While we know that high interest rates can take a toll on your wealth, the holidays are a time where I see students in my financial education program rack up more debt than they expect.
Here are three simple tips to keep your credit card debt out of the New Year.
Focus on the lowest credit card balance instead of multiple accounts
Your credit card with the lowest balance is the first place to look at paying off debt, especially with interest rates currently around 27%.
My husband and I cleared $300,000 in debt in three years, with many ups and downs and unexpected surprises along the way. There were many times when we felt discouraged and ready to give up and start spending more again.
Instead of trying to pay a little extra for multiple credit cards, choose the one with the lowest balance, regardless of interest rate. People may argue that the math makes sense to pay the higher interest, but I’ve found that the choice can be daunting if the balance is large.
By making minimum payments on all other debt and focusing on the credit card balance with the lowest amount, you’ll feel a sense of accomplishment that will help you move on to the next balance. It also helps to have one less bill to keep track of as you head into a new year.
Change your priority from points to real cash savings
I used to be obsessed with accumulating credit card points just to spend on my regular purchases. Credit card company marketing thrives on the feeling that you’re missing out if you don’t earn all those seemingly free rewards for flights, hotels and cash back.
But once I decided to ignore my credit card points, I shifted my focus to researching interest-bearing options like high-yield savings accounts and certificates of deposit, which currently earn over 5% in passive interest in some cases.
I recently showed my financial education students some real numbers. In the first four months of 2023, I earned credit card bonuses. But the amount I collected in interest and dividends from focusing on saving and investing resulted in $10,005.27.
Those extra dollars in my bank accounts feel like a much more immediate reward than the points I have to earn by spending instead of saving.
Put your credit cards on ice until the New Year
If you’re feeling guilt, anxiety, or any other kind of unwanted emotion, you’re not alone. Wholesale 60% of Americans live paycheck to paycheck heading into the holiday season, according to a recent LendingClub report.
Stopping credit cards can be a scary move if you’ve made them a daily habit instead of a debit card. When I temporarily replaced my credit cards with a debit card, I also felt the fear of losing points.
But after a month of only using my debit card, it became clear that I was overspending because I started overdrawing my account. Taking a break from credit cards shows what your real cash flow looks like, and the changes you need to make in the way you spend become undeniable.
If you find yourself looking for credit cards while paying off the debt on these accounts, you can cut up the physical cards without closing the accounts and apply for new ones once your debt is cleared.
Or for a more seasonal theme of putting your credit card on hold, you can literally put them on ice by placing them in your freezer and thawing them out when your debt runs out. It may feel like an inconvenience right now, but your future self will thank you for saving yourself hundreds or even thousands of dollars in unnecessary interest payments in the future.