Oct 2, 2020
While we adhere to strict editorial guidelines, partners on this page may provide us earnings.
Many Americans hunkering down at home have found the coronavirus pandemic is a good opportunity to pay off debt. U.S. credit card balances fell by a record $76 billion during the spring quarter, according to Federal Reserve data.
But amid widespread layoffs, credit card debt has gotten worse for many. A CreditCards.com survey in May found almost half of American adults are carrying credit card debt — a 4% jump from early March. Nearly a quarter of the people who already had debt have added to it.
Advertisement
While there’s usually nothing wrong with a bit of short-term debt, it’s more important than ever to get rid of it quickly. If your income has been disrupted, the sky-high interest rates of your typical credit card will become a lot more painful. And you’ll need plenty of cash on hand (and the ability to borrow) if the pandemic lingers or a more personal disaster comes your way.
Here’s how to lighten your load and stay nimble in the future.
1. Monitor your spending
It’s time to get your budget on a tight leash.
Assuming you’ve been stuck at home during the pandemic, your lifestyle has totally changed. You’ll want to do a complete reset of your budget. For example, you’ve probably got bigger grocery bills and lower gas costs, so revise your numbers accordingly.
Not sure where all your money is going? Is it your takeout lunches? Have you signed up for too many subscriptions and memberships? Has your car become a money pit? You may want to download a budgeting app that automatically monitors what you spend your money on and warns you when your balance is low.
Next, you’ll want to reduce your use of credit cards whenever possible so you’re spending only money that you have. Cash-back rewards and the ability to shop online are big draws, to be sure, but you can get debit cards that will do both of those things. Some will offer as much as 10% cash back, so you can start exploiting your purchases instead of losing money in interest.
Must Read
- Dave Ramsey warns nearly 50% of Americans are making 1 big Social Security mistake — here’s what it is and the simple steps to fix it ASAP
- Robert Kiyosaki begs investors not to miss this ‘explosion’ — says this 1 asset will surge 400% in a year
- Vanguard reveals what could be coming for U.S. stocks, and it’s raising alarm bells for retirees. Here’s why and how to protect yourself
Join 250,000+ readers and get Moneywise’s best stories and exclusive interviews first — clear insights curated and delivered weekly. Subscribe now.
2. Erase your credit card debt
Advertisement
This could be a big job, so take baby steps. Reduce your debt little by little, paying what you can with the money you’ve saved.
But first, you’ll definitely want to look into a few ways to ease your burden.
If you’re bogged down with a lot of high-interest credit, you could try a balance transfer. With a good credit score, you could qualify for a new card with a 0% APR for a set period of time. Then you can transfer your old balance over to it. You’ll still owe the same amount of money, but you’ll be able to pay it down without more interest fighting you along the way.
It also doesn’t hurt to talk to your creditors. Just pick up the phone, dial the number on the back of your card and try negotiating for a lower rate. Credit card companies are like any other: They want to keep your business. Plus, the pandemic has inspired some companies to defer payments and even pause interest for borrowers in trouble.
Lastly, if you’ve got multiple high-interest bills, you can save yourself a lot of money and headaches by consolidating your debt into one lower-interest loan.
You can make single monthly payments to give yourself some breathing room and save up for each pay date. Do some digging and compare different lenders online to find the offer that works best for you. You could free yourself sooner than you think, and with an APR as low as 4.99%.
3. Set up your emergency fund
Advertisement
Once your debt is in a more manageable place, it’s time to start saving and reserve some of your income for emergencies.
Even if you haven’t lost work due to the coronavirus lockdown, a layoff could still be looming. And you never know when your car might break down or your cat might get sick.
A common rule of thumb is to have cash equal to three to six months of expenses on hand. That will give you time to find a new job and allow you to pay any big, unexpected bill.
While that money is just sitting around unused, you’ll want to put it to work. Hoard your cash in a high-yield savings account, which will earn you greater interest than a typical savings account. And if you’re concerned about potential maintenance fees, don’t worry. Not all bank accounts require monthly fees, so you can decide which account suits you best.
Once you get a routine going — you may want to set up automatic deposits — you’ll hit that three-to-six-month milestone in no time.
Then you can sit back and marvel at the progress you’ve made: from a mountain of credit-card debt to a comfortable cushion of cash.
You May Also Like
- Turning 50 with $0 saved for retirement? Most people don’t realize they’re actually just entering their prime earning decade. Here are 6 ways to catch up fast
- This 20-year-old lotto winner refused $1M in cash and chose $1,000/week for life. Now she’s getting slammed for it. Which option would you pick?
- Warren Buffett used these 8 repeatable money rules to turn $9,800 into a $150B fortune. Start using them today to get rich (and stay rich)
- Here are 5 easy ways to own multiple properties like Bezos and Beyoncé. You can start with $10 (and no, you don’t have to manage a single thing)
Serah Louis is a reporter with Moneywise.com. She enjoys tackling topical personal finance issues for young people and women and covering the latest in financial news.
