With New Year resolutions just around the corner, people are starting to look at their finances with a little more scrutiny.
Credit card debt fell mightily during the pandemic— by $106 billion between Q1 2020 and Q2 2021 according to MoneyGeek. But the average American is still carrying more than $5,668 on their credit card balance.
The Federal Reserve’s most recent consumer credit report, released on December 7, shows the average APR on credit cards accruing interest is 17.13%, the second-highest since the government started tracking this data in 1994. That means the average person would pay $970 for each year they do not pay down their balance.
“Trying to pay down debt actually has some real similarities like another resolution: to lose weight,” said Doug Milnes, head of data analytics at MoneyGeek. “What credit cards do is they decouple the pleasure and the pain from spending.”
So, how do you work to pay down that credit card debt efficiently?
Make a budget. Taking a close look at your finances and creating a budget is perhaps the tops way to start paying down debt. It will allow you to see where you are spending excess money and save so you can put more toward your credit card balance.
“Decide not to take cash or your wallet with you if you’re out and you might go shopping,” suggested Milnes.
Pay with cash rather than card. Research has shown that physically paying with cash is painful. According to Avni Shah, an assistant marketing professor at the University of Toronto Scarborough, people who bought something with cash were more likely to value that item more than someone who paid for it with credit. She tested her theory at Duke University, where she sold mugs to students for $2. She asked one group to pay cash and another to pay credit. Professor Shah returned to each purchaser two hours later and said she needed to buy the mug back and asked the person to name their price. Professor Shah found those who paid with card, on average, asked for $3.83 back, while those who paid with cash, on average, asked for $6.71.
“What’s going on [when you pay with credit] is you’re going, ‘I really want to feel the pleasure from this purchase and it’s not being counteracted with, ‘There goes my money,’” explained Milnes.
Consider setting up auto payments on your credit card debt. If you are comfortable enough, Milnes suggests setting up auto payments to reduce your credit card debt. Perhaps, after you receive your paycheck. He says spending that money at the beginning of your pay period will force you to put money toward your balance when your account is healthy, and it will also force you to guide your spending for the weeks leading up to your next paycheck as that money will not be available to spend.