Ask an advisor: How do I get out of credit card debt?

February 16, 2024 5:25 PM

Credit card debt is a growing problem in the United States, with balances reaching $1.13 trillion in 2023.

Welcome back to "Ask an Advisor," the advice column where real financial professionals answer questions from real people. The topic can be anything in the world of finance, from retirement to taxes to wealth management — or even advice on advising.

In this column, we often field questions from people trying to take their finances to a higher level. Readers have asked how to save for retirement, prepare for a new baby, build a home or even help save the planet.

But until now, we've never talked to someone who's just trying to break even. And it's about time we did, because many Americans are struggling to do just that.

Debt is a massive and growing problem in the United States. In the fourth quarter of 2023, Americans' total household debt reached $17.5 trillion, according to the Federal Reserve — a $212 billion increase from the previous quarter.

In particular, credit card debt has skyrocketed. In the final three months of 2023, Americans' credit card balances rose by $50 billion, reaching a total of $1.13 trillion. According to the Fed, 8.5% of those balances became overdue — in fact, serious credit card delinquencies increased across all age groups.

And with interest rates at 20-year highs as the Fed battles inflation, this is no time to be in debt. Today the average interest rate on a credit card is 20.75%, according to the finance website Bankrate. With interest that high, even a small debt can turn into the beginning of a vicious circle.

One of our readers finds himself caught in that trap. Through a combination of circumstances and personal decisions, a young media worker in Washington, D.C. has ended up knee-deep in debt on multiple credit cards. To break the cycle, he turned to the experts for help.

Here's what he wrote:

Dear advisors,

This isn't easy to say, but I'm in over my head in credit card debt. I live in Washington, D.C., and I spend more than half my income on rent. In addition, I've had a habit — which I'm working on — of buying expensive electronics on credit. At this point I owe about $12,000 in total, spread across seven different cards. What do you recommend doing to get this under control?

Sincerely,

Indebted in D.C.

And here's what financial advisors wrote back:

Stop the bleeding

Jay Zigmont, certified financial planner and founder of

Childfree Wealth

in Mount Juliet, Tennessee

The first step to getting out of debt is to lock all of your credit cards and stop taking out any new debt. You've already proven that having credit cards is not helping you, so it's time to eliminate the option of using them.

With your cards locked, the next step is to get on a budget and set a goal. The key is to make paying off debt a priority, not what you do with what is left over. I tend to recommend the snowball method of paying off the smallest debt first, but you can also use the avalanche method of paying off the highest interest first.

Once you are out of debt, the challenge will be to stay out. It will take time to get out of debt, but you can do it.

The rub is the rent

Dennis Hunt, CFP and senior financial advisor at

Moisand Fitzgerald Tamayo

in Melbourne, Florida

The credit card debt is not the problem here. It's just a symptom of the real problem, which is that you spend north of 50% of your income on rent.

The short term Band-Aid is to stop the bleeding. Quit buying stuff you can't afford to pay cash for. Maybe even destroy the cards. I know, it's simple but not easy.

Next is to attack the card with the smallest balance first. Don't worry about the interest rates. Seeing those balances disappear will give you hope that knocking the debt out is possible and will create momentum to work your way through each card.

Finally, your housing situation is not sustainable. That's just the cold, hard math. You'll never be able to both live your best life now and save for the future with that kind of housing/income ratio. A much cheaper place or a much higher income is the only real long-term solution to you winning with money.

Grab the scissors

Vaughn Kellerman, CFP and associate wealth advisor at

HCM Wealth Advisors

in Cincinnati

The first step I would take is to destroy six of the credit cards. If the information is saved on any websites, like Amazon, remove it. Keep one credit card for emergencies but stop using it. Only buy anything with a debit card or, even better, with cash. Having to physically hand over the cash can be a strong mental technique to stop spending on frivolous items.

Regarding the paydown, I recommend starting with the card that has the lowest amount and putting any extra money you can toward paying it off. Once you have that card paid off, you take the minimum payment plus the extra amount you were paying and roll that to the card with the second lowest amount. Continue doing this until all cards are paid off. As you pay off the cards, close them (except for the one card you kept for emergencies).

You're not alone

Hazel Secco, CFP and founder of

Align Financial Solutions

in New York City

I commend you for bravely addressing this issue and expressing your thoughts. It's often easier to resolve problems when they're acknowledged openly. Know that you're not alone in facing this challenge. Regardless of their income level, many people can find themselves in credit card debt due to the ease of spending and occasional loss of control. Taking steps to change your habits can make a significant difference.

Moving forward, it might be best to stop using your credit card for a while. Until you establish better spending habits, relying on a debit card or cash will be safer. This way you'll have a clearer sense of your bank account balance and avoid the temptation to overspend. If you notice improvements over the next six months, you can gradually reintroduce limited credit card usage. I hope this was helpful and wish you the best of luck!