Relieving the Credit Card Payment Pinch

by Gary Foreman

Relieving the Credit Card Payment Pinch photo

When facing a large credit card balance, it can sometimes feel like you’ll be paying on that debt forever. Here’s how to find a way out of the debt trap and relieve that credit card payment pinch.

Dear Dollar Stretcher,
We have a few high interest credit cards. We know now that we were using poor management when we started using these cards and now we are feeling the squeeze from them.

Could you tell us how we can pay these cards off? It seems like we never get close to paying them off.
Linda from TN

A secret about credit card companies

Linda has discovered a secret. The credit card companies don’t want you to pay off your balance. And business keeps getting better for the card issuers.

According to ValuePenguin.com, the average household balance is now $6,270, and while many people charged less to their credit cards this past year after the virus hit, it became harder for people to tackle the balances they did have. With the average credit card interest rate now just above 20%, finance charges are growing, making it harder and harder for people to pay off those balances in a timely manner.

How do you find some relief?

Ultimately, to prevent the payment pinch, Linda must make payments that are bigger than any new purchases plus this month’s interest charges. So to solve the problem, Linda can spend less each month, reduce the amount of interest that she owes or make bigger payments.

Find ways to charge less each month

How can Linda need find a way to charge less each month? A review of her monthly credit card statement could be fruitful.

If she finds a series of small purchases or items that she doesn’t remember buying, it’s time to consider leaving the cards at home. She needs to find a way to identify purchases that could be avoided or postponed.

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Reduce the amount of interest you’re accruing

Next, try to reduce the amount of interest that’s charged each month. Linda should contact her creditors. Some will reduce her interest rate if she picks up the phone and asks.

She’ll want to pay off the highest interest cards first. If possible, she should transfer her balance to a lower interest rate card. (You can compare balance transfer cards here.) Only use the card with the lowest rate for new purchases.

Pay more toward your credit cards each month

Finding a lower interest rate will help, but to really solve the problem Linda needs to see if she can manage to make a bigger payment each month. The only permanent way to eliminate the payment pinch is to reduce the balance.

Suppose that Linda and her husband were the average couple and had $16,061 in debt at 18% interest. If she made no new purchases and wrote the minimum payment check for $401, she’d only be reducing her balance by $160! It would take about 389 months to pay off the balance and she’d end up paying about $23,500 in interest.

Fortunately, it doesn’t take much to begin to reduce the balance. What would happen if instead of paying the minimum she paid $500 per month and kept it at that level? She’d have the balance paid off in 45 months and only pay about $6,000 in interest!

Where can you find extra money for debt repayment?

So where can she find the extra money? It may not be easy so Linda needs to be motivated. The thought that she’s paying over $200 each month in interest and not getting anything for it should help. That’s money that isn’t buying any new clothes, cars or groceries.

Could Linda find $100 a month to increase her payment? Tough? Sure! But a little sacrificial cost cutting could yield $25 a week. That might be your daily stop for coffee. Or two lunches out per week. Two nights out per month might free up the $100. Or ditching your cable TV. (See also: 5 Simple Budget Cuts That Can Save $200 a Month.)

Perhaps Linda has an asset that could be sold with the money going to pay her debt. Or if she has an asset that can’t be sold, maybe she can borrow against it at a lower rate than she’s paying on her credit cards. Borrowing against her home equity is an obvious possibility. But look beyond the obvious. She might have a life insurance policy that allows for loans. Or perhaps she could borrow from her 401k plan. (See also: How a 401k Loan Affects Future Wealth.)

It might be time for Linda to consider a part-time job or a side gig until the card balances are paid off. Although it’s tough having a second job, knowing that it’s only for a short time makes a big difference.

What if you just can’t reduce your balance?

Suppose that she fails in reducing the balance and it keeps going up. She can expect the card companies to begin to increase her interest rate. Each month the financial noose will get a little tighter.

If Linda can’t reduce her balance and is struggling with the minimum payments she might be wise to seek credit counseling. They will negotiate a payment plan with the card companies that Linda can afford. She can expect to give up her credit cards and her credit history will reflect that she sought assistance. But struggling with the minimum payments is a warning sign of upcoming disaster. Unless immediate changes are made things will only get worse.

It’s important for Linda and all credit card users to recognize that the minimum payment is dangerous. The first warning sign isn’t when paying the minimum is hard. It’s when the total that you owe on all of your cards continues to creep up month after month and year after year.

If you can’t afford to make more than the minimum payment each month slowly but surely you’re heading for an even bigger debt problem in the future. The only safe credit card balance is one that’s shrinking each month.

Reviewed March 2021

About the Author

Gary Foreman is a former financial planner and purchasing manager who founded The Dollar Stretcher.com website and newsletters in 1996. He's the author of How to Conquer Debt No Matter How Much You Have and he's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com. Gary shares his philosophy of money here. Gary is available for audio, video or print interviews. For more info see his media page.

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