Behavioral economist Meir Statman likened the struggle of getting out of debt to the challenge of quitting smoking: good intentions alone aren’t enough. To truly succeed, we must break the underlying patterns of our financial behavior. It’s surprising to learn that despite living in one of the wealthiest countries in the world, the average American carries over $11,000 in debt. In contrast, many European nations that predominantly use debit cards boast an average savings of $13,000. During a recent trip to Germany, I was taken aback to find that less than 35% of shops and restaurants accepted credit cards. What can we do to reverse this trend and achieve a healthier financial situation?
Ditching Plastic for Cash
To effectively pay off credit card balances, consider reducing your reliance on plastic. This doesn’t mean you need to cut up your credit cards, but you should limit their use. Start carrying a set amount of cash for your weekly expenses. This method encourages better purchasing decisions, as handing over cash makes transactions more tangible. Once the cash is gone, spending stops. If cash isn’t an option—such as for online purchases—opt for your debit card as a more responsible alternative.
Leave Credit Cards at Home
To enforce a cooling-off period for new purchases, store your credit cards in a secure location away from your wallet. The harder it is to access them, the less likely you’ll be to make impulsive purchases. Keep the whereabouts of these cards private to prevent temptation.
Close Unused Accounts
While having a long history with certain credit lenders can help your credit score, too many accounts can harm it. Aim for a maximum of three credit cards and never utilize more than 50% of your available credit on any one card. Consider closing store credit accounts; if a purchase is necessary, use your primary credit card and pay off the balance monthly.
Negotiate Lower Interest Rates
One way to decrease your financial burden is by reducing interest payments. Contact your current credit card issuers and express your intent to transfer your balance unless they lower your interest rate. Many companies offer promotional programs with low or zero percent interest to retain customers. All you need to do is ask!
Tackle Your Credit Card Balances
Create a plan to pay off your existing credit card debt. Start by gathering all your credit card statements and making a simple table that lists each card’s total balance, minimum payment, and interest rate. Focus on paying down the card with the highest interest rate first, making minimum payments on others until the highest interest card is paid off. Then, shift your focus to the next highest rate card, and continue until you achieve debt freedom.
Avoid Late Payments
Late payments are the cardinal sin of debt management, leading to hefty fees, high penalty rates (which can reach 30%), and damage to your credit score.
Improving financial literacy and developing effective money management skills are essential. It’s time to move beyond the mindset of “someday things will get better” or “someday I’ll earn enough to stop worrying about bills.” The truth is, the only person who can change your life is you. There is no substitute for action. With determination and proactive steps, you can overcome financial fears and achieve your goals.