What to Do When You Have More Credit Card Debt Than Savings
Credit card debt is a fact of life for many Americans. After all, the U.S. has more than $1 trillion in credit card debt among 123 million households. But did you know that one in three Americans has more credit card debt than savings?
A new study from Bankrate found that 33 percent of Americans’ emergency funds do not exceed their credit card debt. This number includes the 21 percent who say their rainy day funds couldn’t cover their credit card debt and 12 percent who have no savings or credit card debt. (While the latter may seem like a good thing, not having any emergency savings at all is also a financial risk, experts say.)
But it’s not all bad news. The report found that 58 percent of those polled said their emergency fund was greater than their credit card debt, and more than half said that padding their emergency fund was a major financial priority. Millennials were among those who said that establishing an emergency fund was important, with 61 percent naming it a priority. Read on for our tips on how to pay off debt and build up your emergency fund.
Paying Off Debt
When faced with paying off a large amount of debt, you may not know where to start. An easy way to get started is to make a list of all your debts, organized by the highest interest rate to lowest interest rate. Then, you can work to pay off the highest interest rate debt first, moving down the list once the first debt it paid.
You could also choose to organize your list by balance, from the smallest debt amount to the highest debt amount. Once you’ve paid off the smallest amount, you move on to the next largest, and so on. You also earmark the payments on your paid-off debt to the next one on your list, which helps you gain momentum and make bigger payments each month. This method of debt repayment is called the snowball method.
In order to more quickly pay off your debt, you can cut your budget and take a more bare-bones approach, get a second job or a side gig, or even consider looking for a new job with a higher salary. You could also cut non-essential expenses, such as cable television, eating out, or any unnecessary subscriptions.
And the most important step to take in paying off debt, especially credit card debt? Stop using your credit cards completely until your debt is paid off. Then once you pay off your debt, be sure to use credit cards responsibly. While using a credit card can be an excellent way to build up credit, you should only use them if you can pay off the balance in full each month.
Worth noting: You can also improve your credit score and build credit by paying your car payment, mortgage payment, and any other bills in full and on time each month. Consider setting up direct debit for as many bills as you can to ensure they’re paid on time.
Build an Emergency Fund
While you are working to pay off debt, you may choose to have a smaller emergency fund of $1,000, in order to pay off your debt more quickly. But once you start really making a dent in your debt, you should consider growing your emergency fund. After all, having a liquid emergency fund on hand can be a powerful tool to avoid going back into debt in the future in the event of an unexpected financial emergency.
Experts recommend an emergency fund of at least six months of living expenses. This includes your rent or mortgage, food costs, monthly bills such as car payments, cell phone plans, and any miscellaneous expenses. This should also include any outstanding debt payments, such as credit card payments or student loans.
You can build your emergency fund much like you’d pay off debt. Cut back on unnecessary spending, make it a habit to eat in instead of eating out, or take public transportation instead of Uber or Lyft.
You may also consider selling items online, moving to a cheaper apartment, or even picking up a side gig to earn extra money.
While it may seem like a sacrifice to save up and build your emergency fund, it’s one of the most powerful things you can do to help secure your financial future. Think of it as a financial insurance policy. Paying off debt is another powerful tool in your financial arsenal. Make both these things a priority and you’ll be well on your way to financial security. And who doesn’t want that?