A New Year’s pledge to pay down debt is common — but the resolution has new urgency for credit-card bills in 2024.
Let’s start with the numbers.
Americans had $1.08 trillion in credit-card debt through the third quarter of 2023. That doesn’t include their holiday shopping tab. About one-third of consumers said they went into debt over the holiday season, racking up an average of $1,028, according to a Lending Tree poll.
Why paying off credit-card debt is so important now
As interest rates increased in 2023, rising annual percentage rates on credit cards made those unpaid balances even more expensive. Card issuers charged an average 22.7% on revolving credit-card balances through the third quarter, according to the Federal Reserve. That was up from 18.4% in 2022’s third quarter.
Credit-card debt weighed heavier on people’s minds this holiday season, said Bruce McClary, spokesman at the National Foundation for Credit Counseling.
Nonprofit credit counselors had an especially busy holiday season, he said. “Normally we see a slowdown in December,” said McClary, followed by an early-year upswing in demand. “That’s not really happening in the same way as it has in prior years.”
Saving more money, paying off debt and spending less are the top three financial resolutions for 2024, according to Fidelity Investments’ annual survey. That’s consistent with past surveys on New Year’s resolutions, the wealth management giant noted.
In the year ahead, paying off credit-card debt was the top goal for older Americans with financial resolutions, according to research at Edward Jones.
Here’s how to turn your resolution to pay down debt into a reality in 2024.
Step No. 1: Get ‘uncomfortable’ and look closely at your credit-card debt
“Sit down and have that really uncomfortable experience of closely examining your debt situation, looking at the good, the bad and the ugly,” McClary said.
That includes looking at your account balances and activity, the interest rates on your card (or cards), the monthly interest charges, the cost of minimum payments and whether you are incurring late fees on any payments. “The less you know, the worse things can get,” he said.
The APR on your credit card plays a key role in how much your monthly payment is, but 43% of people who carry a credit-balance say they don’t know the interest rate on their card, according to a Bankrate survey.
Getting more clarity about your debt situation can be as simple as making a paper list of your credit-card balances or adding them up on a spreadsheet. Some people use budgeting apps that track income and expenses. However, some apps charge a fee, and McClary also advises consumers to look closely to make sure the platform is securely handling users’ personal financial data.
Step No. 2: Build a routine for paying off debt
Now that you’ve got a full view of your total credit-card debt, account activity and the monthly cost of interest rates, it’s time to set a budget that can hopefully help you push past making just the minimum payment on your credit card. A budget “sets the boundaries of what’s really possible and helps with goal setting,” McClary said.
“The first rule of thumb is keep it simple,” he said.
One budgeting method is the 50/30/20 rule, McClary said. That’s earmarking 50% of after-tax income for essentials such as housing, groceries, transportation, utilities and debts. Then there’s 30% for discretionary spending and 20% for savings and retirement.
When the goal is to pay off debt, one tactic is to devote somewhat less to the discretionary and savings categories. That means a 50/30/20 approach could become something like a 60/25/15 approach, or some other breakdown.
“50/30/20 simplifies how you split out those categories, but these percentages are a starting place where you can adjust from time to time,” he said. McClary cautioned against skimping too much on discretionary spending and saving.
Another important tool for battling debt is to set up automatic payments, where your credit-card payment is automatically deducted from your bank account on a specific day of your choice, said professor Abigail Sussman at the University of Chicago Booth School of Business, where she studies how people make financial decisions. Most credit-card companies let customers set up autopay arrangements.
“Probably the biggest insight from behavioral research over the last several decades is that simplification, making things easier, is going to be the path to getting things done and getting people to change their behavior,” she said.
One strategy is to set up automatic payments for a baseline amount that you know you can pay. But by keeping close tabs on your income and expenses, you should be able to identify times when you might have a little extra available to put toward your credit-card bill. Seize that opportunity and pay more than the minimum payment whenever you can.
Paying only the card minimum can make it very hard for consumers to get out from under their debt. It would take about 25 years, for example, to pay down a $6,000 balance with a 22% APR by making only minimum payments, according to one calculation. The cardholder would also fork over more than $10,000 in extra interest.
It’s good to figure out how much extra you can pay toward your credit-card bill as soon as your paycheck hits your bank account, Sussman said.
“You prioritize the debt payment, as opposed to making it an afterthought,” she noted.
Step No. 3: Decide which card to focus on first
It’s common to have more than one credit card. People have nearly four cards on average, according to a 2021 estimate from Experian
And each of those cards may have different APRs and carry different balances. So which one should you try to pay down first?
One strategy is the “snowball” method, which pays off the smallest balance first, then moves on to the next highest-balance and pays it off, and so on.
Or there’s the “avalanche” approach, which focuses first on paying off the cards with the highest interest rate debts first, and then moves on to paying off cards with lower interest rates from there.
While the avalanche approach could ultimately save you more money in the long run by knocking out those higher-interest payments first, the snowball method can sometimes help people build momentum on their journey to eliminating debt, because they feel a sense of accomplishment after they cross an entire balance off their list.
There’s no need to take sides in the debate, McClary said. Pick whichever one works best for you. “I’m on the side of the consumer, and whatever motivates them to get to the finish line is the option I recommend,” McClary told MarketWatch.
Step No. 4: Use smaller goals to help you achieve your overall goal
The goal of becoming debt-free sounds great, but some people might find it too daunting to get to $0 when so much is pulling at their wallet.
“What you don’t want to do is to end up in a situation where you feel like I didn’t make my goal this month, and therefore it’s not worth it, I’m never going to get there and let me just stop trying,” said Sussman.
To avoid best intentions that devolve into downers, Sussman said people need “concrete” and “achievable” goals. It can also help to use “sub-goals” along the way, like a monthly goal. They also should be ready to revise those goals as resolutions meet reality, especially in early months.
Suppose a person had $5,000 in credit-card debt. By itself, an overall goal to pay all that off this year could sound intimidating, Sussman said.
“Instead, reframing the larger $5,000 goal into subgoals of repaying $500 each month can seem more manageable and this more achievable goal will then be more motivating,” she said.
That said, people also need to give themselves leeway when setbacks and unplanned expenses snag plans, McClary and Sussman said.
“Life is not exactly linear and sometimes there are detours,” McClary said. “You have to allow yourself flexibility to adjust for those detours.”
“If the goals are realistic, then you should be able to achieve them most of the time,” said Sussman. “And if you miss a month, then the next month you can get back on track.”