Derek Hoffman, ’03, is co-founder and CEO of Wall St. Cheat Sheet. Forbes has named him No. 1 on its list of Top 10 Social Media Influencers on Wall Street.
You, the all-powerful consumer, have control over your own credit cards. Here’s a look at four simple, but useful, ways to manage credit card debt.
Commit to a Budget
Americans are on pace to accumulate $47 billion of new credit card debt this year, according to CardHub.com. You can avoid becoming a part of that statistic by creating and sticking to a household budget. CardHub.com recommends tracking your monthly expenses and ranking them in order of importance. If you spend more than you make, it’s time to face reality and make changes. Remember, the Joneses are probably in debt, too, so stop trying to keep up with them.
Build an Emergency Fund
Financial advisers often advocate an emergency savings fund of around eight months. The simple reason for this is that it takes the average unemployed person about 35 weeks to find a new job. If you don’t have an emergency savings fund, start one. It will grow over time and be there when you need it the most. You will also become less dependent on a credit cards for unexpected expenses.
Try the Island Approach
This strategy involves using different cards for different transactions. For example, you could transfer your existing high-interest debt to a card charging lower or even 0 percent interest to escape the debt sooner. You could also use different cash-back enhanced cards to supplement consumer spending.
Try the Snowball Approach
This strategy involves sending the majority of your monthly debt payment to the credit card balance with the highest interest rate. Doing this will cut down on interest expenses and help you pay off debt more efficiently. Once the debt with the highest interest rate is paid off, repeat the process as many times as necessary for the other cards. However, if you are the type of person who feels more satisfaction by paying off balances as quickly as possible, the snowball approach may be a difficult strategy to maintain in the long run.
Originally appeared in the summer 2014 issue of Michigan Alumnus.