The COVID-19 pandemic has caused unforeseen financial challenges for people worldwide. A 2021 survey by Bankrate.com found that 42% of adults in the US have increased their credit card debts since the pandemic began in March 2020. The survey revealed that 1,297 out of 2,400 US adults had credit card debt. 47% of people in debt said that their debt directly resulted from the global pandemic. Similarly, the Federal Reserve data suggests a significant downfall in credit card balances after the pandemic. With the annual interest rate over 16%, it is challenging for people to settle their credit card debt. More than 54% of people carry their debt from one month to another, and around 50% of those have been in debt for over a year. The average person owning a credit card owes $5,525, and if they keep making minimum payments, they will remain in debt for 16 years and will pay over $6,000 in interest.
Another survey by CreditCard.com poll suggests that two-thirds of Americans worry about their ability to make minimum credit card payments for the next three months if the pandemic continues. However, the positive side of this is some credit card issuers are now offering 0% balance transfer deals that were unavailable during the pandemic. These deals allow people to block interests for up to 20 months while paying back their debt. But one would need a credit score of at least 700 to get one of these deals. To continue with the 0% deal, one must make minimum monthly payments. Here are some of the things borrowers can do to reduce their credit card debt:
1. Enter into Hardship Programs
Several banks issuing credit cards offer a hardship program for financial emergencies. It is basically a payment plan that allows customers to negotiate with their banks. They can get lower interest rates or/and waivers for part of the fees for a short period of time. Many credit card companies, including Capital One, Bank of America, and American Express, offer credit card hardship programs for their customers. Several circumstances can qualify as a hardship, including a layoff, pay cut, family emergencies, serious illness, natural disaster, divorce, and many more. You need to talk to your bank to find out their terms and conditions. NerdWallet survey reveals that 80% of people who applied for such hardship programs were accepted. Therefore, you can directly talk to your credit card issuer and negotiate your debt when in debt. You will have to prove your emergency/hardship and sign an agreement to get into the program.
2. Loan Consolidation
Loan consolidation refers to merging different debts through the same lender as one debt. This can be done for high-interest loans like credit card bills by combining them as a single payment. Loan consolidation is an excellent idea if you struggle with multiple debts with different interest rates, due dates, and minimum payments. There are two ways for loan consolidation:
Balance Transfer Credit Card: Some issues provide a 0% interest balance transfer credit card in which you can transfer all your debt and make a full repayment within a specific time period. This will save you a lot of money in interest.
Fixed-Rate Debt Consolidation: You can get a fixed-rate loan to pay off your credit debt and then repay the loan in installments. Additionally, you can get money from lenders who can loan you cash against your assets like vehicles or other assets.
3. Create a Repayment Plan
There are three major ways to plan your repayment. The first is called the snowball method, in which the borrower can choose the smallest amount and pay it back at once. However, the minimum payments for other debt have to be maintained. This method targets the smallest amount aggressively and provides instant results, thus, giving immediate gratification. The second approach is the avalanche method, where people have to dedicate all their extra resources to the debt with the most interest. Other debts get minimum payment.
The third way to plan your repayment is the blizzard method. Proponents of this method argue that the snowball and avalanche method does not make sense financially. The blizzard method combines snowball and avalanche methods. First, the borrowers have to put their debt in order of their size. Go for snowball for clearing one debt to give yourself the motivation. Then, switch to the avalanche method to repay your remaining debt. The key to a successful repayment plan is selecting one that meets your financial goals and needs and then sticking with it.
4. Consider a Debt Management Plan
If you struggle with credit debt every month, you can consider a debt management plan provided by several non-profit credit counseling agencies. A credit counselor from the non-profit agency is assigned to you to look over your financial situation and offer you the most appropriate program. The non-profit agency will contact your creditor and make itself the payer on your debt account. The agency negotiates your interest rates, minimum payments, etc. Each month, you will make a monthly payment to the non-profit counseling agency, which will then pay your creditor. Debt management plans are the best solution when you have a single small debt payment. You won’t be able to use your credit if you are on a plan, so be prepared for that.
Several other methods have proven useful for managing your debt during the COVID-19 crisis. However, the best approach is the one that resonates with you, i.e., you can afford and stick with it at all times.