The average American has thousands of dollars in credit card debt.
As of the second quarter of this year, Americans collectively carried a record $1.14 trillion in credit card debt, according to an August report from the Federal Reserve Bank of New York.
Their average individual account balance is about $6,330, up from $5,947 at the same time last year, according to TransUnion data.
But Americans aren’t always getting into debt to make extravagant purchases, Ted Rothman, senior industry analyst at Bankrate, told CNBC Make It. “People tend to get into credit card debt for practical reasons, like emergency expenses and everyday expenses, but this cycle can be hard to break,” Rothman said.
According to a Bankrate survey, many Americans have been carrying credit card balances for years: About one-third of consumers surveyed by Bankrate had been carrying balances for one to three years.
“Credit card debt is easy to get into but hard to get out of,” Rothman says.
If you have credit card debt,
Carrying a balance each month can make your credit card debt even more expensive in the long run because of the interest that accrues. If possible, it’s wise to make steady, incremental payments until you’ve paid off your debt.
With that in mind, CNBC calculated how much you’d need to pay each month to pay off $6,330 in credit card debt over one, two, and three years, and how much you’d end up paying in additional interest.
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CNBC’s calculations are rounded to the nearest dollar and assume that credit card debt doesn’t increase while you’re paying it off, and that the $6,330 balance is on a single credit card with a 25% interest rate, which was the average interest rate as of Sept. 20, according to LendingTree.
1 year
Monthly payment: $602 Total payment: $7,200 Additional interest paid: $890
2 years
Monthly payment: $338 Total payment: $8,108 Additional interest paid: $1,778
3 years
Monthly payment: $252 Total payment: $9,060 Additional interest paid: $2,730
As the math shows, the faster you pay off your credit card debt, the better: If you pay off that $6,330 balance over three years instead of within one year, you’ll end up paying thousands of dollars in extra interest.
You can try CNBC Make It’s debt repayment calculator for yourself to see how quickly you could pay off your debt based on the amount you owe, interest rates, and different timelines.
How to pay off credit card debt
If you’re not sure how to pay off your credit card debt, there are two common methods that experts typically recommend.
With the Avalanche Method, you prioritize paying off the card with the highest interest rate first. After you’ve paid the minimum payments on all your cards, put any money left over towards the balance with the highest interest rate. Once that’s gone, pay off the card with the second highest interest rate, and repeat until your debt is paid off. The benefit of this method is that you save money in interest in the long run. With the Snowball Method, you prioritize paying off the smallest balance first. Pay the minimum payments on all your cards, but put any money left over into the card with the smallest overall balance. Once that card is paid off, put any money left over into the second smallest balance, and gradually work your way up towards the highest balance. Your first small wins will motivate you to keep going.
Whichever method you choose, the most important step is to get started and stick with it, Matt Schultz, principal credit analyst at LendingTree and author of “Ask Questions, Save Money, Make More,” told CNBC Make It.
“There’s no one-size-fits-all solution to paying off debt,” he says. “You just have to find what works for you and, most importantly, follow through.”
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