October 20, 2023How to Reduce Your Reliance on Credit Cards

In early August 2023, the Federal Reserve Bank of New York revealed that US consumer credit card debt surged to its highest level – topping $1 trillion.1 This upswing in credit card spending comes as individuals nationwide grapple with managing their finances amidst escalating prices.  

While rising credit card balances are worrisome, it’s the potential long-term consequences of higher interest rates that are cause for alarm. In this article, we’ll reveal tactics you can implement to reclaim your budget and reduce your dependency on credit cards. But first, it’s essential to understand the cause of these record-setting balances.  

The Foundation of Higher Credit Card Usage 

During the COVID-19 pandemic, stimulus payments and decreased spending caused consumer savings to jump drastically. As businesses began to reopen, consumer spending resumed as people sought to return to normalcy. However, no one was prepared for the record-setting inflation that would soon follow.  

Skyrocketing prices, slower wage growth, and declining savings levels created the perfect storm that would lead many to become reliant on credit cards to make ends meet. As the Federal Reserve implements monetary policies to curb inflation, consumers are left stuck in the middle. 

Strategies to Reduce Credit Card Dependency 

It’s easy to blame the economy and remind yourself that millions of people are in the same financial predicament. However, if left unchecked, excessive credit card spending can wreak havoc on your finances for years to come.  

While reducing debt or changing spending habits is never easy, small adjustments can lay the groundwork for drastic improvements. Fortunately, many of these moves are simple and can provide instant financial relief.   

#1: Rework Your Budget 

Budgeting is the key to successfully managing your finances. It’s important to remind yourself that your budget doesn’t have to be perfect. It rarely will be. Instead, your goal is progress. Create a budget that is flexible and can adapt to the changing economy.  

As prices continue to rise, it’s crucial to reevaluate your spending habits. Your financial position has likely changed over the past couple of years, and the best way to make ends meet without relying on credit cards is to reduce expenses. Even temporary cuts can free up valuable funds.  

When creating a budget, keep the following tips in mind: 

• Most people overestimate their incomes and underestimate expenses. Review several months of financial account and credit card statements to obtain accurate figures. 

• Don’t wait until the end of the month to use leftover funds to pay down debt. Instead, treat money for savings or credit card payments like any normal monthly bill and add it directly into your budget. 

• Group your expenses into categories to make them easier to track and evaluate. Examples include housing, transportation, groceries, entertainment, savings, and debt payments.  

• Track your expenses regularly and set a time monthly to balance your budget. Remember, don’t become frustrated if you get off track. Instead, learn from any mistakes and keep going. 

#2: Consolidate High-Interest Debt 

Credit cards tend to have the highest interest rates among loans today. Anytime you can reduce the interest you pay on credit card debt, the better. One of the easiest ways to reclaim control over credit card balances is through debt consolidation.  

Debt consolidation is the process of taking several high-interest credit card balances (or personal loans) and switching them to a single, lower-rate credit card or loan.  

23.99% APR. Through debt consolidation, you can move all these balances to a new credit card with a lower rate, like 12% APR. Instantly, you’ll reduce the amount of interest you pay monthly – freeing up money for your budget or extra credit card payments.  

• Credit Card Balance Transfer 

With a credit card balance transfer, your outstanding balances are moved to a new, lower-rate credit card (as in the example above). This process is simple, and you can often take advantage of promotional offers with lower introductory rates. Just make sure you review and understand any fine print pertaining to special rates or offers. 

PEFCU offers no-fee balance transfers and low, fixed rates on our credit cards to help you pay down debt faster*.  

• Debt Consolidation Loan

A debt consolidation loan functions in the same manner, except the outstanding credit card balances are transferred to a lower-rate personal loan. This tactic often helps people reduce their debt quicker since you have set monthly payments (versus minimum monthly payments on credit cards).  

PEFCU’s personal loans are a great option for small debt consolidation*. We have competitive rates and flexible terms to fit your lifestyle and budget. 

#3: Combat Temptation 

While the economy plays a tremendous role in surging credit card debt, it’s not the only factor. Other measures, including advertising, social pressures, and mental health, influence people’s spending habits.   

When creating your budget, review your credit card statements. Identify frivolous expenses and determine what caused you to make those purchases. For example, many people shop when stressed, bored, or upset. Others feel pressure to keep up with the Joneses thanks to social media.  

Understanding your spending habits and identifying what triggers you to spend is crucial. You might consider unsubscribing or unfollowing certain companies online or removing shopping apps from your devices. Anything to help reduce the urge to spend frivolously will boost your bottom line.  

#4: Rebuild Your Emergency Fund 

Once you regain control over credit card debt, focus on rebuilding your emergency fund. If the world taught us anything over the last few years, it’s that the unexpected should always be expected. Whether it’s record inflation or an unplanned medical expense, being prepared is vital.  

Try to set aside three to six months of living expenses in an emergency fund. That is a lofty goal, but you don’t have to do it all at once. Set up payroll deductions or automatic transfers into your savings account, and let the balance grow steadily over time.  

An emergency fund not only provides money to cover unexpected expenses, but it also shields you from relying on high-interest credit cards.  

We’re Here to Help! 

Overcoming credit card debt can often feel impossible, especially when factors out of your control, like the economy, are at play. However, with some help and the proper guidance, it’s much easier than you might think.  

If you’re interested in learning how debt consolidation can instantly save you money, we’re ready to help. Please stop by any of our convenient branch locations or call 800-226-6673 to speak with our Member Contact Center today.  

 

1https://www.newyorkfed.org/newsevents/news/research/2023/20230808   

 

Each individual’s financial situation is unique and readers are encouraged to contact PEFCU when seeking financial advice on the products and services discussed. This article is for educational purposes only; the authors assume no legal responsibility for the completeness or accuracy of the contents.  

*Approval based on creditworthiness.