Now we enter what we fondly call the holiday hangover period—the time when all the bills begin to arrive and we are reminded of how much we spent over the holidays. If you are among the average consumer, then you probably added a little more than $1,000 to your existing debt, according to a survey conducted by Magnify Money. For most people, this new debt is not expected, meaning that the money to pay it is not in the budget.
Using psychology to erase credit card debt
Here is where behavioral science research can help us in our quest to erase our credit card debt and get rid of the hangover. Researchers at Harvard Business School and other institutions offer a single mantra: focus. After analyzing 2.5 million credit card accounts and three years of data, Harvard researchers found that consumers who were the most successful at erasing credit card debt were those who concentrated on one card at a time. Most of us have multiple cards. But if we try to engage in a strategy of paying all our balances off at the same time, we can get lost or disappointed. The research indicates that if you target one account to pay off first and then move to the next, you will be more successful. Part of this is due to the sense of accomplishment you have when you see that zero balance. It gives you the emotional strength to continue. In an article in the Harvard Business Review reporting on the study, Remi Trudel, advised that if all your credit cards are carrying the same interest rate, then begin with those that have the smallest balance and work forward to those with larger balances. Of course, if you have a higher interest rate card, then you should begin with that one.
Your credit card interest rates could increase
Last month the Federal Reserve Bank agreed to a small increase in the interest rate of one-quarter of a percentage point. This hike will begin to be reflected on your credit card statements. It will not apply to existing balances unless you have a variable rate card. This is even more incentive to get those balances down, in addition to the financial freedom that erasing your credit card debt will give you.
What to do if any strategy is difficult for you?
If paying off your credit card debt is difficult there some options. One is to apply for a balance transfer card which gives you a grace period with zero interest, but this is only a good option if you are sure you can pay off the transferred balance before the grace period expires. It will cost you money though, in some cases as much as 5% of your transferred balances. A second option is to apply for a consolidation loan through a marketplace lender, such as peer-to-peer. One automatic payment for all of your credit cards will help you erase your credit card debt more quickly and successfully.
Pay with cash if you can
An Urban Research Institute study offers a couple of more helpful tips for erasing credit card debt. Many times we find ourselves making a purchase believing we have cash on hand and find that we do not, or the purchase is spontaneous. It is easy to swipe the credit card. But if the total amount of the purchase is not more than $20 and you charge it, you will end up paying more because of the interest. Better to use cash or your debit card and as Urban Research Institute recommends restrict your credit card charges to items in excess of $20.