How To Manage Credit Card Debt as Costs Rise Due to Inflation

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Americans have been racking up credit card debt — and inflation is making it harder to break out of the debt cycle. According to recent data from the Federal Reserve Bank of New York, total household debt reached $15.8 trillion in the fourth quarter of 2021, which was an increase of $333 billion from the third quarter. Credit card balances alone increased by $52 billion, which was the highest quarterly increase in the past 22 years.

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Paying down debt while dealing with increasing costs is a challenge, but with the right strategy, it’s possible to get out of credit card debt — even during an inflationary period.

Now Is the Time To Hone in on Your Discretionary Spending

The cost of basic necessities like groceries, gas and utilities have skyrocketed. But unfortunately, these are expenses you largely can’t avoid paying. What you can control are your discretionary expenses. To see where you can cut back, it’s important to first see where you are overspending.

Make Your Money Work for You

“I highly recommend [using] an expense tracker,” said Rob Stevens, retirement income specialist at TIAA. “There are a lot of good free apps that are available on your phone. They cull all of your expenses from credit cards, debit cards and cash withdrawals all in one place so you can see your transactions. And they also put them into categories, such as restaurants, entertainment, utilities and car expenses, so you can really see where your dollars are going. They also typically automatically pull the last six months so you can see some trends.”

Once you have a clear picture of where your money is going, you can come up with a strategy to cut back in categories where you may be overspending. Whether you’re spending too much on eating out, entertainment or something else, there are always ways you can curb your spending.

“Can you bring your lunch to work instead of eating out every day? Do you need all of the streaming services that you added on during COVID when you couldn’t go to the movies? Could you cut back on a couple of those? Are you paying for a gym membership that you don’t use anymore? Could you invite friends over for dinner and take turns having each other over instead of always going out to eat every time? There are some tough decisions there, but there are choices in terms of saving money,” Stevens said.

Make Your Money Work for You

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Any money you are able to save on discretionary expenses can be put toward paying down your credit card debt. Consider credit card debt as an additional category in your monthly budget that you will set aside money for.

“People don’t like the word budget — I think of it as a ‘spending plan,'” Stevens said. “On a monthly basis, I manage my lifestyle [expenses] but also see [how I can get] out of credit card debt or [stop from] furthering credit card debts.”

If you’re having trouble seeing where you can cut costs to redirect funds to pay off your credit card, you may want to seek professional advice.

“If you have a financial advisor, that’s the type of thing you want to share with them,” Stevens said.

He also recommends using a credit card pay-off planning app to help you stay on track. These apps allow you to input your amount of credit card debt, your interest rate and how much you plan to contribute each month so that you can see how long it will take to pay off your debt.

Make Your Money Work for You

“I think that’s incredibly useful because if you know, I’m making this sacrifice by no longer going to Starbucks, but if you have a light at the end of the tunnel, you’re more likely to stick to it than if you feel like you’re throwing a bucket of water into the ocean,” Stevens said. “Those can give you a finite plan for paying off your debt, which is very behaviorally helpful for you.”

Is It OK To Take on Credit Card Debt During Inflationary Periods?

With nearly everything costing more, it’s easier than ever to rack up new credit card debt. But this should be avoided if at all possible, Stevens said.

“You really don’t want to be financing shoes and things like that,” he said. “It really hurts your financial wellness — your ability to have an emergency fund, college savings, retirement savings, saving for a home — all these things you want to do to progress further and put yourself in a better financial situation. It tends to prevent that.”

There are extenuating circumstances that may cause you to rely on a credit card — such as a job loss or unexpected medical expense — but this debt should be seen as a temporary solution.

“Rather than seeing credit card debt as OK, see it as something you want to escape from,” Stevens said. “It may be a necessary temporary evil, but I don’t think you want to get comfortable with it and say, ‘This is the way it is.’ You want to plan to mitigate it as fast as possible.”

How To Balance Paying Off Debt and Saving for the Future in Times of High Inflation

Saving for the future may seem like an impossibility when you are juggling rising costs and credit card debt, but Stevens said this should still be a priority.

“Pay yourself first,” he said. “You want to have an automatic distribution right to your 401(k), IRA, Roth IRA, and then build the rest of your lifestyle around that.”

Stevens said at the very minimum, you should contribute enough to max out an employer match, if offered.

“Let’s say you’re a 25-year-old with a $50,000 salary and your 401(k) is matched 100% on your first 3% contribution. If you put in $1,500 and they put in $1,500, that’s going to outweigh the 16% credit card [interest],” he said. “They’re giving you a 100% return, so you want to take advantage of that.”

He again emphasizes the importance of cutting out discretionary expenses before cutting back on your savings for the future.

“If you go to Starbucks every day, cut it down to two days a week and look at it as a treat,” Stevens said. “Identify things like that first before you cut savings.”

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About the Author

Gabrielle joined GOBankingRates in 2017 and brings with her a decade of experience in the journalism industry. Before joining the team, she was a staff writer-reporter for People Magazine and People.com. Her work has also appeared on E! Online, Us Weekly, Patch, Sweety High and Discover Los Angeles, and she has been featured on “Good Morning America” as a celebrity news expert. 

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