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If you racked up credit card debt in 2020 because of COVID-19, you’re not alone. Many Americans found themselves working fewer hours or out of work completely. Some industries, such as restaurants and gyms, experienced complete shutdowns, leaving hoards of individuals unemployed. And although the stimulus checks helped, after emergency savings were used up many had to take on debt to make ends meet.
Now that 2021 is off and running, it’s time to make a plan for that debt you accumulated because of the COVID-19 pandemic.
Autopsy your previous year’s spending
First, figure out where your money was spent in 2020. If you haven’t already gone through your expenditures from last year, print out your bank and credit card statements and take a good hard look at your spending.
If you have your accounts linked up to a budgeting app such as Mint, then you should be able to do a quick inventory of how much you spent on what each month. And if you’re overwhelmed by this task, just take a peek at the last few months. You should get a good idea of where your money went by analyzing even three month’s worth of expenditures.
The pandemic probably forced you to evaluate what you wanted versus what you actually needed in 2020. Although you may have thought you cut back on non-essentials, reviewing your spending may point out that you didn’t as much as you could have. Were there any recurring charges for subscriptions or other products/services that you don’t use or need? Cancel or downgrade anything that isn’t necessary to free up cash.
Come up with a plan
If you know you racked up some debt in 2020 but are afraid to take a closer look, it’s time to dig in. Go through all of your credit cards and any other personal loans you may have used in 2020 and write down the balance and the interest rate for each. This will help you to come up with a plan for how to pay it all off.
Many prefer the Snowball Method, in which you pay the smallest debt off first and then transfer that payment to the next while working your way up to the highest debt, but the Avalanche Method will actually save you in interest in the long run.
Mason Miranda, Credit Industry Specialist at Credit Card Insider, sums it up this way: “This (avalanche method) has you target debts with the highest interest rates first. Once the first is paid off, you’ll have a larger pool of money to put towards the next, burying all your debts beneath an avalanche as you free up more and more money.”
Budget in your debt repayment
If you’re coming up with a negative amount, it’s time to cut out or decrease some expenses or take up a side hustle to increase your income. You won’t be able to consistently put money towards your debt if you’re having to continue using those credit cards to pay for your life.
Track your progress
Getting out of debt will likely take you longer than it took to get into debt, so it’s easy to get discouraged. Tracking your progress monthly, or even weekly, is a surefire way to keep the momentum going. Applaud how much progress you make with each payment, and keep focused on the end result of debt freedom.
Use a crutch (if needed)
If the COVID-19 pandemic is still affecting your job status and you’re unable to stick to a debt repayment plan, it may be time to consider other options.
Consolidating your debt onto a balance transfer credit card or personal loan can give you some breathing room if you’re still struggling financially. This will allow you to have all your debt in one place with a lower interest rate and one monthly payment to keep track of.
Although there are a lot of balance transfer cards out there, Meghan Gound, Vice President of Credit Cards at Navy Federal Credit Union, states that the best balance transfer cards feature “no fees, zero percent interest during the introductory period, and a low rate after the intro period expires.”
If you’re struggling with making payments on time or making the minimum payment, you can call your credit card provider to see if you can work out an agreement that will give you flexibility on payments or save you interest in the long run. Matt Schulz, Chief Credit Analyst at LendingTree agrees: “If you’re struggling with debt, consider calling your card issuer and asking for a reduced interest rate. Your chance of success is likely higher than you think.”
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