6 min read

How to Manage Credit Card Debt During Periods of High Inflation

  • Facebook
  • Twitter
  • LinkedIn
  • LinkedIn Copied link to Clipboard!

With rising inflation rates in the United States, Americans increasingly rely on credit cards to cover their expenses. However, one of the growing effects of inflation is a significant increase in credit card balances, which creates the risk of consumer financial stress due to both inflation and mounting debt. Here are several tips for managing your credit cards during this inflationary period.

Smiling young man holding debit credit card in hand and using cell phone, making financial transaction while sitting on the couch at home in living room. Article Image
Yellow notepad with pen svg icon Lesson Notes:
  • Debt prioritization and focusing on paying off debts as quickly as possible.
  • Pay off credit card balances in full each month, prioritizing debt repayment using the snowball or avalanche methods
  • Consider a balance transfer to a lower interest rate.
  • Creating and following a budget, avoiding new debt, and negotiating with your lender for a lower interest rate.

Managing credit card debt during inflation

As price growth continues to outpace nominal income growth, many Americans lean on credit cards to cover their monthly budgets. According to the New York Fed, credit card balances increased by $61 billion in the fourth quarter of 2022. Consumers carry higher credit balances due to rising annual percentage rates (APRs) and higher prices. While in the short-term, credit cards help cover daily expenses and maintain standards of living, they pose the risk of driving you into a debt spiral in the long run.

You might be facing the challenge of higher credit balances as the cost of goods and services increases at a faster rate than your income. Sometimes it is unavoidable to use credit cards but overusing them can result in a lower credit score and excessive interest charges.

Pay the full monthly bill on time

In this inflationary environment, one effective strategy to avoid falling into a double whammy of inflation and credit card debt is to pay at least the minimum monthly bill on time to avoid penalties and fees. By paying on time, you avoid accruing interest on the remaining balance, which can further increase your debt. Settling your balance in full will reduce your costs and help you maintain a good credit score. Remember, your payment history is the most critical factor for your credit score, accounting for 35% of the calculation. In addition, timely payments show lenders that you are a responsible borrower, which can lead to better credit terms and lower interest rates in the long run.

Prioritize debt repayment

Prioritizing debt repayment is crucial during periods of high inflation. There are two common strategies that you can consider for paying off your credit card debt:

The snowball method:

With this strategy, you first pay off your smallest debt while making minimum payments on your other debts. Once you clear the smallest debt, you move on to the next smallest debt, and so on. This strategy can help build momentum and motivation as you see your debts getting paid off one by one.

The avalanche method:

This approach involves prioritizing your debts based on interest rates. You make minimum payments on all your debts while paying off the debt with the highest interest rate first. Once that debt is paid off, you start paying the debt with the next highest interest rate, and so on. This method saves you money on interest charges over time.

Increasing your payments is always a good idea regardless of which strategy you choose. Even a slight increase can significantly impact your debt over time.

Consider a balance transfer

This is similar to debt consolidation but involves transferring your existing credit card debt to a new credit card with a lower interest rate. Many credit union credit cards offer a 0% introductory APR on balance transfers for a limited time, usually 6 to 21 months. During the introductory 0% APR period, you can aggressively pay off your debt without incurring additional interest. Keep in mind that the APR reverts to the regular rate after the promotional period expires.

Usually, balance transfer fees apply, and you'll need to pay off the balance before the introductory rate expires to avoid accruing interest charges. Always assess whether the transfer fee is lower than what you would otherwise pay in interest.

Create a budget

Tracking your expenses is always essential for managing personal finances. A budget plan becomes more critical in high inflation, pinpointing areas where you can save money. Start by tracking your expenses to identify where your money is going. For example, review your subscriptions for unnecessary or overlapping items. Then, prioritize your spending based on your needs versus wants. Cut down on discretionary spending and allocate those funds to paying off your credit card.

Negotiate with lenders for a lower interest rate

If you're having difficulty making your credit card payments during periods of high inflation, consider negotiating a lower interest rate or a more manageable payment plan. Be honest about your financial situation and explain that you're struggling due to the high inflation. Many creditors are willing to help find a solution that works for both parties.

By following these detailed money management tips and best practices on dealing with credit card debt during inflation, you can effectively manage debt and minimize the impact of inflation on your finances. If you're struggling to manage your credit card debt, you can also seek professional help from a credit counselor or financial advisor. They can help you create a personalized plan to pay off your debt and reach your financial goals.

*PLEASE NOTE: This article is intended to be used for informational purposes and should not be considered financial advice. Consult a financial advisor, accountant or other financial professional to learn more about what strategies are appropriate for your situation.

Related Resources

View All