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As inflation soared, consumers took on more and more credit card debt to get by. Total credit card debt in the United States hit $930 billion in the third quarter of this year, the highest amount since 2019. That debt is also getting much more expensive as interest rates just hit a record level.
Dave Ramsey’s solution is simple: ditch your credit cards. While that’s an extreme measure, he’s right that relying on your credit card and getting into debt will cost you dearly. To avoid that, here are the top tips Ramsey gave on credit cards and credit card debt.
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How to pay off credit card debt
Many people call Ramsey’s radio show for help paying off credit card debt. Here is the method he normally recommends:
- Cut all your unnecessary expenses to free up as much money as possible.
- List your debts from smallest to largest.
- Make minimum payments on all your accounts to keep them current.
- Put the rest of your money in the account with the smallest balance.
- Once you’ve paid off the account with the lowest balance, move on to the next lowest balance, and so on.
This debt repayment strategy is known as the debt snowball method. The reason it works well is because it keeps you motivated. When you tackle your smaller balances first, you pay off your accounts faster. Each time you pay off an account, you see a clear progression on your debt, which is a good motivation to continue.
Personal finance is 80% behavior and 20% knowledge
It’s advice Ramsey repeats often, especially to callers with credit card debt. Financial knowledge goes no further. What really determines your success with money is your behavior.
Let’s say you are trying to get out of credit card debt. As you saw above, none of the steps involved are complicated or require a lot of financial knowledge. It’s all about cutting your expenses and putting as much as you can on your credit cards. If you can develop these habits and stick to them consistently, eventually you will be debt free.
Have an emergency fund
Emergency expenses are often the reason people end up with credit card balances they can’t pay off. Like most financial experts, Ramsey recommends putting money into an emergency fund. This way, you won’t have to go into debt in the event of an unexpected bill.
Ramsey’s advice is to have an emergency fund sufficient to cover three to six months of living expenses. However, saving that much money can take time. In his financial plan, he says to start by saving an emergency start-up fund of $1,000. Once you’ve paid off all of your debt, excluding mortgage debt, you can focus on a fully funded emergency savings account.
Do not borrow money to pay your living expenses
With the rising cost of living, many are struggling to make ends meet. Putting your living expenses on your credit cards might seem like a solution, but Ramsey thinks you should avoid it at all costs.
As he puts it, it’s a “temporary fix that creates a permanent problem.” Although it covers your expenses for the time being, the interest charges you will accrue will likely put you in an even more difficult financial situation.
Ramsey emphasizes that your income should cover your living expenses. If not, he recommends cutting costs by any means necessary, whether that means cutting your food budget or moving to a less expensive area. Another option would be to take a side hustle to earn some extra cash.
Credit card debt is a serious problem that can cost you dearly. Ramsey provides great advice on how to avoid or get out of credit card debt if you have card balances to pay off. His recommendation to ditch your credit cards altogether isn’t necessary for everyone, as they can be a useful financial tool if you pay them off in full each month. But with interest rates rising, avoiding debt should definitely be your first priority.
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