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How to Avoid Credit Card Debt

Kimberly Palmer
File photo dated 03/09/13 of a general view of a Visa, a MasterCard and an American Express credit card next to each other as banks are seeing annual growth in credit card and personal loan borrowing for the first time in four years, in further evidence that households are starting to feel more confident.

Roughly one in five Americans believe carrying credit card debt from month to month is "a responsible way to manage his or her finances," according to a recent online poll by the National Foundation for Credit Counseling. Many financial experts would say they're wrong.

Carrying that kind of debt means paying more for items than they actually cost, in the form of interest and, in the case of a late payment, extra fees. If the debt is constantly growing, it can also mean that eventually the borrower will no longer be able to afford to maintain the cards, which can damage his or her ability to take out other forms of credit.

"If they have a high balance relative to their credit line, their credit score will go down," says Gail Cunningham, a vice president of the National Foundation for Credit Counseling. It can also mean that when a real emergency comes up, such as suddenly needing to buy new car tires or facing health care costs, the person has no ability to cover those costs because he or she has used up their available lines of credit.

[Read: How to Survive an Unemployment Spell.]

That's why financial experts generally recommend either paying off credit card bills in full each month, or at least figuring out how to pay down the balances with the goal of eventually paying them off. Among the 1,630 respondents in the NFCC survey who said their financial health has improved since the recession, six in ten said they pay off their credit card balance every month.

They're part of a bigger shift toward financially responsible behavior. In a report released this month from Aite Group and Chase Blueprint, two-fifths of the 1,242 respondents said they are saving more now than they did during the recession, and more than half also said they know more about financial matters today than they did during the recession. "We've seen consumers tell us that their financial literacy has improved over the last several years, some of that probably out of necessity," says Tom O'Donnell, senior vice president of quality for Chase. That means understanding the financial products they're using and any fees attached to them, he adds.

Meanwhile, credit card debt levels have been trending downward over the last five years, says Amy Cutts, chief economist at Equifax, a credit bureau. "With credit cards, balances continue to decline. ... We're seeing a continued trend of consumers using their credit cards differently than they have in the past and going on a debt diet," she says.

Consumers who describe themselves as having financial plans seem to be the ones who are most likely to have control of their credit card spending. New research released last week from the Consumer Federation of America and the Certified Financial Planner Board of Standards found that about one in five household "decision-makers" consider themselves to be big-time financial planners. Another two-fifths of the roughly 1,000 respondents were more basic planners. The survey found that the bigger planners were more likely to save and manage their debt well.

"Those who plan do better and feel better than those who do not. Planning has a purpose - it gives people more confidence to manage their finances in the short and long term," said Kevin Keller, chief executive officer of the CFP Board in a conference call about the findings.

[Read: How to Stop Overspending.]

For some people, the debt build-up is because they spend more than they earn, a pattern that can lead to financial destruction. "Debt has become a way of life for many people," Cunningham says, and she warns that anyone caught in an endless debt cycle needs to figure out why so they can stop. "You need to stop charging and start paying down debt - that is the only way you're ever going to get control of your spending," she says.

Not all credit card debt is created equal, however. Barbara Nusbaum, a New York-based psychologist and consultant for the financial security company Genworth, says taking on credit card debt as part of a bigger plan sometimes can be a smart move. "Education is an important [reason], but you have to be doing it mindfully. Maybe you don't go to the school with a name but a school that will get you what you need," she says. Health care costs and clothes for a job interview could also be smart credit card purchases, she says, because you're investing in your future.

If you're looking for alternatives to your mounting pile of credit card bills, here are five ideas:

1. Earn more money.

"There are only three answers to bringing spending in line with income: increase income, decrease expenses or both," Cunningham says. She suggests taking on a part-time job in the retail industry, which hires many temporary workers in preparation for the holiday season. "Do something you like - work at a bookstore if you're interested in books, and dedicate all of that income to paying down debt," she adds.

2. Think more positively.

Nusbaum says many people get trapped in a cycle of debt that's compounded by the fact that they feel awful about it. "Credit card debt is almost like a black mark on someone. ... Because you feel so badly about yourself, you feel even more shame. One of the ways to move away from that is to say, 'It's not me that's bad ... I have debt, but I can work on this,'" she says. She suggests writing down the negative thoughts in your head and then, next to them, listing more positive alternatives. Instead of, "I'm terrible with money," you can write, "I've fallen down on these bills. I want to get better."

[See: 10 Things to Watch When Interest Rates Go Up.]

3. Become a Zen master of personal finance.

After freeing yourself of the anxiety around money, Nusbaum suggests boosting your financial prowess. "You don't have to be good at all of this ... you can either acquire skills through financial planners, books or websites, or you can go to somebody who can supplement what you know," she says. "Have a day of reckoning where you pull out all of your bills and list your outstanding debt," she adds.

4. Celebrate your success.

"It's critical for consumers to understand the progress that they're making and recognize when they achieve something successful," O'Donnell says. If consumers know they are getting closer to paying off their credit card debt, then they feel more motivated to continue, he says. "It turns into a good feeling so they'll do it again," he adds.

5. Save up more cash so you can be your own creditor.

Consumers who have emergency funds stashed away so they can rely on their own money, and not credit cards, when unexpected expenses pop up are better prepared to weather financial storms, Cunningham says. She suggests saving at least 10 percent of your current income in order to provide that cushion.

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