Americans have shaved off more than $100 billion of credit card debt during the coronavirus pandemic and, as vaccines raise hopes for a more open and mobile life again, we all need a plan to keep from diving back into debt.
The categories in which spending via credit cards fell off most noticeably, according to analysis by Money.com and Morning Consult, include clothing/shoes, entertainment, gifts and home goods/furnishings. Travel, too, of course. All good stuff, much of it nonessential, as we've learned in lockdown.
Academics who study the messy interplay between psychology and personal finance have landed on a simple strategy that can help prevent a return to freer-spending ways: precommitment.
Hatch a plan for how you will react in the future. Write it down. Share it with family and friends. When we slow down and think through how we want to behave in the future, it helps us stay on course in the heat of the moment.
• Keep your pandemic spending habits. Make "wants" a budget item with the 50/30/20 approach. Half of your after-tax income goes toward needs (housing, food, utilities), 30% to wants and 20% is for saving/paying down debts. (If you have high-rate credit card debt, you might consider 20% on wants and 30% for saving/debt repayment.)
• Decide now how you will use extra money. If you receive new federal stimulus funds or a tax refund, cover essentials first by all means. But if you already have those costs covered, make a plan for how the money will be used. There is no single "right" move. But if you already have a decent emergency fund, then using extra dollars to pay down credit card balance is wise.
Caveat: Paying down credit card debt is effective only if you simultaneously make the commitment to not run up a new balance on wants.
• Get the best deal on your existing credit card balances. If you have unpaid balances, and you have been diligent about making on-time payments (even just the minimum), ask for a lower interest rate.