Credit card debt poses significant challenges for both individuals and the broader economy, especially during tough economic times. High payments towards credit card debt reduce disposable income, limiting funds for essential and discretionary spending. This reduction in overall consumption can hinder economic growth.

The financial stress from debt can also be overwhelming, often leading to anxiety and negatively affecting mental well-being. Moreover, there is a substantial risk of falling into a debt spiral, where high-interest rates and minimum payments trap consumers in continuous debt.

Steps to escape the cycle of debt

Wondering how to break free from credit card debt? Many face this question as they struggle with limited income and rising expenses, often relying on credit cards to cover basic living costs. Here are actionable steps to regain control of your finances and eliminate growing credit card debt.

Understand your finances

Start by gathering your latest credit card and bank statements. Record all sources of income, such as salary and investments, along with their respective amounts.

Monitor your expenses

Compile a list of all monthly expenditures, including fixed costs (rent, utilities) and variable costs (groceries, entertainment). Categorize your expenses to identify potential areas for spending reductions.

Know your total debt

List each credit card, noting the current balance, interest rate, and minimum payment. Prioritize the cards based on either their interest rate or balance, depending on your chosen strategy.

Create a budget and cut unnecessary expenses

Track your income and regular expenses. Write down all income sources and fixed expenses. Track your monthly spending using receipts, bank statements, or budgeting apps. Categorize expenses and identify areas to reduce spending.

Allocate funds for debt repayment

After calculating your income and expenses, budget to reduce your debt. Deduct fixed expenses from your income to establish your discretionary spending limit. Allocate a significant portion of this budget to paying off credit card debt, aiming to pay more than the minimum required payments.

Prioritize debt repayment

Ensure you make at least the minimum payments on all your cards to avoid late fees and protect your credit score. Missing payments can increase debt and negatively impact your creditworthiness. Use the debt avalanche strategy, focusing on paying off the debt with the highest interest rate first.

Consider the debt avalanche method

List all your credit cards with their balances and interest rates. Focus on paying down the card with the highest interest rate, allocating any additional funds beyond the minimum payments on other cards. Once the balance on that card is cleared, move to the next card with the highest interest rate.

Explore the debt snowball method

Alternatively, the debt snowball approach emphasizes paying off the smallest debt first to achieve quicker psychological victories.

Negotiate credit card debt

Many credit card holders are unaware that negotiating debt is an option. Contact your credit card companies to explore better terms. Especially during challenging economic periods, companies may be more willing to find mutually beneficial solutions, such as lowering interest rates, extending payment deadlines, or offering hardship programs.

Successfully negotiating and adhering to a new repayment plan demonstrates responsible credit management, potentially improving your credit score over time and unlocking access to more favorable interest rates and loan options in the future.

The Pakistan government had to impose additional taxes of 215 billion Pakistani Rupees (PKR) and slash expenditures by 85 billion PKR in order to strike an agreement with the International Monetary Fund (IMF), The News International reported on Saturday. Although Pakistan was able to secure the IMF deal just in time, the conditions imposed by the body are turning out to be tedious to implement. The announcement was made by Pakistan Finance Minister Ishaq Dar at the National Assembly.

While briefing the National Assembly Standing Committee on Finance and Revenues, Dar said that when the government had presented the budget on June 9, 2023, it was stated that no more taxes would be slapped, however, for striking the IMF agreement the government had to impose more taxes for clinching the new SBA programme. We have to make changes in the winding-up speech in view of the conditions of the IMF. Some concessions granted on June 9 were taken back in the amended Finance Bill 2023. Under the IMF program, it is forbidden to give tax exemptions or preferential tax treatments or amnesty schemes. Till we are in the IMF programme it is prohibited to grant any new tax exemption,” the News International quoted Dar as saying.

When he assumed the charge of minister for finance at the end of September 2022, the IMF was requested to visit for the review in November but the Fund staff delayed dispatching of its mission and they came on January 31, Dar said, adding the staff-level agreement could not be reached within the stipulated timeframe that created difficulties. He said now there is a compulsion, Pakistan is in the IMF programme, he told the participants. Dar further said that it is written in the IMF document that Pakistan will not give any kind of tax amnesty. He said that he had asked the FBR to convene a meeting with the real estate sector to work out revised evaluation rates of immovable properties across the country, The News International reported.

Notably, Pakistan is battling a huge economic crisis, with staggering inflation and depleting Forex reserves. Weeks before, IMF approved a USD 3 billion bailout to support Pakistan in avoiding a default on its debt repayments. With sky-high inflation and foreign exchange reserves barely enough to cover one month of controlled imports, Pakistan has been facing its worst economic crisis in decades, which analysts say could have spiralled into a debt default in the absence of the IMF deal.

Fitch Ratings has downgraded the United States government’s credit rating, citing rising debt at the federal, state, and local levels and a “steady deterioration in standards of governance” over the past two decades. The rating was cut Tuesday one notch to AA+ from AAA, the highest possible rating. The new rating is still well into investment grade. The decision illustrates one way that growing political polarisation and repeated Washington standoffs over spending and taxes could end up costing US taxpayers. A lower credit rating, over time, could raise borrowing costs for the US government.

It’s only the second time in the nation’s history that its credit rating has been cut. In 2011, the ratings agency Standard and Poor’s stripped the US of its prized AAA rating after a prolonged fight over the government’s borrowing limit. The Government Accountability Office, in a 2012 report, estimated that the 2011 budget standoff raised Treasury’s borrowing costs by USD 1.3 billion that year. At the same time, the huge size of the US economy and the historic stability of the federal government has kept its borrowing costs low.

Global investors often flock to US Treasury securities during periods of economic turmoil, lowering the interest rate paid by the US government. Fitch had warned May 24 that it could remove the government’s triple-A rating as Congress again struggled to raise the borrowing limit. A deal was reached nearly a week later that suspended the limit and cut about USD 1.5 trillion from the government deficit over the next decade.

Fitch cited the worsening political divisions around spending and tax policy as a key reason for its decision. It said US governance has declined relative to other highly rated countries and it noted “repeated debt limit standoffs and last-minute resolutions.” Biden administration officials strongly criticised Fitch’s move. Treasury Secretary Janet Yellen said it was “arbitrary” and “based on outdated data.” Yellen noted that the US economy has rapidly recovered from the pandemic recession, with the unemployment rate near a half-century low and the economy expanding at a solid 2.4 per cent annual rate in the April-June quarter.

Fitch informed Biden administration officials that the January 6, 2021 insurrection was a factor in its decision to downgrade because it indicated an unstable government, according to a person familiar with the discussions between the administration and the rating agency. Fitch produced a report last year that showed government stability declined from 2018 to 2021, but increased since Biden assumed the presidency, said the person, who was granted anonymity to disclose private conversations.

Another factor in Fitch’s decision is that it expects the US economy to tumble into a “mild recession” in the final three months of this year and early next year. Economists at the Federal Reserve made a similar forecast this spring but then reversed it in July and said growth would slow but a recession would likely be avoided.