The psychology of getting out of credit card debt
Your brain could be keeping you in debt. It could also be the key to getting out of it.
What if you could think your way out of debt? While there’s no silver-bullet solution to paying down debt, there is evidence that tapping into how we think — which influences how we behave — could be a winning strategy.
Getting rid of credit card debt can feel daunting. It requires long-term stamina and the discipline to stick to a pay-down plan that might stretch over multiple years. Plus, it may go against people’s natural inclinations. “We have a prehistoric brain that is really wired toward satisfying our needs today and not worrying about what’s going to happen a month from now,” says Brad Klontz, a financial psychologist and associate professor at Creighton University.
Just two generations ago, credit cards were used primarily as a convenience — a way to avoid having to carry around cash. But today, we live in a culture that encourages casual, frequent credit card spending, with new credit card offers giving people the ability to easily borrow money. “That’s a very new phenomenon,” Klontz says. “I don’t think we’re really equipped to deal with it.”
It’s especially tough when the features of everyday financial products can make it easier to stay in debt and potentially rack up more. For instance, one recent study from the National Bureau of Economic Research found that the prominence of the minimum payment amount on a credit card statement might influence people to stick to that minimum each month — even if they’re able to pay more. Paying just an extra $50 or $100 over the minimum each month would help people get out of credit card debt faster. But, because the minimum payment seems like a recommendation, that’s what some people pay.
Credit card companies are required to include a “minimum payment warning” on statements informing card holders that paying only the minimum payment will result in paying more interest and showing them what they’d need to pay each month to erase the balance in three years. But, this transparency can be confusing to some people. According to a study in the Journal of Public Policy & Marketing, some consumers gravitate toward paying that three-year amount rather than paying more and paying off credit card debt sooner.
What many don’t realize is that this strategy only works if you pay the same original amount every month for 36 months. Since the three-year payoff amount on the statement decreases each month along with the balance, some consumers pay less with each passing month, leading to a payoff time period of closer to 10 years. And that’s only if there are no new additional charges on the card.
On one hand, credit card debt seems commonplace, or even expected. More than half of the Americans Marcus surveyed agree that credit card debt is something that happens to people — it’s part of life.
On the other hand, money continues to be one of the biggest causes of stress in people’s lives. In a survey conducted by the American Psychological Association, 72 percent of Americans reported feeling stressed about money in the past month.
“It can cause so much anxiety and shame that many of us try to avoid thinking about our financial lives altogether,” Klontz says. “We’re all sort of flying solo, and we’re not sure what anyone else is doing, so we end up having a lot of shame around what’s happening. That shame can really keep us stuck.”
Psychological strategies to manage credit card debt
But even if it’s psychologically easy to acquire and keep debt, that doesn’t mean you’re destined to owe money forever. Just as your brain plays a role in keeping you in debt, it can also help you climb out. Here are a few strategies you can use to make your psyche’s natural tendencies work in your favor.
Set it and forget it
Forcing yourself to make a conscious choice to pay off credit card debt every month could backfire. It’s one more thing to think about, and one more thing to forget. Instead, set up automatic payments that happen on paydays before you can spend the money on other things. This way, you won’t have to exert the mental energy to make that decision each month — it will happen no matter what.
“Anything that involves change is hard for us,” says Mary Gresham, a psychologist in Atlanta who specializes in money issues. “Some people do best paying down debt by automating many transactions, letting the course be set one time, and then going on with it.”
You also won’t have to feel guilty if you spend the last bit of your paycheck on dinner out with friends, because you’ve already taken care of your credit card debt for that month. Choose a date when you’d like to be debt-free and calculate what you’d have to pay each month to make that happen. Then set it up.
To keep yourself motivated, you may want to try focusing your efforts on your smallest debt balance first. Chipping away at that large balance with the higher interest rate may make financial sense, but mentally it can be tough to keep up the pace without seeing results.
As Klontz notes, tackling the debt that’s going to take you five years to pay off can be “a little depressing.” Instead, use your extra cash each month to attack your smallest debt and tuck a victory under your belt. You’ll get a sense of reward because you’ve nixed one debt, and feel inspired to work on the next biggest balance.
This approach was the key for Dan K. who had $50,000 in debt to pay off. Dan and his wife moved in with family for a while to save money, and they began paying off their debt by focusing on what he calls “the low hanging fruit. “There was great satisfaction in being able to cross our debts off the list by starting with the smallest one first,” says Dan, 30, who lives in Sioux Falls, South Dakota. “When you feel down about debt, you need quick wins like that.”
Think both short-term and long-term
When you plan to pay off credit card debt, the finish line can seem miles away. Boost motivation by setting some interim targets, along with rewards when you hit them. “Set up some sort of treat for yourself when you hit those milestones, like every 25 percent, 50 percent, 75 percent, and then paid off,” says Beverly Harzog, a consumer credit expert. You could also skip something you do for fun, like a night at the movies or dinner out with friends, and save it for your goal-setting prize.
At the same time, it also pays to think about your post-debt future. For example, once you’re done paying off debt, you can start saving for that vacation you’ve been wanting to take. Set up a board on Pinterest where you gather information about possible destinations and things to do. “This gives you something to look forward to, even if it’s a year or two away,” Harzog says. You can also think about the things you’ll do with that extra money once you pay off credit card debt, such as saving more in your children’s college fund or joining that new gym you’ve been eyeing.
This worked for Michelle S., 27, a blogger and writer who paid off $40,000 in debt. Michelle began by looking for ways to earn extra income, including taking on several side gigs on top of her full-time job. Imagining what her life would be like after paying off her credit card debt kept her motivated to work all those extra hours and get closer to her goal. “I thought about a life that was free from debt stress,” she says. “And I thought about how, eventually, I could spend that money on other things such as retirement and a vacation.”
Make it concrete
Research has shown that if you write down your goals, you’re more likely to accomplish them. Put yours on paper and look at them every day — post them somewhere prominent so you can see them as you brush your teeth or make breakfast. Reading them will keep them top of mind and boost your resolve. Similarly, using a whiteboard or poster board to make a bar chart or pie chart can help you visualize your progress.
Phil R., 26, set a daily reminder on his phone that went off at 6:55 am, prompting him to read his goals to himself in the mirror. “This was very important in not losing momentum,” says Phil, who lives in the Washington, D.C., area. Phil also broke down his total debt into a daily amount ($83 per day, to be precise), which felt concrete and doable.
Making your goals public can also be a big motivator. After paying off thousands of dollars in debt over several years, Jessica G., 39, of Wellington, Fla., had lost momentum. In the final stretch of her credit card payoff plan, she had slipped into making minimum payments, devoting less money and energy toward paying off debt. When a friend challenged her to post her payoff goal on Facebook, she felt re-energized. “Not only did I post it in the group, but I also posted on my own Facebook page for more accountability,” Jessica says. Along with creating a credit card debt payoff plan and sticking to a budget, Jessica says finding a supportive community was a big factor in finally paying off her debt.
Some people have also found success documenting their progress in the blogosphere. “Many people have written very personal blogs about getting out of credit card debt,” Gresham says. “Read them and consider doing one of your own, anonymously. The writers of those blogs feel that they cannot let their readers down and will persist longer than someone who is trying to change on their own.”
If you don't succeed, try again
Not every payoff strategy is going to work for everyone. If one tactic fails for you, try something else. The important thing is that you take action with intention, rather than relying on your instincts to run the show.
“Most people make a number of tries before they find something that works,” Gresham says. “Understand that you will make two steps forward and a step back, and that is how change usually happens. It is not smooth and linear. It is choppy and up and down, and that is OK.”
This article is for your informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.