Before retirement, resolve credit card debt

Question: As my retirement date approaches, how can I reduce monthly expenses to be more in line with projected income after I stop working?

Answer: In retirement, some expenses naturally will decline or be eliminated, such as costs associated with commuting to work and paying professional dues or fees.

One expense that is unaffected by retirement status, but has a definite impact on the monthly budget, is credit card debt.

About 61% of American households have an average credit card balance of $7,486, according to NerdWallet's 2022 American Household Credit Card Debt Study. While some card providers offer rewards, like cash back on purchases, the value of any perks likely will be eclipsed if paying interest on a monthly balance.

Also, credit card interest rates have been increasing by some 15% during 2021. That's the largest jump in more than 20 years, according to the Federal Reserve Bank of New York.

It's estimated that U.S. households will pay an average of $1,380 in credit card interest this year, according to the same study.

To effectively eliminate credit card debt will require determining the best re-payment strategies for your individual situation, including working with creditors to negotiate lower rates.

One method is to prioritize debts by amounts, then focus on paying off the smallest amount first.

Once that is done, then roll that usual monthly payment into payments toward the next smallest balance and so on. This is often referred to as snowballing.

Like snowballing, the avalanche approach starts by paying off the card with the highest annual percentage rate first. When that account is paid off, apply that monthly payment to the next highest APR account on the list. This can be a faster, and cheaper, method than the snowball method, according to Nerdwallet.

To avoid paying credit card interest altogether, transferring existing balances to a zero APR card could save money in the long run. Often new credit card customers are offered a favorable or zero introductory interest rate for a set number of billing cycles.

Usually, an initial balance transfer fee is charged, typically 3 to 5% of the transferred amount. After that there is no additional interest charged if the transferred balance is paid off within the intro period.

If your current debt is overwhelming, consider reaching out to creditors to explain your situation.

Some credit card issuers offer hardship programs and may be willing to re-negotiate terms, especially for longtime customers with good payments records. Also, such arrangements might be part of an overall debt consolidation plan.

Certified nonprofit credit counseling agencies often can help customers negotiate more favorable terms with creditors. Once a repayment program is in place, you'll pay the counseling agency a fixed amount each month. Your credit accounts may be closed, and you may have to forgo opening new accounts for the term of the negotiated period.

Also, reputable credit counseling organizations provide free educational materials and workshops on managing credit. Certified counselors are trained in credit issues, budgeting as well as money and debt management, according to the Federal Trade Commission Consumer Advise Credit Counseling Service.

If you have good credit scores, a commercial consolidation loan can be used to pay off higher interest accounts, such as credit cards, and you'll make one payment each month, usually for less than the combined payments to multiple creditors, according to CNBC news reports.

Whichever method is used, eliminating or significantly reducing debt prior to retirement will increase purchasing power of retirement income.