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While paying down debt is often easier said than done, sometimes, even when we finally experience that sweet, sweet feeling of having a $0 credit card balance, it usually isn't too long before we start to see the balance balloon once again.
Below, Select breaks down three main reasons why staying debt free is so tough for so many people and what you might be able to do to help get things back on track.
1. You don't have an emergency fund
An emergency fund is a very important part of your finances and the money in that account should only be used for surprise expenses, for instance, if your car suddenly needs an unexpected repair or if you lose your phone and need to replace it ASAP. That way, you can avoid going deeper into debt and still cover unexpected bills.
When you don't have an emergency fund set up or enough cash on hand to cover surprise expenses, your first instinct may be to use a credit card to float the fee. Depending on how much it costs, doing this could leave you having to make small payments over several months to become debt free again.
Having an emergency fund of just $1,000 can help you feel better equipped to handle the unexpected without having to take on too much additional debt. While most experts say you should aim to save three to six months' worth of your necessary living expenses in an emergency fund, it's fine to start small and work your way up from there.
It can also help to use a high-yield savings account such as the Ally Online Savings Account or the Marcus by Goldman Sachs Online Savings Account, so you can earn more interest each month compared to traditional banks and grow your balance just a little bit faster.
Ally Bank Savings Account
Annual Percentage Yield (APY)
3.00% APY
Minimum balance
None
Monthly fee
None
Maximum transactions
10 withdrawals or transfers per statement cycle
Excessive transactions fee
None
Overdraft fee
None
Offer checking account?
Yes
Offer ATM card?
Yes, if have an Ally checking account
Terms apply.
Read our Ally Bank Savings Account review.
Pros
- Strong APY
- No minimum balance or deposit
- No monthly fees
- Option to add a checking account with ATM access
Cons
- Higher APYs offered elsewhere
- $10 excessive transactions fee
2. Pricier items no longer fit into your current budget
It's no secret that the cost of living has been increasing lately due to inflation. After all, inflation in 2022 has had the biggest impact on all the essentials, including the cost of gas, buying a car, rent and groceries. Even if you've always deemed yourself to be pretty good at budgeting, if your monthly income just doesn't provide enough money to support these price increases, you may find yourself falling back onto a credit card so you can afford some of these big-ticket items.
From there, you might find yourself continuing to pay for groceries or gas with a credit card each month and before you know it, you will have racked up a sizable balance again. Even if you used a rewards credit card like the Blue Cash Preferred® Card from American Express — which gives you 6% cash back on up to $6,000 per year in eligible purchases at U.S. supermarkets (then 1% thereafter), and 3% cash back at eligible U.S. gas stations — the cash back is only impactful when you can pay off your balance in full each month and avoid paying additional interest charges.
The Blue Cash Preferred® Card from American Express is a low-fee card with generous cash-back rewards and useful ongoing benefits, such as a monthly Disney Bundle credit. (Enrollment required for select benefits mentioned)
- High cash-back earnings for U.S. supermarkets and streaming services
- Intro-APR offer for purchases and balance transfers
- No annual fee for the first year
- It's less rewarding after the first year because of the annual fee
- Bonus rewards for U.S. supermarkets are capped
Highlights
Highlights shown here are provided by the issuer and have not been reviewed by CNBC Select's editorial staff.
- Apply and find out your welcome offer. As High As $300 cash back* after you spend $3,000 in purchases on your new Card within the first 6 months of Card Membership. Welcome offers vary and you may not be eligible for an offer. Apply, and if approved: 1. Find out your offer amount 2. Accept the Card with your offer 3. Spend $3,000 in 6 months 4. Receive the cash back. *Cash back is received in the form of Reward Dollars that can be redeemed for a statement credit or at Amazon.com checkout.
- $0 intro annual fee for the first year, then $95.
- Enjoy 0% intro APR on purchases and balance transfers for 12 months from the date of account opening. After that, your APR will be a variable APR of 19.49%-28.49%.
- Plan It®: Buy now, pay later with Plan It. Split purchases of $100 or more into equal monthly installments with a fixed fee so you don't have the pressure of paying all at once. Simply select the purchase in your online account or the American Express® App to see your plan options. Plus, you'll still earn rewards on purchases the way you usually do.
- Earn 6% cash back at U.S. supermarkets on up to $6,000 per year in eligible purchases (then 1%), 6% cash back on select U.S. streaming subscriptions, 3% cash back at eligible U.S. gas stations and on transit (including taxis/rideshare, parking, tolls, trains, buses and more) purchases and 1% cash back on other purchases. Cash Back is received in the form of Reward Dollars that can be redeemed as a statement credit and at Amazon.com checkout.
- Get up to a $10 monthly statement credit after using your enrolled Blue Cash Preferred® Card for a subscription purchase, including a bundle subscription purchase, at DisneyPlus.com, Hulu.com, or Stream.ESPN.com U.S. websites. Subject to auto-renewal.
- Terms Apply.
- See Rates & Fees
Balance transfer fee
Either $5 or 3% of the amount of each transfer, whichever is greater.
Foreign transaction fee
2.7% of each transaction after conversion to US dollars
3. You haven't addressed the underlying causes of your high spending habits
Changing our spending habits is often difficult since our subconscious beliefs and past experiences play such an important role in our relationships with money. According to Paco de Leon, author of "Finance for the People: Getting A Grip On Your Finances," not recognizing and dealing with these underlying beliefs can keep us trapped in a cycle of paying down debt only to incur it all over again.
For example, someone who gets stressed out and copes by shopping online may work hard to pay off their credit card debt completely, but the next time they use retail therapy to ease their stress, they'll just end up right back in credit card debt. In this case, paying off their balance won't do anything to address how they cope with stress, and the cycle of debt will continue.
De Leon recommends journaling or hiring a coach as a great way to start to uncover some of your beliefs and habits around the way you spend money and use debt. It may also help to use a budgeting app such as YNAB (You Need A Budget) or Mint to get a clearer picture of where your discretionary spending is highest and possibly pinpoint significant triggers that may have caused it.
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For rates and fees of the Blue Cash Preferred® Card, click here.
