According to new data released by the Federal Reserve, U.S. credit card debt has reached a record high of $1.021 trillion .
Revolving debt, the type that includes credit card purchases, rose by $4.1 billion in June alone. It's down a bit: in May it rose a whopping $6.9 billion. Still, for individual consumers who are fighting to pay off their balances, it's still a bad sign.
"America's credit card balances have never been higher, but there's no reason to think they won't just keep climbing," says Matt Schulz, CreditCards.com's senior industry analyst. "Combine that with steadily rising interest rates and you have a potentially volatile mix."
Schulz says this new record should serve as wake-up call to Americans: Start tackling your debt now before it grows any more.
"Even if you feel your debt is manageable right now, know that you could be one unexpected emergency away from real trouble," he says. "Get that debt paid down while things are good so you can be better prepared if things turn for the worse."
If you're struggling to pay back your credit cards, there are two effective ways to tackle it: The snowball method, which targets the smallest debts first, and the avalanche method, which focuses on the highest interest rates.
Here's a closer look at each:
Snowball
Popularized by "The Total Money Makeover" author Dave Ramsey, the snowball method prioritizes your smallest debts first, regardless of interest rate. To try it, start by listing out all of your debts, smallest to largest. Pay the minimum balance on each one, except the smallest. For that one, dedicate as much cash as possible each month until it is repaid. Then move on to the second-smallest debt.
The idea is that you'll gain momentum by watching debts disappear and that will motivate you to continue.
If you'd prefer to visualize your progress, personal finance blogger Derek Sall of "Life and My Finances" created a helpful spreadsheet that breaks down this method.
Avalanche
To employ the avalanche method, list your debts from highest to lowest by interest rate. Pay the minimum balance on each, but this time dedicate as much extra as you can each month to the one with the highest interest rate.
Mathematically speaking, tackling the highest interest rates first is the most efficient way to handle debt because it eliminates interest as quickly as possible. The debts that would be racking up the most in interest are dealt with first, so you can minimize interest paid.
However, researchers for the Harvard Business Review find the snowball method to be the most effective because you're more likely to stay engaged if you can see your debts disappear.
"Focusing on paying down the account with the smallest balance tends to have the most powerful effect on people's sense of progress — and therefore their motivation to continue paying down their debts," Remi Trudel, one of the researchers, writes for HBR.
At the end of the day, the most important thing is to choose a debt repayment method that works for you, and then stick to it.
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