Less Spending Power, More Debt? Navigate a Declining Dollar and Make Progress on Credit Card Bills
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Elizabeth, what's something you know you shouldn't do but just can't manage to stop doing? I like to think that I don't have any bad habits, Sean. Okay, but actually, I'll be honest. It's eating dinner at 10 p.m., especially when I don't feel like I had enough protein for the day. I feel like that would give you some weird dreams. You ever hear about that? If you eat too close to bedtime, you have strange dreams? Well, that might explain why I'm always flying in my dreams, but hey. Okay.

Well, there you go. For me, it's browsing the vintage clothing sellers on eBay and buying stuff that I simply do not need. But we're not here to talk about that today. Instead, we'll dive into how to break some bad spending habits that might be contributing to your debt. ♪

Welcome to NerdWallet's Smart Money Podcast, where you send us your money questions and we answer them with the help of our genius nerds. I'm Sean Piles. And I'm Elizabeth Ayola. This episode, we're talking about some smart strategies to tackle credit card debt. But first, our weekly Money News Roundup, where we break down the latest in the world of finance to help you be smarter with your money.

Today, we're talking about something that touches everything from your shopping cart to your online checkout screen and your summer travel plans, the value of the U.S. dollar. We've talked about tariffs many times before on the podcast, but today we want to zero in on what those policies mean for the value of the dollar and your spending. To help us unpack all that, we are joined by our news colleague, Anna Helhusky. Hey, Anna.

Hey, Sean. As usual, let's start with the big picture here. Why are we talking about dollar value? So the U.S. dollar is usually considered a safe haven when the market is volatile or when investors are concerned about the economy. Sounds familiar. It sure does. But right now, as the markets are volatile and there are mounting concerns about the U.S. economy, something kind of strange is happening. The value of the dollar is falling.

And investors are selling U.S. assets. Any idea why? It's uncertainty, really. There are two main causes of that uncertainty among investors. The first is Trump's trade policies, i.e. his wide-reaching tariffs, which have escalated a trade war.

And the main partner fighting back is China. And it's an economic powerhouse, so there are a lot of financial implications for global trade. And that makes investors highly concerned about how that's going to play out. And the other causes of uncertainty, which are not unrelated to Trump's trade war, are some of the recent shaky data about consumer sentiment and forecasts for the U.S. economy, like growth, unemployment, and inflation. And they're not exactly inspiring confidence with investors.

Anna, how do we know what the dollar value is? Tell us how it's measured. Yeah, so its value is measured in two ways, at home and abroad. Now, domestically, the dollar value is its purchasing power, which is tied to prices and inflation in the U.S. Purchasing power is just what your money can buy. So when prices increase, the purchasing power goes down and vice versa. Now, at the international level, the dollar's value is measured against the strength of other currencies.

You know when you travel internationally and you exchange your U.S. dollars for the euro, for example, and the amount you get back in euros isn't exactly the same face value as your dollar amount that you put in. So we look at the exchange rate. If the dollar rises compared to another currency, that means the dollar value is strengthening. But if the exchange rate for the dollar goes down compared to another currency, that means the dollar value is weakening. And how much is the U.S. dollar worth now? Other than looking at an exchange rate, how do we know?

We can tell by the dollar index, and that compares the value of the U.S. dollar to a basket of six other key global currencies, including the euro, the Japanese yen, the British pound, the Canadian dollar, the Swedish krona, and the Swiss franc. And those currencies are weighted according to its reach or share. By far, the euro comprises the largest share.

Now, the value of the dollar index displayed as USDX in markets will rise and fall based on those domestic and international measurements that I talked about. It's basically supply and demand at home and abroad.

Can you talk more about what factors impact supply and demand? For some background, the U.S. dollar was once backed by gold, but that changed in 1971 under Nixon. Now it's a fiat currency, meaning that because the U.S. government says it's legal tender, it's legitimate. But its actual market value is not determined by the government, but rather by factors that influence supply and demand.

Now, the first, as you might expect, are international trade policy and the overall geopolitical climate. The U.S. has instituted protectionist trade policies in the last few months, and as a result, our biggest trade partners have responded in kind. And restrictive trade policies tend to cause volatility in investment markets. Now, as I mentioned before, usually the dollar value increases during volatile times since it's considered a safe haven. But

But when the economy of the U.S. itself is unstable, investors may opt to sell off U.S. assets like Treasury bonds, and that weakens the dollar. So foreign investors are reacting to the health of the U.S. economy? Yes, that's a big part of it.

In stable economic periods, the dollar tends to have greater value. The health of the economy, as we know, is a mix of policy and economic data indicators. First is monetary policy, which is set by the Federal Reserve's Federal Open Markets Committee. The FOMC sets interest rates, which impact the dollar value. Demand for the dollar goes up when interest rates are high, since high interest rates are more desirable to investors.

But lower interest rates create less demand for the dollar, which means the value goes down. Now, other economic indicators like consumer spending and inflation influence market sentiment as well as consumer sentiment and economic forecasts. All of the above will impact investor assessment and expectations.

Positive sentiment leads to more investment in the U.S. economy, and that could increase the dollar value. Right now, the economy is technically doing okay, but there is a lot of fear and uncertainty about the direction it's heading. As you mentioned earlier, the dollar is weakening. What does that mean for people, and what can they do? When the dollar weakens, its value does too, which means your dollar won't go as far as it once did.

When purchasing power goes down, goods and services are more expensive for you, me, and everyone else in the U.S. So people are going to want to keep an eye on prices and potentially adjust their budgets, find ways to cut back on spending, etc. It's the usual advice for dealing with inflation that consumers have had to do over the last few years. That said, domestic goods that don't rely on imports may not increase in price due to tariffs. It depends what supply chains that companies are part of.

One last thing, a weaker dollar can, typically, make U.S. goods cheaper for consumers in other countries and ease the trade deficit. But with the current trade war, that's far from a sure thing.

And what about when you travel outside the US? I'm asking as someone who is a couple weeks out from a vacation in the UK. International travel will also get more expensive for Americans because you won't be getting as favorable an exchange rate. And that'll obviously vary from country to country. If you are planning a trip abroad,

Keep in mind that your dollar isn't going to go as far as it used to. And that means in local currency, everything from hotels and transportation to food and gifts for friends back home are going to cost more. But again, it'll really depend on where you go. The dollar is still strong in places with lower costs of living. Does the dollar's strength impact investments? Definitely. Investments in U.S. assets like stocks and bonds may decline because the dollar won't be as appealing anymore.

Foreign investors can get more for their money outside U.S. markets. If you invest, you may want to diversify your portfolio to include other international assets. Well, Anna, thank you for walking us through that. No problem.

Up next, we answer a listener's question about how to deal with credit card debt that never seems to go away. But before we get into that, a reminder, listener, to send us your money questions. Are you looking to diversify your accounts but don't know where to start? Are you trying to have a big money conversation with your partner but aren't sure how to navigate that? Whatever your money question, leave us a voicemail or text us on the Nerd Hotline.

at 901-730-6373. That's 901-730-NERD. Or you can email us at podcast at nerdwallet.com. Now let's get to this episode's money question segment. That's coming up in a moment. Stay with us. Today's episode is sponsored by The Best One Yet, a podcast from Wondery.

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We're back, and we're answering your money questions to help you make smarter financial decisions. This episode's question comes from Allison, who sent us an email with some questions about paying off their debt. And at this point, we'd usually read our listener's email, except that's not what we're going to do. Sean, do you want to tell our listeners this idea that you cooked up? Gladly. This episode, we're going to do something a little bit different to answer Allison's question.

Truth be told, I really wanted Allison to join us on the podcast, but they were unable to do so. And I'm nothing if not persistent, and I do love a creative solution. So Elizabeth and I are going to do a little role play to answer Allison's question. Elizabeth will play Allison, and I will play myself.

To keep things from getting too confusing, I'm not going to call Elizabeth by Allison's name, but we'll just use the details from Allison's email throughout the conversation. Okay, I think I'm following you, Sean. Okay, so get into Allison Elizabeth mode. Ready to dive in? Me, me, me! Go for the Oscar. Here we are. Well...

Elizabeth Allison. Elizabeth, tell me about your financial life right now. Where do you think you're doing well? What's been challenging? Wow. Where do I start, Sean? I think in terms of where I'm doing well, I think I have a good level of self-awareness. So I understand how much debt I'm in. That is one of my pain points at the moment. I have quite a bit of debt. I think I'm earning quite a bit of money. And I generally have a good understanding of my financial basics.

So let's talk about that debt. Exactly how much do you have and how did you get into it? Sean, so at the moment I have two credit cards with high balances. One of the balances, the highest, has $22,000 on it and the other one has $17,000 on it. For the $22,000 credit card, the interest only on that card is about $300 a month. And then for the $17,000 credit card, I'm paying $150 a month off.

of interest on that credit card. So it's quite a lot of money that's coming out of my paycheck each month. And at the moment, what I'm putting towards that is about $1,100 a month on each card. But you know the issue I'm really having, Sean, can I be honest with you? Please.

Even after shelling out about $1,100 per month on each card, I somehow end up charging again. And I just don't understand why I'm in this cycle of paying off the debt and then mounting back up the debt and just finding the debt is not moving anywhere. Yeah, a lot of people find themselves in similar situations with their credit card debt. It can become so...

normal in a way. It's like a piece of furniture in your house that you don't really care about, but just is there forever. And you want to get rid of it, but you're having a hard time shaking it. But it's good that you know how much you have. Nearly $40,000 in credit card debt is sizable. I'm glad to hear that you at least know the amount of interest that you're paying on these debts. But let's talk a little bit about what even got you into this debt. What are you spending your money on that led to this high balance? What

What's crazy sometimes with credit cards for me is I use them with the idea that I'm going to pay it off at the end of the month. What I realize is I end up not tracking how much I'm actually spending. And then the end of the month comes and I'm ready to pay it off. And I'm like, well, who spent all that money? Couldn't have been me, but I guess it was me.

Yeah. Yeah. And then in terms of what I spend it on, I mean, different things. I don't know about you, Sean, but the inflation has been kicking my butt. So I'm finding I'm spending a lot more on groceries. I eat out with friends sometimes. I'm paying my bills, of course. And then sometimes unexpected expenses will come up. Sean, oh my goodness. Recently, I have had to fix something in my home that broke the water boiler. And that's going to cost me about $2,000. Yeah.

Yeah, geez, I'm sorry to hear that. So it's a mixture of lifestyle inflation, it seems. You're going out more, you're buying more clothes, and then regular old inflation that we're all feeling. Everything else is more expensive. And then life just happens, like you have to replace your water heater and suddenly you're out another grand. All of this is building up and making it so that you're having a hard time paying off your debt. But it seems like you know...

deep down that this might partially be a behavioral thing. You aren't entirely tracking how much you're spending and you aren't really paying off your credit card debt as much as you might be able to.

So Elizabeth, let's talk about your income a little bit. How much are you taking home? Because that might help me figure out how we might be able to pay off your debt. Before we go into that, Sean, I know you said that I'm going to have to charge about $1,000, but no, Sean, I'm going to have to charge about $2,000 on a card I had paid off in January, and it's only April. Okay.

I'm telling you, it just feels oppressive right now. Like, I need a drink, Sean. But I probably just need to put on my big girl pants and get some discipline over my spending. Elizabeth, you are for sure going to need to have your big girl pants firmly on. And we may both want a drink. This is all done. But we can take care of your debt together. I'm confident in that. I want to go back to your income, though, because that might be the key to how we're paying off your debt. What are you bringing home monthly? I'm bringing home about $5,000 after taxes.

One thing I want you to do is look at your budget in detail. Look at your credit card statements. See how much you're spending and how that compares to your income. Because what we call your debt-to-income ratio, how much debt you have compared to your income, can be a great way to determine the best path forward for your debt payoff.

So let me give you some quick parameters here. If your debt to income ratio is less than 36%, your debt is probably affordable within your budget and you can just keep shoveling money toward your debt and paying it off. If your debt to income ratio is somewhere between 36% and 42%,

Your debt is eating more and more of your budget. Paying it off DIY style might work. You're probably going to want to use a debt payoff strategy like the debt avalanche method or the debt snowball method. But it's important to really make a proactive plan to pay it off.

Depending on where your credit stands, if it's around 670 or above, consider looking into a balance transfer credit card or a debt consolidation loan. We have a bunch of roundups on the NerdWallet website that can help you sift through these options. Then if your debt to income ratio is north of 42%,

your debt's going to be increasingly unaffordable, and you may want to seek debt relief, such as a debt management plan at a nonprofit credit counseling agency or bankruptcy. So I've just run through a lot of different ways to pay off your debt. What may be standing out to you in terms of where you think you might fit on that scale of debt-to-income ratios?

Sean, if I'm going to be honest with you, you lost me at the budget part. Okay. Because I'm terrified of looking at my income and expenses right now because I feel ashamed. I feel a lot of shame around how I'm spending. And I feel like it's going to be really difficult for me to actually sit down and just rework my budget because then I'm going to have to face my indiscipline and the spending habits that I've adopted right now. Yeah. And I...

completely understand where you're coming from. I had a brief stint with credit card debt a number of years ago, and it was pretty embarrassing. And I felt ashamed of the debt that I racked up. I felt like I didn't have enough self-control and it can be hard to get out of that rut. What helped me was thinking about why I wanted to pay off this debt. I imagined what my life was going to look like when I was on the other side of credit card debt. On your end, Elizabeth,

What would your life look like if you weren't paying $1,100 or so in credit card debt each month? That's a lot of money that it would free up in your budget. So just thinking out loud here, what would you do first if you had that amount of money free in your budget? Wow.

Oh, it feels like such a distant dream. But if I had that extra cash, I probably would throw it into some savings because I know that if I had a solid emergency fund that could have paid for this emergency that just happened.

So I probably would beef up my emergency fund. And honestly, I'm a little behind on my retirement savings, too, because all my discretionary income is going towards paying off this debt. So those are probably two things that I would prioritize. Those are great priorities. I want to touch on your savings in a little bit, but I just want to underline as well that having credit card debt isn't a personal failing. It doesn't make you a bad person necessarily.

As we talked about earlier, the world is very expensive and you also want to enjoy the life that you have. It can be easy to overindulge sometimes. We have a lot of pressure to spend a lot of money. So try to rid yourself of some of that guilt and understand that a lot of people are in a similar situation and it's not because they're bad people too. Things just cost a lot of money. Oh, thank you so much. That makes me feel so much better about my situation. But I want to know which...

debt repayment method works best for someone like me who wants some instant gratification from paying off that debt? Because when I'm just making the minimum payments, it feels like I'm not getting anywhere. So is there a specific method that I could use that may kind of give me that instant hit and make me feel like, yes, I'm making progress?

Yeah, in that case, the debt snowball method is probably going to be your best friend here because with this route, you pay off your debt with the smallest balance first. You're making your minimum payments on your other credit card, but you are funneling as much extra cash as you can into that lower balance debt. That way, you're seeing that you're making progress. You're paying off $1,000 at a time.

You're really accelerating the payoff there. And that just feels good. But what I would really encourage you to do as well is reach out to a nonprofit credit counseling agency. They actually are...

nonprofits that partner with credit card companies, and they can set you on what's called a debt management plan. This is where you can roll your credit card payments into one payment. It's almost like a form of consolidation. And these debt management plans allow you to slash your interest rate so that you can make much greater progress on paying off your debt. You likely won't be able to use your credit cards while on this plan. What?

Yeah, that can be a rude awakening for people. That's crazy. That's crazy, Sean. I don't know about that. But it seems like you are getting to the point where you realize you might need to make some tough decisions and change the way you're managing your money. You're breaking my heart, Sean. But I hear you. I hear you.

I'm trying to break your heart so you can rebuild it stronger, more financially resilient in the future to get what you want out of life, because that's what I'm getting at here. Paying off your debt like this gradually, slowly over time can be okay, but it's going to, at the end of the day, impede you from making progress on your other goals, like saving for retirement, like building your emergency fund, like going on fun vacations with your friends or buying a house. Credit card debt that is this expensive and this big can stop you from doing anything else with your money.

But Sean, I want to address the elephant in the room.

I like shopping. I like going on vacation. Is there a way that I can pay down this debt and still do the things I love and not feel like I'm a prisoner to my own debt? Moderation is key. Go back to knowing your why. You're going to have to make some sacrifices when you're paying off your debt. And when you are going out with your friends or you get a call to get that happy hour and you think it's really not in your budget, go back to that and realize, look, this short-term pain of not going out or not shopping is worth a long-term gain of...

being able to be free of this debt and focus on other financial goals. So yeah, at the end of the day, you're going to have to make sacrifices. But that is the cost, quite literally, of getting out of this debt that you have. Well, Sean, I guess I do want to get started on implementing some of the strategies that you have mentioned. So are there any resources that you can recommend? Because it does also feel really overwhelming.

I would recommend using a budgeting tool to help you get a really clear understanding of where all of your money is going, because you don't have to go through line by line and map out your expenses on your own in an Excel spreadsheet. I mean, some people like to do that, but it's not the most fun way to do it. One tool that we have at NerdWallet is our app.

We are one of the few personal finance apps that let you track your credit score, your cash flow, net worth, and insurance all for free. You can download the NerdWallet app in the iOS and Android stores, and we'll include a link to download it in today's show notes. You guys have an app? We do, and we have a website that has a bunch of great features on it as well. Oh, I'm downloading that right now. Listeners, download that right now.

Sean, the information you have given me today, I know it sounds cliche, but it really is life changing. And I feel now like I have a shot of getting out of this debt. But I just do want to say to those listening out there, everyone needs to be prepared for this emergency and know how to shut their water off and be sure the valve will turn and shut off water.

when needed. And don't be like me. Don't put off your home maintenance. I knew better. This could have been a big disaster if I was gone to work or out of town when I found out that thing was broken. So please prepare for an emergency, people. You know, I think you could think about your debt as like your broken water heater.

It has made a bit of a mess of your financial life right now, and you can be proactive to solve the issue. You're not out of town when it comes to your finances. You're actively engaged. You're in the house with your money right now, Elizabeth. Do what you need to to fix it. I know that's right. A little mess up here and there is not a big deal because it makes for a good story, right? I mean, so after I pay all this debt off, I'll have a great inspirational story to share, and I'll feel really good about myself.

One last thing I want to add on to this is the importance of saving even a little bit of money in your emergency fund while you're paying down your debt. You might think that you need to channel all of your cash toward debt payoff, and it's important to put a good amount of cash toward it. But if you don't have savings, something like that water heater is going to pop up again. And this can help you from going deeper into debt when the inevitable happens. So I really encourage people to save what they can when they can. So Elizabeth, Allison, Elizabeth,

How are you feeling right now? Tell me what your plan is for your debt. Wow, how am I feeling? I'm feeling like I can do anything right now thanks to you, Sean. That makes my heart so warm. I don't know if you've ever thought about an alternative career, but motivational speaking, definitely your thing.

Well, let me tell you, as a certified financial planner professional, a lot of my job is having emotional conversations with my friends and clients about how they can meet their financial goals. It's not just the nuts and bolts stuff. It's how you can kind of overcome what some people call their head garbage that's getting in their way of making progress on their goals. And I think you feeling overwhelmed, you feeling ashamed is that head garbage. And I hope that we've worked to clean up some of it and take out the trash today. For

For anyone who cares to know the next steps I'm going to be taking, I'm going to be blocking Zara from all deleting the apps and blocking Zara. I am going to check out this snowball method. I'm sure you guys have an article on on nerd wallet dot com about it. So I'm going to use that. So I'm going to replace the instant gratification I've been getting from shopping with the instant gratification that will come when I pay down one of those cards. I

I love to hear it. Well, thank you so much for sharing your story with us. Oh, thank you for listening and being my therapist and all the other things. I appreciate it. And cut. Wow. Amazing role playing, Elizabeth. How did that feel? That was fun. I loved it. We need to do that again. That was fun.

Well, that's all we have for this episode. Remember, listener, that we are here to answer your money questions. So turn to the nerds and call or text us your questions at 901-730-6373. That's 901-730-NERD. You can also email us at podcast at nerdwallet.com.

Follow Smart Money on your favorite podcast app, including Spotify, Apple Podcasts, and iHeartRadio to automatically download new episodes. And here's our brief disclaimer. We are not your financial or investment advisors. This nerdy information is provided for general educational and entertainment purposes, and it may not apply to your specific circumstances. This episode was produced by Tess Vigeland, Anna Helhosky, and Hilary Georgie. Hilary also helps with editing.

Nick Karisamy mixed our audio. And a big thank you to NerdWallet's editors for all their help. And with that said, until next time, turn to the nerds.