It may appear to be easier to simply ignore it, but your unmanaged credit card debt will follow you everywhere you go. Although it may appear to be a daunting task, you can pay off your debt with order and dignity! Use the following strategies to effectively attack your debt.
Part 1 Tackling Your Debt Wisely
1. Make a larger payment than the minimum. Credit card companies love it when you pay just enough to cover your monthly expenses. At that rate, you’re primarily paying off interest and only scratching the surface of your actual debt. Examine your most recent credit card statements to get an idea of your monthly interest rate, then budget as much of a payment as you can above that amount to see a difference in your statement.
Remember what interest is if you want to know how much you should pay above the minimum. Interest is the cost of money, and creditors always prefer that you pay interest before anything else. As a result, making the minimum payment is usually only enough to keep your interest from compounding your debt into the stratosphere—in other words, to keep it where it is. You should try to pay enough each month to cover the interest as well as the principal.
2. First, pay off the debt with the highest interest rate. It almost goes without saying, but it’s something that many people overlook. If one credit line charges you an 11 percent Annual Percentage Rate, or APR (interest over the course of a year), and another charges you a 9 percent APR, focus all of your attention on the debt with the lower interest rate. Pay it off first, then move on to the other debt. Sure, the other one will earn interest in the meantime, but since you’re going to pay interest anyway, you might as well pay it at a lower rate.
If this process appears to be too difficult, consider snowballing your debt. If your interest rates are all about the same, or if you’re simply overwhelmed by the sheer number of payments you have to make each month, make the minimum payments on all but the lowest balance––which you should attack aggressively so it disappears quickly. Once it’s gone, add the payments you’d have made on your lowest debt to the minimum payment on your next-lowest debt until it, too, is gone. Rep until all debts are paid off. The sense of accomplishment you will feel as you make fewer and fewer payments each month will make the process more bearable and assist you in reaching your goal.
3. Consult with your credit card companies. Explain your financial situation and inquire whether there is anything they can do to assist you. Many will reduce your interest rate for a set period of time and/or waive current late fee balances to give you a chance to catch up.
Mention that you’ve been a long-time customer of theirs. While some credit card companies are uninterested in customer loyalty, many are. Those who do go to great lengths to keep their customer base happy and loyal, regardless of the circumstances.
If you don’t succeed at first, ask someone more important. If you are unable to make progress with the first people you speak with, request to speak with a supervisor. If that doesn’t work, request a meeting with the retention department. If that doesn’t work, give us a call in a week or two.
Bring your A-game. Make a list of any other offers you receive. Understand the terms of your interest rate. Examine the rates that your competitors are offering.
4. Never close a card with an outstanding balance. It may appear to be a simple way to get a handle on your debt, but it will wreck your credit score and leave you liable for the debt. All of this will do is lower your credit utilisation (your available limit divided by your current debt), further lowering your credit score. Learn more about how to improve your credit score here.
If you feel compelled to close an account, you must pay it off as soon as possible, and you must ensure that the company records that it was closed at your request, not theirs. Put your request in writing.
5. Transfer your debts. To be clear, transferring money from a credit card with a 12 percent interest rate to a card with a 0% interest rate may harm your short-term credit. However, barely making a dent in your debt because your interest rate is too high will harm your finances in the long run. Look for long-term, low- or no-interest rate transfer opportunities, or consider transferring some of your debt to an existing low-interest card. Remember the following:
How long will the low interest rate last? Depending on your total debt and how quickly you believe you can pay it off, 0% interest for six months may not be a better deal than 2% for 18 months.
The transfer fee’s amount. When transferring, you are usually required to pay a percentage of your debt up front. Make certain that a) you can afford the transfer fee and b) the fee is less than the interest you would have paid during the introductory period. Transferring to a low-interest card usually incurs fewer fees than transferring to a no-interest card. When deciding whether to transfer, consider how long it will take to make a dent in your debt.
What the interest rate will be once the introductory period is over. Will it reach 18 percent after a year? If that happens, will you have paid off enough debt by then to make the leap worthwhile?
How long will you be required to maintain your balance with the company? Since credit card hopping has become a popular way to avoid paying interest, some companies have begun requiring that if you transfer your debt to another card before a certain amount of time has passed, the normal interest rate will be applied retroactively to all of your previous balances, leaving you with a massive new debt.
Make certain to read all of the fine print! Credit card companies are nothing if not inventive when it comes to stealing your money. Before making any decisions, look for all of the above catches and more, such as transfer fees and ballooning interest rates.
6. Look into what you can sell to help pay off your debt. No one enjoys doing it, but it must be done from time to time. If you’ve recently purchased a car, a memory foam mattress, or a new jacuzzi, consider whether you really need these items, especially if you’re paying for them in instalments. Selling your large-ticket items now will save you money in the long run.
Always try to find the sales venue that will net you the most money at resale. Consider eBay and jewellers rather than pawn shops.
Think outside the box and do the math. For example, if you have a car payment and can sell it (even for less than the note is worth) for enough to pay off a card balance or three with higher interest rates and possibly pay off the interest on the car note, it makes financial sense.
Part 2 Budgeting Your Money Like a Pro
1. Keep track of your spending. It’s one thing to keep track of what you’ve bought over the course of a month in your head, but it’s quite another to see how much you’ve spent on paper. This is especially true if you pay with a credit or debit card (people tend to spend more freely when they pay with plastic) or use multiple accounts to pay for things (and therefore never really see the net total). Manually tracking your expenses will not only help you make better decisions, but it will also reveal areas where you are overspending but are unaware of it.
2. Make a personal budget for yourself. It is not sufficient to make a random payment to your credit card(s) every month. Instead, devise a strategy, document it, and plan your other expenses around your credit card payments. Here are some popular methods for saving money and reducing debt:
Consider seriously beginning to save pocket money. It may sound childish, but the savings are far from it.
Check to see if you are eligible for food assistance. It’s not glamorous, but it’s also not fun to be broke.
Reduce your expenses by cutting costs in various areas of your life, such as spending less on entertainment or ensuring your car runs efficiently so you spend less on gas.
3. Make good use of your tax refund. A tax refund is a welcome surprise at the start of the year for many people. If you expect to receive a tax refund this year, resolve to set aside a sizable portion of it to pay off some of your debt.
4. Give up a small luxuries (or three). For example, instead of buying coffee on the way to work every day, make it at home for a fraction of the price. Borrow books, DVDs, and CDs from your local library instead of purchasing them. Make your own lunches for work instead of buying them. (Short on time? A simple sandwich or salad with a hard-boiled egg makes an excellent lunch. If necessary, prepare it the night before.)
When you’re stressed, treating yourself to small pleasures can seem like a necessity, and to some extent, it is. However, there are much less expensive options. Instead of queuing for an overpriced mocha, bring a thermos of tea to the park and enjoy the autumn foliage. Instead of going out to dinner with your friends next Friday night, invite them to your house for a potluck. There are numerous inventive ways to cut back without feeling like a Spartan.
5. Create an emergency fund. Credit cards are often our go-to resource for unplanned expenses (the alternator fails, you become ill and miss work, etc.), but this can wipe out months of payments and completely demoralise you. A better option is to set aside some money solely for emergencies.
This does not have to be a financial burden. Remember those expenses you’re trying to cut? Rather than simply not spending, try saving the money you would have spent on one or two of those expenses (for example, bar money every Friday night, manicure money every-other Sunday, etc.). Make a (free) savings account, invest in a CD, or even hide it in a cookie jar.
Keep in mind that this fund is only for emergencies. Have you broken your leg? Take a look around and see what you think. Do you want to upgrade your phone? Find another place to put the money.
6. Don’t let your spending habits slip just because you’ve paid off some debt. When your credit card balance begins to fall, you may be tempted to treat yourself to a series of restaurant outings or a gleaming new smartphone. Don’t do it; a few impulsive purchases can land you right back where you started, especially if something unexpected occurs. Keep the end goal in mind––rewards that cost little or nothing, such as watching a movie at a friend’s house or making your favourite rich chocolate dessert and eating it all, are much better!
7. Remember to keep the end goal in mind. Remember what you’re attempting to accomplish: get out of credit card debt. You won’t get out of debt if you keep adding to it by using your credit cards all the time, just like smokers almost never quit by cutting back. You should try to limit your use of cards or stop using them entirely.
If necessary, freeze them in a block of ice. A fun and mess-free way to do this is to freeze a sealed bag of water with the cards inside. That way, your card will be available if needed, but you’ll have to wait for the ice to melt, giving you hours to consider whether you really need it.
Purchase a lock box. Place your cards in a lock box and store it somewhere out of the way. Give the key to someone else or put it somewhere else, such as your desk drawer at work, so that when you need to use the credit card, you have to think long and hard about it.
As a last resort, cut your cards into pieces with scissors to ensure you never use them again.
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