How To Get Out Of Credit Card Debt


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One of the hallmarks of the COVID-19 era has been economic turmoil – and recent trends in credit card spending reflect that. While the average card balance has been rising steadily for years, it actually declined during the pandemic, leaving the average American adult with a balance of $ 5,315 at the end of 2020, almost $ 1,000 less than the average. ‘in 2019. Yet despite this drop, more than half of American adults added to their card balances – yet another example of unequal distribution of financial difficulties we have been facing since March 2020.

And, for now, the decline in credit card debt has come to a halt, with $ 17 billion added to our national balance in the second quarter of 2021. As such, here are some best practices for reducing your debt. expenses and develop a practical and achievable payment plan. on your credit card balances.

Find out how you got into credit card debt

Understanding what got you into debt in the first place is one of the most important steps to mastering credit card debt. Otherwise, you might find yourself in the same boat soon after paying off your current card balance.

Brittney Castro, CFP for the Mint Financial App, believes bad habits often stem from a lack of financial literacy. “Students are often offered a credit card on campus or apply for multiple credit cards online, thinking it’s more or less free money,” she says. “What they are not told is that if the balance is not fully paid off each month, they will be charged the APR (interest rate) of the credit card on their balance (the money spent with the card), which can sometimes be as high as 29.99%. This can quickly degenerate into a balloon of debt. ”

To avoid this situation, it is important to know how credit cards work. Credit is useful in many situations, but it can cost you money. The longer you keep a balance, the more interest you will pay. “Good credit card payment habits are to make payments on time and pay off the full balance each month,” she says. “In other words, only charge it if you can afford it.”

Build a budget

There are many reasons why you can be overwhelmed with credit cards. You may not know how much you are actually spending. Or you had an emergency but no emergency savings funds to draw on and paid with your card instead. Whatever the reason, knowing how much money is going in and out of money is critical to taking control of your finances. It’s crucial to create a budget to control spending and pay off your debt.

Quite simply, credit card debt is the result of spending more than you can afford to pay off. A good budget can take a while to set up, but will ultimately serve as a visual tracker of your financial situation. To budget, create an income category by adding up all the money that comes in each month. Then categorize and add up all of your expenses. Budgeting apps do the heavy lifting. Some of the most popular are:

Once you’ve established a budget, ask yourself the following questions:

  • Are my expenses greater than my income? If you spend more than what you earn, you have two options: reduce your expenses or increase your working hours (or a side activity) to increase your income.
  • Am I saving money for an emergency fund? Developing a rainy day fund could help you avoid resorting to credit cards in an emergency.
  • Can I reduce my expenses? Take a look at your spending to find ways to cut back, like eating less at restaurants or canceling certain subscriptions. Send the money you saved to pay off your credit cards faster.
  • How much do I owe? Calculate the current balances on each of your credit cards to decide how much you owe and how long you need to pay them off.
  • How much interest do I have to pay? Figure out how much of your card payments are earmarked for interest, and rate the cards with the highest interest rates.

Choosing a debt repayment strategy

Once you’ve budgeted and got a feel for how much credit card debt you need to pay off, it’s time to start reducing it. There are several ways to approach debt repayment. Some of the most popular methods of getting out of credit card debt are:

The avalanche method

If you have more than one credit card to pay off, the avalanche method saves you the most money, since you pay off your most expensive debt first. Start by allocating the most money to the credit card with the highest interest rate, and make sure you pay at least the minimum on all other cards. Once you’ve paid off the credit card balance at the highest interest rate, concentrate the funds on the card at the next interest rate, and so on.

The snowball method

The opposite of the avalanche method is the snowball method. It uses momentum to keep your debt payment plan going. Pay the smaller balance first and bet on your success until you pay off the card with the highest balance. Hide your cards as you pay them off to avoid the temptation to spend again.

Pay more than the minimum

A general way to get out of credit card debt is to pay more than the minimum for your card each month. Otherwise, it could take years to get rid of a balance. For example, paying the monthly minimum of a balance of $ 5,000 at an APR of 17% can take ten years and cost a total of $ 10,000.

In addition, maintaining high balances could significantly affect your credit rating since the use of credit weighs heavily. Carma Peters, CEO of Michigan Legacy Credit Union, says, “The biggest negative impact on your credit score is keeping a balance above 50% of your limit. »The sooner you pay off your balance, the faster you can rebuild your credit.

Balance transfer card

Some credit cards offer attractive signup bonuses such as a low introductory rate for balance transfers. If you have good credit, you can benefit from a card that offers 0% interest balance transfers for 12 months or more. Taking advantage of a balance transfer can save you time to pay off a large balance for free. Just make sure you’re able to pay off the balance in full by the end of the term, or you could be hit with interest on the remaining amount, or worse, the full transferred balance.

Debt Consolidation Loan

If you’re juggling multiple credit cards, your best plan might be to take out a Personal loan for the total you owe on all credit cards. You are essentially consolidate all your debts in one loan to save significantly on interest.

The average credit card interest rate hovers around 16%. In comparison, the APR for a debt consolidation loan is around 6%. That’s big savings. However, your credit score could affect your interest rate and the chances of getting approved for a loan.

Debt counseling program

Debt counselors can work with you to create a repayment plan and give you advice on how to manage your finances. Keep in mind that most debt counselors are paid. Depending on your financial situation, it may be best to pay off your debts on your own and apply the fees you would pay to a counselor to your credit card debt.

Difficulty assistance programs

If you have problems with bills and financial difficulties, contact the card issuer. Creditors generally have hardship assistance programs that could waive certain fees, lower your interest rate or defer your payments for a few months.

Consider debt settlement or bankruptcy

Debt settlement and bankruptcy are two more ways to get out of credit card debt. The problem is, they’ll likely affect your credit score. Brian Dechesare, former banker and founder of Breaking Into Wall Street, warns these methods should only be used as a last resort. “You should only consider both in extreme situations when you’ve exhausted all other options and can’t make ends meet to pay,” he says.

Debt settlement

Contacting the creditor to negotiate a lower balance can help you get out of credit card debt if you have a larger balance. According to Dechesare, “Most lenders will only consider debt settlement if the debt is over $ 10,000, so for small debts you might be better off consolidating or paying it off.”

You might get up to half the pardon, but it has lasting consequences. Dechesare says that “debt settlement could drop your credit score by 100 points and will stay on your file for seven years.”

Bankruptcy

In times of extreme financial hardship, bankruptcy can help clear your slate. The moment you file, you will get instant relief from creditors. If the court grants you a discharge from bankruptcy, you will no longer be required to pay your debts. However, there are downsides to note. You will need to attend credit counseling prior to the deposit. This can get expensive when you factor in the filing fees and a bankruptcy lawyer. If your debt is discharged, bankruptcy will go public and stay on your credit report for seven years, while also bringing down your credit score.

Regularly review your finances and set goals

Once you’re debt-free or on your way to getting rid of your credit card debt, it’s important to practice healthy financial habits to keep yourself from slipping off. It will be essential to respect your budget. You may want to do an annual review of your spending and make budget adjustments. Plus, be prepared for unforeseen expenses by putting money into an emergency savings account. Finally, set goals and stick to them. Saving a down payment for a home or setting up a retirement fund is a great way to keep your price and spending under control.

The editorial content on this page is based solely on objective and independent reviews of our editors and is not influenced by advertising or partnerships. It was not supplied or ordered by a third party. However, we may receive compensation when you click on links to products or services offered by our partners.


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