Alex GoodmanIt’s crucial to keep in mind that debt settlement is not a surefire fix and ought to only be considered as a last resort. Credit cards can be very helpful, but if you don’t use them wisely, they can put you in a lot of debt and make it hard to pay your bills.
Spending sparingly and making payments on time are crucial to preventing this. Credit card debt has many problems, such as high interest rates, a drain on monthly budgets, and the possibility of future money problems. In addition, unlike other types of debt, the interest on credit card debt is not tax deductible.
Paying more than the minimum each month is essential if you want to lower your credit card debt. Paying more than the minimum amount due each month is essential if you want to lower your credit card debt. Additionally, it is advisable to pay off debts with the highest interest rates first.
Additionally, it’s crucial to consolidate or transfer balances to credit cards with lower interest rates and to refrain from making new purchases with the card. Finally, it’s critical to spot and cut down wasteful spending and, if necessary, consult with a debt settlement or debt reduction company.
In a Nutshell
- Credit card debt can significantly reduce monthly income and result in hardship.
- Compared to other types of debt, credit card interest rates are significantly higher.
- Tax deductions for credit card interest do not exist.
- A credit score is said to be bad if the credit utilization ratio is greater than 30%.
- Pay the highest interest rate initially and more than the required minimum.
- Refrain from taking on additional debt, and switch accounts to credit cards with lower APRs.
- Consolidate your debts or see a debt settlement or debt reduction firm.
The Disadvantages of Credit Card Debt
There are many good reasons to have less credit card debt, or even none at all. Among them:
Cost
Credit card interest rates are much higher than those of other forms of debt. In fact, interest on credit cards is, on average, two to three times higher than on a mortgage loan. In addition, they can be a significant drain on your monthly budget.
Emily RobertsFinancial advisors often say the average person should pay no more than 10% of his or her take home pay on credit cards or other consumer debt (not including mortgages), says Howard S. Dvorkin, a certified public accountant and founder of Consolidated Credit Counseling Services. Spending more than that amount can make it difficult to make ends meet.
Money is a poor manโs credit card.
Marshall McLuhan
Risk
Lewis J. Altfest, a qualified financial planner in New York whose clients tend to be high earning professionals, says credit card debt is often a risk. It can also be an early warning sign of future problems. “Too often, [financial planners] see that abusive use of credit leads to financial difficulties,” Altfest writes. “Sometimes, people get in too deep.”
Taxes
Unlike other types of debt, credit card interest is not tax deductible. On the other hand, the interest you pay on your home mortgage or student loan is usually deductible.
Lower Credit Score
One of the factors the credit bureaus use to calculate your credit score is called your credit utilization ratio. This is the amount of money you currently owe, as a percentage of all the credit you have available to you. For example, if your credit card limits are $15,000 and you owe $5,000, your credit utilization ratio is 33%. In general, a credit utilization ratio above 30% is considered a negative credit score.
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Avoid the temptation to make minimum payments on credit cards. High interest rates can cause credit card debt to increase rapidly.
How to Attack Credit Card Debt
If you want to reduce your credit card debt, here are some steps you can take.
1. Pay More than the Minimum
Suppose you owe $5,000 on a credit card and pay 15% interest. Your credit card company may allow you to make a modest minimum payment, such as 2% of your balance, or $100 a month. But just making that minimum payment will add up to years of debt and many hundreds of dollars in added interest.
Assuming you make no new purchases with the card and pay the minimum $100 each month, how long will it take you to pay off the $5,000 debt? The answer is 79 months, or more than six and a half years. In addition, you’ll end up paying about $2,900 in interest. That’s a lot of money to pay off a $5,000 loan.
2. Pay the Highest Interest Rate First
“Let’s say you have four credit card debts,” says Charles Hughes, a certified financial planner in Bayshore, New York. “Instead of making four equal payments on all the cards, consider making the largest payment on the card with the highest interest rate.” Once you’ve paid off that card, move on to the one with the next highest interest rate.
This technique is called debt avalanche and is the most financially efficient option. It contrasts with the other repayment strategy, the debt snowball, in which the smallest debt is paid off in full first (paying only the minimum for the others). Then you use the leftover money to methodically pay off the rest of the debts, from smallest to largest. This has the psychological benefit of reducing the number of debts by a series of small victories until the largest is the only one remaining.
Spending too much on your credit card can hurt your credit score, even if you use less than your credit limit.
3. Avoiding new Debts
Put your cards away for a while and try to make your daily purchases in cash. It can also be an opportunity to do a cash flow analysis and find out where your money has been going, notes Hughes. You’ll probably spot unnecessary expenses that you can cut back on and save even more.
4. Transfer your Balances
You may be able to transfer your balances from high interest cards to lower interest cards. These offers often include a 0% introductory interest rate for six to twelve months. While this may sound tempting, there are a few caveats. First, transfer offers often require an upfront fee of 3% to 5% of the amount being transferred or a flat balance transfer fee. Still, it can be worth it, especially if you use one of the best balance transfer cards available.
5. Consolidate your Debts
You could also take out a personal loan or line of credit to consolidate your credit card balances (and other debt) at a lower interest rate. With this strategy, you could convert card debt on which you pay 15% or more interest into a loan with an annual percentage rate equivalent of 4% to 8%.
Just remember to bank what you save in interest instead of spending it on increasing your debt, and be sure to compare different personal loans to find the best one for you. You may also want to work with a debt reduction or debt settlement company to help you reduce the amount of outstanding debt.
Wrap Up
Finally, while it may be challenging, paying off credit card debt is a vital activity. It is crucial to find and cut out wasteful spending, pay off as much debt as you can each month, and take into account consolidating or transferring balances to the credit card with the lowest interest rate. Bankruptcy and debt settlement firms may be choices in extreme circumstances. It’s critical to keep in mind that paying off debt can raise your credit rating and result in long term cost savings.
FAQs
The first step in reducing credit card debt is to identify and eliminate unnecessary expenses, such as entertainment or luxuries. Next, it is important to pay off as much of the debt as possible each month. The fastest way is to pay off the highest interest debts first and pay the minimum on all other cards. Larger debts can be consolidated or transferred to the lowest interest card, but this may result in additional charges.
Capital Maniacs has several free articles with tips on financial education, how to get out of deep debt, and how to reach a debt settlement. In more serious cases, you can also talk to a non profit credit counselor about how to pay back your debts.
In extreme cases of credit card debt, it may be possible to reduce the debt with the help of a debt settlement company. These are companies that negotiate with credit card companies on your behalf, usually for an expensive fee. The most severe cases of unmanageable debt can be discharged in bankruptcy.
The easiest way to negotiate with a credit card company is to call their main phone number and request a debt settlement plan. Some credit card companies are willing to forgive a portion of your debt, provided you agree to pay the remaining amount. This is likely to hurt your credit score, but if a borrower is in a really bad situation, it may be in the credit card company’s best interest to get a portion of the amount owed instead of going after the full amount.
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- NerdWallet – How to Get Out of Credit Card Debt in 4 Steps
- Forbes – Reducing Your Credit Card Debt
