Credit Card Debt-Free:
Learning the Facts, Saving Money and Paying Balances.
If you’re like most Americans, then you most likely have credit card debt. According to USA Today, the average household has a credit card balance of over $6,000. The Federal Reserve also recently stated that Americans are fast approaching credit card debt of $1 trillion. To successfully pay off your debt, you need a hands-on approach. Continue reading and learn the best payment strategies to clear your debt.
The Effects of Not Paying Your Credit Card Debt
If you keep missing the payment, a foreclosure process can be ongoing. But before that, you will be notified and given a window to pay up before the creditor starts the process of claiming your house.
Your situation can get worse when you delay your credit card payment. The information on your credit score determines how much you can lose after a late payment. The better the credit, the more points you stand to lose.
The Problem With Having a Little Debt?
Up to now, you have known that too much debt is not a good thing. However, did you know that having little credit can also harm your credit score? To maintain a good credit score, you need some debt. Little or no debt makes it hard for lenders to know if you are a reliable borrower. Having little debt can also be a good thing since you will be improving your credit score when you are repaying your car loans, student loans, and credit cards on time.
You might incur some interest, but in the long run, you will be saving a lot of money by having a good credit score. Debt can be a positive thing, especially when you need it for short term reasons. That said, you should still never strain yourself with too much debt since it can negatively impact various features of your financial life. For instance:
The Mistake of the Minimum Payment
You probably have noticed a minimum payment amount displayed on your credit card bill. The amount might seem too little to cover all the charges that you have amassed in that month. The question to ask yourself is, why would your credit card issuer be satisfied by a payment of, let’s say $40 on a $2000 bill?
Many credit card holders fall into this pitfall without even noticing. The main issue starts when you start treating the minimum payment more like a set monthly fee and less like just the bare minimum. You might be fooling yourself into thinking that you have to charge thousands of dollars of purchase you make for a little fee. The truth is that there is no such thing as free; you will have to pay off the debt. Making only minimum payments each month will only prolong your debt since the minimum payment is usually interest plus 1% of the balance. You will end up paying more in interest.
Let’s say, for example; you have a balance of $2,000 on your credit card with a 15%APR. Your credit card issuer’s minimum payments formula requires a 1 percent interest plus interest charges every month. If you decide to pay only the minimum payment of $40, you will end up paying over $2,200 in interest for 14 years. This is assuming that you don’t add extra charges to your card before paying it off. This simply means that you will end up paying more in interest than the original balance amount.
The Shame of Debt
In every debt relationship, there is usually a lender and a borrower. Debt can be considered as good debt or bad debt; it doesn’t matter anyway since any type of debt can seriously affect you emotionally. Debt affects people in different ways. One person might suffer anxiety over a small debt, while another person takes even the largest debt load in stride. Many people tend to feel isolated by the shame of being in the red with massive loans.
Having Too Much Debt: The 10 Warning Signs
Paul Golden, a managing director of media and communications for the National Endowment for Financial Education (NEFE) offers advice on understanding the difference between needs and wants as one concept of personal finance. He also warns of unnecessary debt and gives warning signs of having too much, which will suggest that you need to take action.
- Your minimum monthly payments are huge
- You are paying one debt with another
- Loan denials
- You don’t know your debt situation or how much you owe
- There is nothing in your savings account
- You pay your bills late due to lack of money
- Debt collectors calling you regularly or creditors threatening you with wage garnishment or repossession
- You can only afford minimum monthly payments
- You lack a strategy to pay off your debt
- Your debt-to-income ratio is over 36 percent
Make a Debt Pay-down Strategy
To get out of debt, you will need to work on several strategies that will make paying off debts easier. However, it doesn’t matter how smart your repayment strategy is if you don’t address the issue that got you into debt in the first place. If you are ready to pay off your debt, here are two types of strategies that will help you.
Pay less over time
This debt payoff strategy requires you to pay down the loan that has the highest interest rate while also paying the minimum balance on the other loans. Instead of starting with the smallest loan and work your way up to the larger ones, you start with the bigger loans. Once you have settled the loan, you go to the second largest loan. This pattern goes on till all the loans are repaid. This is the fastest method of repaying off your loans.
Pay down easy-to-handle debt faster
With the snowball method, you start to pay off your smallest debt first. In this strategy, you list all your debts, starting from the smallest to the largest balance regardless of the interest rate. As soon as you finish paying off the smallest loan, take the money you have been paying on it, and use it to repay the next smallest loan. Continue with this process until all your debt is settled. The snowball strategy offers you an emotional boost since you will see one of your loans being paid off faster. It offers you the motivation you will need to continue the process of getting out of debt.
The avalanche and the snowball strategies of paying down debt are almost similar. With both strategies, you will be able to repay your debt quickly, depending on the amount you owe and as long as you stick to the plan and stay motivated. According to many financial experts, the snowball strategy has worked well for many people. Staying motivated is significant because the worst thing is giving up on a plan or even sliding back to debt.
John McArthur, financial expert, on the snowball method:
Paying off debt can be overwhelming and stressful. With the right repayment strategy, you will understand the easy way to become debt-free. The snowball strategy really makes sense, especially when it comes to the numbers. The math seems to lean more towards paying the smallest loan first. Also, personal finance is just 20 percent head knowledge while 80% behavior. Therefore, you will get a sense of accomplishment with small wins as opposed to larger wins to get the needed motivation to continue with the debt reduction process.
This strategy is straightforward; however, natural feelings are usually what hinders noticeable progress in debt management and reduction.
It is very easy to spend too much with your credit card. You can walk into a store to get just one item, and even before you notice, you’ve spent more than you intended. The consequences of spending too much on your credit card can be very hard to deal with. Here are some tips to help you stop overspending on your credit card:
Make a budget
A budget helps you know what you are spending and what you should be spending. Make sure to base your budget on the money you get every month. A lack of a budget can tempt you to spend money you don’t really have. Additionally, if you don’t have a budget, you won’t have any idea how much you can afford to spend every month.
Instead of taking the risk of navigating around money blindly, take some time, and create a budget. List what you really need and stick to your budget. Once you know where your money goes, you can cut back in some areas and make smarter spending options.
Lock down your credit cards
Unless you are going to sue your credit card to buy something and you have a plan to pay it off, leave it at home. Always carry the amount of money you intend to use. Leaving your credit cards at home helps you avoid the temptations of buying frivolous things. You can easily fall prey to impulse buying when you carry your credit card with you everywhere you go.
Additionally, if you are a fan of online shopping, your credit card information is stored onto your shopping profile; this can also tempt you to buy unwanted items. Cancel your current credit cards and ask your favorite online shopping accounts to remove all the saved information to avoid temptation.
Make a payment plan
When you realize that you cannot pay your credit card bills on time, it is always advisable to contact your credit card issuer and try to explain your situation. If you are a good and loyal customer with a good credit history, they might be willing to work with you.
Late payments can lead to penalty fees and a high APR while also causing damage to your credit score. Many lenders will be willing to work out a payment plan with you if you provide proof that you are a loyal customer and give them a specific timeline by when you will be able to pay off the debt.
Transfer to a zero-interest card
If you have too much debt on a high-interest card, you might want to consider transferring it to a zero-interest card. This method will help you apply more of your payments to the main balance every month instead of interest charges, hence eliminating your debt faster. The goal of transferring the balance to a zero-interest card is to save money on interest. You need to apply for a new credit card with little or no interest rate and transfer the balances. Your credit card issuer might approve the full amount to be transferred or just part of the request. Additionally, your credit card limit determines the amount of balance that you can transfer to a zero-interest card.
Keep in mind that you cannot transfer debt between products from the same credit card issuer. Continue making payment in your old credit card until the transfer is approved. You can only qualify for a balance transfer if you have a good credit score, and are absolutely committed to being debt-free. Do not start using your old credit card until all the debt is repaid.
Use cash or a debit card
Nowadays, many people do not carry cash. They just put a couple of dollars in their wallets just for emergencies. However, it is proven that you will spend less when you use cash. Sometimes, giving out money hurts and can make you think twice before giving it to the cashier. However, with plastic, you cannot notice when you overspend. Cash is the best way to limit your spending.
On the other hand, a debit card is a great way to stay out of debt. You only spend what is in your checking account. According to studies, 80% of people use their debit card to make everyday purchases. Instead of carrying cash, you can carry your debit card to limit your spending. If you are looking for a way to limit how much you are spending, use a debit card, or endorse a cash-only policy.
Unsubscribe from credit card offers
Many times you get a phone call or a mail only to find out that it is another credit card offer. Usually, these credit card companies call to claim that you have been preapproved for a new line of credit. These recurrent communications can be overwhelming and frustrating. The good news is that you can opt-out from these credit card offers and stop getting the endless requests. The Consumer Credit Reporting industry has come up with a way that you can opt-out of getting credit card offers. You can either call a toll free number 888-5OPT-OUT (888 567 8688), or you can visit www.optoutprescreen.com and submit a request. When you call to opt-out from the offers, you can choose to get your name removed from the mailing list for five years or even permanently. By opting out, you are basically removing yourself from the credit card marketplace.
Plan a date to be debt-free
Imagine what your life would be like when you are debt-free — no stress and no minimum monthly payments. To have a good future, you need to get started on the right financial path by saving and minimizing irrelevant debt. Always set a target date on when you want to be debt free. Paying off your debt can seem like a long lasting process. However, as the years go by, you keep nearing the finish line. Start planning as early as possible for how you are going to pay off your debt and for how long you will be paying off.
John McArthur on credit card rewards:
Credit card companies know exactly how to market our wishes. They are aware that credit cardholders love their rewards, miles, and points. To make matters worse, people keep falling for these offers blindly. It is never a great idea to get a credit card. Bonuses are usually one way that credit card companies use to get you hooked on their services. However, every type of credit card has its own guidelines. With credit card rewards, you get the points depending on the amount of money you use. The more the money spent, the more points awarded.
According to a recent survey by NerdWallet, 73% of credit card holders use rewards as a major factor in choosing the best credit card. Additionally, they fail to read the fine print that contains all the qualifications for every card. Let’s take, for example, miles earned. Every card has an expiration rule. Credit cardholders can lose their miles due to a missed payment as well as any modification in the structure of the reward programs. Avoid using a credit card if you cannot follow a budget and if you know that you are an impulse buyer.
Tips for College Students
Credit card mistakes made in college can surely catch up to you in the future, especially when you want to get a loan. Credit cards might have some benefits; for instance, they can help you establish a good credit score. However, having a credit card also means more responsibilities, like taking care of your expenses.
The truth is that many college students are prone to overspending. If you are a college student, avoid a credit card unless you have a stable income and can afford to pay off the balance in full every month, or if you have an adult co-signer. You should also use your credit card for emergency reasons only. If you are relying on a student loan for your college expenses, avoid adding extra burden with credit cards. Manage your loans and borrow only what you require to go to school.
If you are determined to use credit cards to learn how to manage your finances or even establish a good credit score, use the following tips to help you avoid overspending and manage your credit card responsibly:
- Pay your credit card bills on time and stick to your budget
- Get the right credit card
- Use your credit card for occasional small purchases
- Enroll in financial literacy classes that will help you avoid overspending
Become an authorized user on your parents’ account; this makes sure that you get an amount of the family’s total credit limit. It will also help you live within certain parameters.
John McArthur on credit cards & college students:
Credit cards and students are two words that most people don’t want to be mentioned in the same sentence. It’s easy for people to point out how students have thousands of dollars in credit card debt and conclude that students should avoid credit cards as much as possible. But I disagree. When used responsibly, credit cards are a good way to increase your credit score. Using credit cards as early as now can help you begin your credit history. It is easy to acquire a credit card with little or even zero credit history than opening a different line of credit without a credit history. Additionally, it’s almost impossible to acquire a mortgage or a car loan without any credit history.
Paying Your Debt Off
Most people fail to pay off their credit card debt mainly because they don’t have any real motivation. While you may start paying your debt motivated to remain debt-free, you may get discouraged easily over time due to the effort and time required to see your plans through. Other common reasons that you may face in paying your credit debt include:
“I don’t have enough money to make the minimum credit card payment.”
One of the most attractive aspects of being a credit card holder is that you won’t have to pay the full amount at the end of every month. You will just have to make the minimum payment, and you can go for another month. Most Americans take advantage of this. In fact, the Federal Reserve Board recently stated that only 45 percent of Americans pay off their credit card balances in full every month. This means that more than half of the entire U.S. population only pays the minimum balances.
But what if your monthly income isn’t enough to make the minimum monthly credit card payment? While monthly minimums often range between 2 to 3 percent of the balance and it sounds like it’s easy to pay the monthly minimum, if you have a credit card balance that is closer to the national average, then the minimum monthly payment will range between $150 and $200, and making such a payment when you’re living from paycheck to paycheck may be almost impossible.
If you’re like most Americans, you won’t account for every penny you spend. Most of us don’t have a budget. A recent survey revealed that only 41 percent of Americans have a budget. If you want to devote yourself to paying off your credit card debt, you will have to start from somewhere. That somewhere will show up on your budget. You can use an online budgeting tool like the NFFC’s online budget worksheet.
“I am unable to track all due payment dates.”
Do you know what the consequences of late credit card payments are? In most cases, your creditors will add a late payment fee, increase interest rates or both. If you default from paying your monthly payment for a period of 30 days, your creditor notifies the credit bureaus. Because payment history makes up 35 percent of your credit score, late payments can harm your score.
You are supposed to make your monthly credit card payments the same date every month. However, if you have multiple payments that are due the same month, consider writing the due dates on your calendar. You can use your cell phone’s calendar and set the alarm to remind you of the due dates. There are also free applications that can help organize your monthly payments, for instance, Bill Organizers for iOS and Bill Organizers for Android. In case you don’t want to use the available online applications that require you to input your personal information, you can change the payment dates to be around the same time.
If you find that you’re unable to make the minimum monthly payments consistently, there are other options, including:
If you need help in understanding your budget or paying off your debt, you may want to consider credit counseling. This service is offered by nonprofit credit counseling agencies. The credit counseling organization you choose will pair you up with an experienced credit counselor. A typical credit counseling session will involve a phone call with your counselor that will last anywhere between 20 minutes and an hour. To get the most out of your credit counseling session, ensure that you gather all your financial information related to your assets, income, monthly expenses, and debts.
Depending on your situation, your credit counselor will advise you on how to improve your financial situation and offer you free budgeting assistance. However, as a last resort, your credit counselor may recommend a debt management plan which will help you settle your debts faster by lowering your interest rates and setting a payment schedule. Once a payment plan has been set, your credit counselor will follow up, and in case you need more assistance, they will schedule a follow-up session.
Consolidating your debt
If you’re in deep with student loan debt, credit cards, and car loans, and making the monthly minimum payments isn’t helping you zero your debt, you have to make important changes. You have probably heard about debt consolidation, and you may be considering it. Debt consolidation is the combination of multiple unsecured debts – credit cards, payday loans, and medical bills – into a single debt that you pay off through a management plan or a loan. Debt consolidation is usually effective on high-interest debts like credit cards. It can help you reduce your monthly payments by reducing the interest rates and making it easier for you to pay off the debt.
John McArthur on consolidating your debt:
Although debt consolidation may seem like a silver bullet, it isn’t. It promises one thing, but it delivers a totally different thing. Debt consolidation doesn’t mean you won’t have debt. You will only be restructuring your debt. What you need is debt reformation and not debt rearrangement. Additionally, your debt problem will most likely grow back because debt consolidation doesn’t help you establish good money habits to keep you out of debt.
While most people use the terms debt consolidation and debt settlement interchangeably, they are two different things. Debt settlement involves the hiring of a company that will negotiate with your creditors on your behalf for a lump-sum payment that is less than what you actually owe. Unlike credit counseling organizations, debt settlement companies will charge you a fee for their services. In most cases, the fee ranges between $2,000 and $3,500.
If all the above options have failed and the credit card company has filed a debt collection lawsuit, you will have to respond to the lawsuit. When you ignore the credit card lawsuit, your creditor will file for a motion requesting the judge for a default type of judgment. Such a judgment states that you owe money to the company, and sometimes the judge may also include attorney fees and other costs to the debt.
Your creditor may also take other legal steps to collect a judgment debt. They may legally garnish your wages or even seize your personal property to satisfy the debt. If you’re in such a situation, you may consider filing Chapter 7 bankruptcy. In case you owe your creditors more than you can pay, Chapter 7 will help you recover. However, before you file for Chapter 7 bankruptcy, ensure that you hire an attorney because bankruptcy law can be confusing.
National Foundation for Credit Counseling: This is a free database of debt counselors who can help you get debt relief with credit counseling or help you come up with a debt management plan.
This is an online database that will help you find an attorney that meets your criteria.
Smart About Money: This is a free online program of the National Endowment for Financial Education (NEFE) that offers articles, resources, calculators, and tips to help you manage your money.
Usa.gov/debt: This is a free government page that includes information on common debt problems and how to file for bankruptcy.
Every Dollar: This is a simple and free online tool that helps you come up with a plan on how to pay off your debt.
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