According to the Federal Reserve, the average household credit card debt (as of 2012) was just over $15,000. The majority of consumers who use credit cards report carrying debt from month to month, and a growing number of people are using credit cards to cover daily expenses like groceries and fuel. No matter how much you owe on credit cards, you need to seriously consider the ramifications of debt on your lifestyle, family, and future.
Don’t Lose Control
Unless you are using credit cards responsibly and paying off debt each month, you are giving up control. Carrying a balance means you will owe money in the future. As your credit card debt mounts, you give up control of parts of your future income because you will be required to make minimum payments.
Some people make thousands of dollars in minimum payments every month, just paying enough to keep interest from bringing their balance over the limit! Those payments are funds that could be used for other things, such as savings, vacations, home improvements, and family fun. Debt also has negative consequences on your future financial and professional status.
Although proper use of credit cards can increase your FICO score and make it more likely, you will be approved for things like car loans and mortgages, a high debt-to-income or high debt-to-credit limit ratio can reduce your FICO score. Your debt can even cause problems in the workplace as more companies are running credit checks before hiring applicants. This is especially true for management or financial positions.
Benefits of Getting out of Credit Card Debt
When you learn to pull yourself from the mountain of credit card debt, you take control of your finances. The benefits for yourself and others include:
- Saving money as you are no longer paying high interest on balances
- Ability to budget money and spend on items you need or would like rather than pay credit card bill
- Higher credit score which increases options for you and your family.
- Reduced financial stress that can reduce tension in relationships and other areas of your life.
What is Credit Card Debt?
In this blog post, “credit card debt” refers to any revolving credit line. In addition to the top players (Visa, MasterCard, Discover and American Express), credit cards can also refer to brand and store accounts. Department stores, gas stations, and online merchants all offer such accounts.
1. Define your debt.
It is surprising the number of people who skip this critical first step. They decide to get out of debt and begin making extra payments willy-nilly on their cards. They may solve the problem eventually, but they don’t always go about it in the most efficient manner.
Knowing what you owe and how you owe it is a critical step in a debt reduction plan. Gather all your credit card statements for a single month. Using a piece of paper, record the total balance for each card, along with minimum payment information and the interest rate. This information will help you create an efficient pay off plan.
Choose one card and make extra payments on it while you maintain minimum payments on all others. You can choose the card with the highest interest rate in order to save the most money in your debt payoff plan. However, many financial experts advise that you start with the smallest balance. You will be able to pay this off faster, giving yourself a feeling of accomplishment.
2. Create momentum.
Regardless of which card you pay off first, once you reach a zero balance, transfer your efforts to another card. Keep paying the minimum on all other cards, but add what you were paying on card one to card two. This creates momentum. Here is an example, using three cards:
- Payments made while working on Card 1: $400, $100, $125
- Payments made while working on Card 2: $0, $500, $125
- Payments made while working on Card 3: $0, $0, $625
You can see that by the time you are working on card three, you are paying over four times the minimum payment!
3. Avoid recreating the problem.
Many people reduce credit card debt only to max out cards six months later. To avoid recreating the problem, you need to change how you think about credit card debt. Never use credit cards to pay for luxury items if you don’t have cash on hand to pay off the balance. If you don’t have the cash, you don’t need the item. Pay off balances as soon as possible and only keep one or two cards open to reduce spending temptations.
A Common Obstacle to Getting out of Credit Card Debt
One of the biggest obstacles people face when dealing with credit card debt is the constant emergency. They use all their funds to pay down debt. When the car breaks, medical bills arrive or another emergency comes up, they are forced to pay with a credit card. The best way to avoid this obstacle is to plan ahead.
Before and during the time you start reducing credit card debt, create a savings account for rainy days. At the minimum, save $1,000. You will be even more stable if you save a few months’ worth of expenses. Paying off credit card debt is not an easy thing to accomplish, but you will gain so many benefits. You will take control of your life, your future, and your finances, reducing stress and increasing the overall quality of life. Get started today by defining what you own and creating a plan to pay it down.
Credit card debt is not a national issue. It is, in fact, a problem that affects millions worldwide. Many of the country’s population, especially the younger ones, get entangled in this problem due to excessive spending that is not aligned to their earnings. When you have more than one credit card account with overflowing balances that need to be settled but you are struggling with, then you are officially stuck in this complication as well.
Having a few credit card accounts might not be too bad if you pay your dues consistently, but miss a few payments and your credit score will start to see the damage. Thus, you are in reality affecting your overall financial situation as having a poor credit score would harm your ability to obtain loans with better financial terms in the future, for instance for the purchase of a home.
If you are facing credit card debt issues, the most natural thing to do is to seek credit card debt relief assistance! There are a few solutions out there for you when we speak of credit card debt relief, thus take your time to evaluate all your options. Weigh the benefits and disadvantages of each option, and then decide on what would be the best move for you.
One of the most effective solutions out there for those needing help with credit card debt is the debt consolidation option. Consider the fact that you have a few credit card accounts, each one of which you pay separate interest rates, annual fees, processing fees, and other similar charges. On the other hand, consider a single account where all your credit accounts are merged under, you pay a single interest rate for this account, and you do not have to worry about all the other credit accounts at the same time.
I am sure that option two would be more appealing to almost all of us out there. Option two is, in fact, the result of debt consolidation, a process that successfully combines all your credit card accounts into a single one for better management. You could explore the option of debt consolidation by yourself, or hire a debt management or consolidation firm to help you out with this process.
If you prefer to do it yourself, you could opt for one of the many credit card balance-transfer programs that are available out there, offered by almost all the banks and financial institutions in existence today. Through this option, you could transfer all your credit card balances (regardless of how many credit cards you have) to a single credit card account. This balance-transfer program is offered to you by a different financial institution (compared to your current credit card lenders) that would usually put forward a lower interest rate to attract you.
The program also comes with a debt-elimination plan that usually takes between two to five years to complete. Alternatively, you could hire a debt consolidation firm that would help you eliminate all your credit card debts effectively with the use of a debt consolidation loan. The interest rate that is offered for this loan would usually be lower compared to your current credit card interest rates. Thus, you would naturally be gaining by opting for this solution. Nevertheless, before you put pen to paper deal with any debt consolidation firm out there, ensure that the company is legal and legitimate by checking the legitimacy of the company with the Better Business Bureau (BBB).
Most people have heard about the snowball effect before, but fail to apply it to their finances. This method continues to be one of the most functional ways of eliminating credit card debt.
If you have heard of this method, but haven’t started, you need to do this now! If you have never heard of the snowball effect, using this method means that you could eliminate your credit cards one after another, starting with the one that has the smallest remaining balance. You can do this by paying off the smallest credit account first, and paying only the minimum balance of the other cards to be able to close off your first credit card account.
Once your first debt is paid, you will have extra cash every month to spare for the other credit card accounts. You can continue along the same path until all your credit card accounts are closed. This helps preserve your credit score better than the debt consolidation option, as closing too many credit accounts at once will damage your credit score without a doubt.
Thus, this option is one that you should consider if you are looking to preserve your credit score, especially if you are planning to opt for a bigger loan shortly.
Being able to negotiate is also important so that you can get the best deal out there. This is especially true if you opt for the debt consolidation option to eliminate your credit card debts. Always get a few options before you pick the best, and only the best, in your bid to clear all your credit card debts effectively.