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How to get out of credit card debt

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You may be feeling a bit overwhelmed by your credit card debt, especially if you’ve chosen to tackle it head-on. Credit card debt can seem like a daunting challenge, especially because everyone’s situation is unique. But by familiarizing yourself with debt repayment strategies and breaking down your step-by-step approach, it becomes acceptable. Here are some best practices for limiting your spending and developing a practical and achievable plan for paying off your credit card balances.

Find out how you got into credit card debt

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

Brittney Castro, Certified Financial Planner for the mint finance app, believes that 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 they’re more or less free money,” she says. “What they are not told is that if the balance is not paid off in full each month, they will be charged the APR (interest rate) of the credit card on their balance (l money spent with the card), which can sometimes be as high as 29.99%. This can quickly escalate into ballooning debt.”

To avoid this situation, it is important to know how credit cards work. Credit is useful in many situations, but the convenience could cost you dearly. The longer you hold a balance, the more interest you’ll pay. “Proper and smart credit card habits are making payments on time and paying 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 might be overwhelmed with credit cards. You may not know how much you are actually spending. Or you had an emergency but no emergency savings fund to tap into and paid with your card instead. Whatever the reason, knowing how much money is coming in and going out is key to taking control of your finances. It is crucial to create a budget to limit expenses and pay off your debt.

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

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

  • Are my expenses more than my income? If you spend more than you earn, you have two options: reduce your expenses or take overtime at work (or a side job) to increase your income.
  • Do I put money aside for an emergency fund? Developing a rainy day fund could help you avoid having to turn 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 some subscriptions. Send the money you save to pay off your credit cards faster.
  • How much do I owe? Determine the current balances on each of your credit cards to determine how much you owe and how long it will take to pay them off.
  • How much interest am I paying? Determine how many of your card payments are allocated to interest and note the cards with the highest interest rates.

Choose a debt repayment strategy

Once you’ve established a budget and have an idea of ​​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 for 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 have paid off the balance on the credit card 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 maintain your debt repayment plan. Pay off the lowest balance first and build on your success until you pay off the card with the highest balance. Hide your cards as you pay them to avoid the temptation to overspend.

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 $5,000 balance at 17% APR can take ten years and cost a total of $10,000.

Additionally, having high balances could significantly affect your credit score 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 sooner you can rebuild your credit.

Balance transfer card

Some credit cards offer enticing sign-up bonuses, such as a low introductory rate for balance transfers. If you have good credit, you may qualify for a card that offers balance transfers to 0% interest for 12 months or more. Taking advantage of a balance transfer can save you time to pay off a high balance for free. Just make sure that you are able to pay the full balance before the end of the term, otherwise you could incur interest for the remaining amount, or worse, the entire balance transferred.

debt consolidation loan

If you’re juggling multiple credit cards, it may be best to get one. Personal loan for the total you owe on all credit cards. You are basically consolidate all your debts into a single loan to save significantly on interest.

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

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 fee-based. Depending on your financial situation, it may be better to pay off your debt yourself and apply the fees you would pay a counselor for your credit card debt.

Assistance programs for people in difficulty

If you’re struggling with bills and experiencing financial difficulties, contact the card issuer. Creditors usually have hardship assistance programs that may waive some fees, lower your interest rate or defer your payments for a few months.

Consider debt settlement or bankruptcy

Debt settlement and bankruptcy are two additional ways to get out of credit card debt. The problem is, they will likely affect your credit score. Brian Dechesare, former banker and founder of Breaking into Wall Street, warns that these methods should 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 smaller debts it may be best to consolidate or pay it off.”

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

Bankruptcy

In the event of extreme financial difficulties, bankruptcy can help you wipe the slate clean. The moment you file your claim, you will get instant relief from creditors. If the court grants you a bankruptcy discharge, you will no longer be obligated to pay your debts. However, there are downsides worth noting. You will need to attend credit counseling before filing. This can be expensive when you factor in filing fees and a bankruptcy attorney. If your debt is discharged, the bankruptcy will be a public record and will remain on your credit report for seven years, sending your credit score into a tailspin.

Review your finances regularly and set goals

Once you’re debt-free or on your way out of debt, it’s important to establish healthy financial habits to keep you from slipping. Sticking to your budget will be vital. You may want to do an annual review of your spending and make budget adjustments. Plus, prepare for unexpected expenses by putting money in an emergency savings account. Finally, set goals and stick to them. Saving a down payment for a house or creating a retirement fund is a great way to keep an eye on the price and control your spending.

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