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myFICO: What to do if you’re struggling with credit card debt

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myFICO: What to do if you’re struggling with credit card debt

SAN JOSE, Calif.–(BUSINESS WIRE)–Credit cards can offer more convenience and security for your daily expenses, and many even offer sign up bonus and rewards to add even more value.

But if you’re not careful, it can be easy to get deeply into credit card debt, and the more your balances grow, the harder it will be to pay them off, especially if interest rates are on the rise. If you’re currently struggling to deal with your credit card debt, here are some potential solutions you can pursue, from myFICO.

For more information on loans and credit, visit the myFICO blog at https://www.myfico.com/credit-education/blog

Look at your budget

If you don’t already have one budget, consider creating one now. Start by taking the average of your income over the past few months, then list and categorize all of your expenses to better understand where your money is going.

This practice will help you determine if there are areas in your spending where you can cut back and use the money for your credit card balances instead. Setting monthly spending goals with your budget will also make it easier for you to stick to your debt repayment plans and make any necessary adjustments.

List your debts

If you only have one credit card, the payment process will be relatively simple. But if you have balances on multiple cards, you’ll want to know what you’re dealing with.

Log in to each of your online accounts and get the balance, minimum monthly payment and interest rate for each card. This will help you know which cards to target first.

At this point, it’s also a good idea to stop using your credit cards, so that the interest-free portion of your balance doesn’t continue to grow. If you keep using your cards while trying to pay them off, you may feel like you’re slipping.

Speak with your credit card issuer

Depending on your situation, you may be able to get short-term relief from your credit card company. Some card issuers offer forbearance programs, allowing you to pause your payments while you recover financially.

You can also apply for a lower interest rate or a modified payment plan to make your payments more affordable.

While there’s no guarantee your credit card company will help you, it doesn’t hurt to ask while you’re trying to figure out what to do next.

Consider the debt snowball or avalanche method

The debt snowball method is a popular approach to paying off multiple debt accounts. With this strategy, you’ll start by making the minimum monthly payment on all of your accounts, and if you have extra money you can spend on your debt, add it to the card with the lowest balance.

Once you’ve paid off that card, you’ll take the amount you paid into it and add it to the minimum payment of the card with the second-lowest balance. You will continue to do so, with monthly payments continuing to increase as you pay off each balance, until you have paid off all of your cards.

The debt avalanche method is a similar approach, but instead of focusing on the cards with the lowest balances, you’ll start with the cards that have the highest interest rates.

The snowball method is designed to give you gains early in the process as you pay off smaller balances. But over time, the avalanche method might save you more interest.

Add the Debt Snowflake Method

The snowflake method of debt can be used in conjunction with the snowball or avalanche method. With this approach, you will take all the extra money you receive throughout the month and apply it to your debt.

On a larger scale, this could include your tax refund or job performance bonus, but it could also be small things, such as rewards earned on a cash back website or savings you get by using coupons or discount subscriptions.

Consider another financial product

If your FICO® score is still in good shape, you may be able to qualify for a credit card balance transfer or one consolidation personal loan.

Balance transfer cards typically offer 0% APR introductory promotions, allowing you to transfer debt from the original card to a new one and pay it off interest-free for a period. Even if you can’t pay it off completely at the end of the promotion, you can still save hundreds of dollars in interest.

That said, balance transfer cards come with an upfront balance transfer fee, so you’ll want to do some math to make sure it’s still saving you money. Plus, if you’re not disciplined with your payments, you may still be in a lot of debt by the time the promotional period ends and the card’s regular APR kicks in.

With a personal loan, you won’t get a 0% APR, but with good credit, you might qualify for a single-digit interest rate. Plus, unlike credit cards, personal loans come with a structured repayment term, so there’s no danger in settling for a small minimum payment and remaining in debt. Just make sure you can afford the monthly payment and watch out for the upfront set-up fees.

Consult a credit counselor

With a free consultation, a reputable credit counseling agency can help you understand your situation and guide you through some of the options available to you. You can find non-profit organizations through the National Credit Counseling Foundation or the Financial Advisory Association of America.

If you’re really struggling and your FICO® score is too low for a low-interest personal loan or balance transfer credit card, the credit counselor may offer to help you with a debt management plan.

With a debt management plan, the agency can negotiate a lower interest rate and monthly payment with your credit card issuers. Then you will benefit from a payment plan that usually lasts between three and five years, by making a single payment to the agency, which will distribute the money to your creditors.

In exchange, you will have to close all of your credit card accounts. Plus, there’s a modest upfront fee, plus a small monthly fee. However, this option can help you avoid some of the damage to your FICO® score that debt settlement and bankruptcy would do.

Consider Debt Settlement or Bankruptcy

While these options aren’t ideal, they may be necessary if you’re already way behind on your payments.

With debt settlement, you agree to pay less than you owe in one payment. If you don’t have the money now, you may be able to work with a debt settlement company or a debt relief law firm to accumulate enough money over time. Be sure to thoroughly research any debt settlement institution you are considering and read all of the “fine print” of their application. Once settlement is complete, the card issuer will accept your payment and cancel the rest of the debt.

Bankruptcyon the other hand, could erase the debt entirely or at least help you get a reorganized payment plan that fits your budget.

Consider these options only as a last resort. While they may seem like a simpler solution, they can damage your FICO® scores, making it difficult to get credit when you need it. If you are considering settling debt or going bankrupt, speak to a reputable credit counselor first for expert advice.

The essential

Credit card debt can easily become a significant financial burden, so it’s always a good idea to try to pay off your balance in full each month. But if your debt has already started spiraling out of control, set a budget and think carefully about all your options.

There’s no better way to pay off credit card debt, so develop your strategy based on what works best for you.

About myFICO

myFICO makes it easy to understand your credit with FICO® Scores, credit reports and alerts from all 3 bureaus. myFICO is the consumer division of FICO – get your FICO scores from the people who do FICO scores. For more information, visit https://www.myfico.com/