Category: Debt

Strategies To Get Rid Of Credit Card Debt

A man adding to his credit card debt.

The worse debt that you can carry is credit card debt. With rates as high as 29 percent, it can strangle your finances and keep you from ever getting ahead. If you are carrying more than $1000 in credit card debt, you should make it a priority to get that plastic paid off. Here are some ways to do just that.

Consolidation Loans

A consolidation loan can pay off all of your credit cards at once and roll them into one loan, hopefully with a much lower overall interest rate. You can then pay off your debt much faster because you will not be burning so much money on interest.

Another perk of consolidation is that it makes paying your bills easier. Instead of paying a half a dozen or more smaller payments, you can pay just one payment.

If you decide to go for consolidation and have good credit, you have a lot of options. Websites like Marcus by Goldman Sachs, for example can make you an offer online for anywhere from $3,500 to $40,000. If approved, you can get funds sent right to your bank account with a loan rate of as little as 6.99 percent.

A rate that low is likely about a third of what you are paying now and that means two thirds less entrance. That is money that you can turn around and use to further pay down that debt.

Want a consolidation loan but have less than perfect credit, you may still have options. Websites like Loan By Numbers can get you an offer online for loans up to $25,000. If approved, you can get funds sent directly to your bank, but the loan rate is likely to be much higher.

If you pursue a loan with poor credit, make sure that the interest rate you get is low enough to actually produce savings. Make sure you consider the added costs of fees as well.

Debt Reduction Methods

If a consolidation loan is not a possibility, you should look into a method for reducing your debt. Here are two popular methods that you can consider, the Debt Snowball Method & the Debt Avalanche Method

Debt Snowball

Motivation is the cheap benefit of this method. You basically motivate yourself by starting out with small goals and then working your way up to larger ones. Here is how it works.

Take all of those credit cards and organize them based on amount owed. Now, start paying the minimum on all cards except the ones with the lowest balance. On this card, pay as much as you possibly can. Since this card has a low balance, you will likely get it paid off super fast.

Having a credit card paid off is a great feeling. That great feeling will likely encourage you to keep going with your debt reduction.

After paying off your first card, keep going by moving on to the next lowest balance. Keep doing this until your debt is gone.

Debt Avalanche

Logic is the thing that makes this method work. If you want to make the most of your money, the Debt Avalanche method is for you. Here is how it works.

Again, take all of your credit cards and organize them, this time by interest rate. Pay the minimum on all of your cards except for the one with the highest interest rate. On this card, pay as much as you possibly can. Because it has the highest interest rate, you will be paying down the debt that is costing you the most.

Paying off highest interest first will maximize your dollar and allow you to overall, pay less interest. The highest interest card is likely not going to be the lowest balance card though. This means that, with this method, you might not get that rewarding “paid off card” feeling for some time.

Once you get that first card paid off, move on to the one with the next highest interest and repeat the process.

After The Debt Is Paid

Once that debt is paid off, put away the cards and keep it off. Start paying cash and if you can not afford something, simply do without it. Hopefully, the struggle of paying off that debt has taught you a valuable lesson and you will never make the same mistake again.

Also, after paying off your debt, you need to give though to your credit score. Reducing your debt will likely cause your credit score to shop u quite a bit, but be careful. The reason that your score increases is because your credit utilization decreases and your available credit shoots up. That is great, but it also means that you need to keep those credit cards.

If you go and cancel your cards, you will decrease available credit and likely decrease your credit age. That could drop your score, so, unless those cards have an annual fee, keep them open.

How To Stay Out Of Debt

Measuring debt

If you are one of the few people with little to no debt, count your blessings. Having no debt is not easy and what is even harder is staying out of debt. Take a look at a few ways that you can keep those finances in order and avoid getting behind.

Set A Budget

This is the best thing that you can do to stay out of debt. Write down an actual budget and stick to it. Far too many people just spend money as it comes in and never really know what they are wasting their cash on. You need to be able to account for every dollar.

As far as budgets go, you do not have to be that fancy. Just write out a list of everything that you spend money on. Include amounts for things like gas, entertainment and food as well. Use a basic spreadsheet program like most computers have or simply write it out an a scratch pad.

In addition to your normal expenses, you should also be allocating 10 percent of your take home pay to savings. If you can not do that, you need to cut some of your other expenses until you can . Without a proper amount of savings written into your budget, you will not stay out of debt for long.

Save For Emergencies

Now that you have that budget written out with room in it for savings, you need to start diverting money into an emergency savings account.

One way that people get themselves into financial trouble, is not being able to handle emergencies when they occur. One thing that most emergencies have in common is that they can be helped or completely handled with money. Open an emergency savings so that you can have the money when you need it.

When you open an account, choose an account at a bank other than your main bank. Preferably at an online bank. This will prevent you from being able to instantly transfer money to your account on a whim. Online accounts generally earn more interest as well.

Keep depositing into this account until you have at least 6 months, but preferably 9 months worth of expenses saved up. Once you are done, start pushing that savings money into a long term savings or an investment account.

Have Revolving Credit But Don’t Use It

Credit cards are a necessity for building a high credit rating. Without a few credit cards, your credit profile will lack diversity and your score will suffer. Unfortunately, those credit cards can be both a blessing and a curse.

It is all too easy to put something on plastic and let your expenses and credit card debt get away from you. It has been shown time and time again that people spend more money when they pay with plastic. Use your credit card as a tool to increase your scoreĀ  but do not become like the average American with nearly 10,000 dollars in debt.

Put your cards away and do not use them, even for emergencies, that is what your emergency savings is for. Only use your card once every 6 months just to keep the issuer from closing it. Then, pay it off immediately and put it away.

Add Extra Income Wherever You Can

Just because you are making enough money to live and even to save 10 percent does not mean that you should not be looking to add extra income. This is especially true if you are young without a family. We tend to get complacent and a bit lazy, especially in our youth when retirement seems so far away.

Money saved when you are young is far more valuable than money saved when you are older because of all the extra time it will have to accrue compound interest. So, make and save as much of it as you possibly can.

Simply picking up one retail shift a week can add over 5000 dollars a year to your income. Put that into an investment account with a modest rate of return and you could be staring at 75,000 dollars in 10 years time.

Don’t Try To Keep Up With Friends

Do your own thing financially. Trying to keep up with friends and co-workers, when it comes to spending, has led many people down the wrong path.

If you see your friends going out and buying new cars, clothes and all sorts of shiny things, do not try to compete. For all that you know, they might make considerably more money than you do. Even more likely though, they are swimming in a mountain of debt and will have to pay the piper some day.

Instead, live smartly based on your own finances. Treat yourself occasionally, but do so responsibly.