Credit card debt in America almost seems like a way of life. With 6 out of 10 Americans in debt, the situation is nothing less than alarming. The average American household owes $16,748 and many Americans have continuously found themselves under a growing mountain of debt. While they are spending, most borrowers don’t realize that paying back the debt is costly and greatly affects your overall financial health.
Carrying a balance on your card each month means that you will pay a hefty amount of money in interest rates. If you’re among the several Americans with credit card debt, the good news is that it is possible to pay it off whether it’s $4000 or $40,000. With focus and discipline, there’s no doubt that you can attain ‘debt-free’ status in a short time with the following steps:
1. Know Your Exact Debt
Many people are not aware of exactly how much they owe. Some will say they owe $8000 and yet the correct figure is $10,000 or $12,000. You can’t pay for what you don’t know for sure, so make it a point to record your debts. Don’t be afraid to look at your statement and face the truth.
List every credit card you have. Next to it, record the balance, interest rate and minimum payment. Place them in order from the card with the highest interest rate to the one with the lowest.
2. Consider Consolidation
Due to the massive interest rates that come with credit cards, a huge percentage of each payment goes to interest. You can avoid paying thousands of dollars in interest by consolidation.
You can do this in several ways, for example using a personal loan. The great benefit of debt consolidation is low-interest rates and longer payment periods. Also, it’s easier because you only make one single payment instead of several different ones.
Different Ways to Consolidate Your Credit Card Debt
Personal loans from realistic loans lending institutions like banks and online lenders come with minimal interest rates and give you a longer payment period. However, there are downsides to this option. First of all, if your credit score is low, you might not get a stamp of approval for the loan. Also, these institutions usually charge an origination fee which results in high costs especially if the debt is huge.
Use Money from Your 401(k) or IRA
You have the option of using your retirement account funds. The advantage is that nobody needs to check your credit for approval. On the other hand, your savings reduce. If you’re below 60, you will pay an early withdrawal penalty. This fee is waived only in a few instances.
You can only borrow half of your balance (not above $50,000). If you’re not using it to purchase your own home, you have to pay it all back within 5 years. Most financial advisors will tell you not to consolidate with retirement funds. You should only do this if it’s the last option you have.
Balance Transfer Credit Card
Isn’t it ironic that you would get rid of credit card debt by obtaining another card? There are cards that run a 0% introductory period. Some cards offer this for up to a year. You can then transfer your balances to this card during that time. Not only will you make only one payment per month, but you will also pay zero interest as well.
Note that the amount you transfer must be less than your credit limit. This might mean that some of your debts are not catered for. A few lenders might disapprove of transferring your balance from the same lending institution.
Use Your Car or Home as Collateral
Car and home loans have much lower interest rates than cards especially because of the security attached. Also, mortgage interest is tax-deductible up to a limited amount. This option is risky because you could possibly lose your home or car.
Turn to Friends and Family
Be careful with borrowing money from people close to you. Granted there are no credit checks and much lower interest rates than any lender out there. However, you risk losing something more important than physical assets – your relationships. If for whatever reason you can’t pay back your loved one, you will break their trust and their finances will also be affected. This will put a strain on your relationship.
3. Follow a Tried and Tested Debt Payment Strategy
Following a solid plan with tactics that have been used by others will help you become debt-free in a short time.
Make extra payments: Reduce your payment duration and interest by paying a higher amount than the originally agreed minimum. This minimum ensures that you pay in time without difficulty, but the truth is that interest is calculated each day. The longer you take, the more you pay.
Debt snowball method: This method works just like a rolling snowball that starts out small and eventually becomes big. You will pay the minimum on all your debts but focus on making extra payments to the smallest debt first. After listing your debts from smallest to biggest, you will pay them off in that order. As you pay off each debt, the sense of accomplishment motivates you to take on the next one.
Debt avalanche method: With this method, you make extra payments on your biggest loan with the highest interest while paying the minimum on the rest. Targeting high-interest debt first results in faster repayment with minimum interest.
Automation: When you automate your debt payments, it becomes easier to pay in time and avoid penalties. The snowball and avalanche methods however may require a more hands-on approach for it to be effective.
Making a budget beforehand will indicate where you have extra money that you can put towards paying off your debts.
4. Negotiate Payment Terms
Get in touch with your lenders to discuss more favorable payment terms. You can request them to reduce your minimum payment or lower the APR. If you’ve been a customer for several years and have a good payment history, use that to leverage better terms. Many institutions value dedicated customers and would be obliged to keep you happy. If you’re payment history is not that impressive, reach out anyway. The worst they can say is no.
5. Consider a Debt Management Plan
You might be in over your head and struggling to pay off your debt. This might require you to consider more serious solutions like a debt management plan. With this program, a debt management company will represent you and negotiate with your creditors for a reduced payment, interest rate and penalties. They agree on a favorable payment plan with a period of 3-5 years to settle your debts.
Benefits of a debt management plan
♦ Provides credit card consolidation without a loan
♦ You will be able to pay your bills in time which improves your credit score
♦ You will have a workable monthly budget
♦ Creditors stop calling you
We hope that with the pointers above, you will become one of the 4 in 10 Americans who are not struggling with credit card debt. When you’re debt-free, aim to keep it that way. First of all, making a monthly budget will help you to live within your means and avoid unnecessary spending. An emergency fund worth 6 months of living expenses is highly recommended.
You might also want to ask yourself questions like ‘how do I want to retire?’ Having the end in mind can put things in perspective and push you to achieve your financial goals. Several Americans having credit card debt doesn’t make it a good thing. Spending your hard-earned money on interest and charges is one of the worst things that could happen to you financially. Taking the steps above will help you leave credit card debt behind for good.
Shift Frequency © 2019 – Educational material