If you’re having trouble paying your credit card bill, you’re not alone. Credit card balances have increased (opens in a new tab) 13% over the past year, the fastest annual growth since 2002. And inflation coupled with higher interest rates can further complicate your efforts to avoid credit card debt.
After years of pandemic restrictions, it’s easy to understand the urge to spend more on experiences and make up for lost time. Some of us pay off our credit cards in full each month and never have a balance. However, this is not the case for everyone, especially millennials and older people. (opens in a new tab). If you have credit card debt (opens in a new tab)consider these strategies to eliminate or reduce what you owe, before it’s too late.
Know your credit score
To pay off credit card debt, you need to start with your credit score to assess your options. Checking your credit score (opens in a new tab), also called FICO, will not damage your credit. If lenders consider you a good credit risk, you will have more options than if you have bad credit. Lenders generally consider FICO scores below 580 as “bad” and below 670 as “fair”.
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Take stock of your debt
If you have balances on multiple credit cards, make a list showing how much you owe on each, its interest rate, and the minimum monthly payment for each. A spreadsheet offers a convenient way to update your progress, but pen and paper work just as well.
Balance transfer cards for good credit scores
If you have a good credit rating (opens in a new tab), a balance transfer could help you get out of debt. Many banks offer balance transfer cards (opens in a new tab) for new customers. These cards often come with a 0% introductory annual percentage rate (APR (opens in a new tab)) for a limited time, from 12 to 21 months, depending on the card.
There are three pitfalls to avoid when using balance transfer cards.
First, be sure to pay off the balance before the introductory rate expires to avoid going into debt again. And resist the temptation to use the balance transfer card to make new purchases, says Beverly Harzog, credit expert and author of Confessions of a credit addict. You want to use the card to get out of debt, not add more, she says.
Second, watch out for balance transfer fees, usually between 3% and 5%. If you transfer $10,000, you could pay up to $500 in fees.
Finally, if you cancel your old card and your new balance transfer card has a lower credit limit, it could affect your credit utilization rate. This ratio measures how much of your authorized credit you use on a given card. Accumulating too much credit over your credit limit could lower your credit score, says Gerri Detweiler, author of The Ultimate Credit Handbook.
Options for Bad or Bad Credit
If your credit score is not high enough to qualify for a 0% introductory rate on a balance transfer card, you may still qualify for a card with a lower introductory APR. of your current card, says Harzog. Another option is a debt consolidation loan from a bank or credit union with a lower rate than the rate you pay on your high-interest credit cards.
Strategies for Paying Off Credit Card Debt
When you have balances on multiple credit cards, there are three approaches you can take to tackle the debt. The first is the “avalanche” approach. Start with your cards that have the highest interest rates and highest balances. Make minimum payments on low-interest cards while devoting most of your available funds to paying off high-interest balances.
Although the avalanche approach makes the most mathematical sense, some people choose the “snowball” approach, paying off low-balance debt first. Paying off your low-balance cards can give you the motivation you need to pay off all your debt, even if it costs you more in interest.
Finally, there is the “blizzard” approach, in which you start with the snowball and move on to the avalanche. Start by paying for a low balance card so you have a hit under your belt, then move on to ones with higher rates.
Paying off your balances will make it difficult to save. But try to set aside enough money in an emergency fund to cover three months of expenses. When you have paid off your debts, you can increase your savings so that you are prepared for unexpected expenses, which will reduce the risk of falling back into debt.
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