Expert Tips for Cutting Credit Card Debt

Cutting debt will not only save money; it could up your credit score

Reviewed by Thomas J. CatalanoFact checked by Marcus ReevesReviewed by Thomas J. CatalanoFact checked by Marcus Reeves

Credit cards can be a huge convenience. But if you aren’t careful, they are also an easy way to get into serious financial trouble and end up with high debts and bad credit.

The best way to handle credit cards is to spend frugally and pay promptly. However, for those people who are already struggling, here are some simple steps for reducing credit card debt.

Key Takeaways

• Credit card debt is expensive, and having too much of it can hurt your credit score.
• Credit cards have high interest rates, meaning any leftover balance at the end of the month can grow quickly.
• To reduce your credit card debt, try to pay as much of your balance as you can each month.
• If you have several credit cards, try to pay off the one with the highest interest rate first.
• Make sure you at least meet the minimum payments each month. One missed payment can seriously damage your credit rating.

How to Attack Credit Card Debt

You know your credit card debt is too high, but there are things you can do to pay down the balance.

Stop Charging to Your Card

Put your cards away for a while and try to make your daily purchases in cash. This could also be an opportunity to do a cash-flow analysis to figure out where your money has been going, says Charles Hughes, a certified financial planner in Bayshore, N.Y. You will probably spot unnecessary spending you can cut back on and save all the more.

While this action sounds simple, it can be challenging if you don’t do a little prep work. To pay for things in cash, come up with a cash budget for the week. Some people succeed with the envelope method, putting cash into categorized envelopes. If you’re struggling to stop using your cards, you might even leave them at home so you’re not tempted to use them.

Advisor Insight

The average person shouldn’t pay more than 10% of their net take-home pay on credit cards or other consumer debt (not including mortgages), notes Howard S. Dvorkin, a certified public accountant and founder of Consolidated Credit Counseling Services.

Pay More than the Minimum

If you typically see the minimum payment due and just make that, your credit card debt will continue to grow. To pay down the debt, you’ve got to pay more than the minimum required.

Let’s say you owe $5,000 on a credit card and are paying 15% interest. Your credit card company might allow you to make a modest minimum payment, such as 2% of your balance or $100 a month. But just making that minimum payment will result in years of debt and hundreds of dollars in added interest.

Assuming you make no new purchases on the card and pay that $100 minimum each month, how long will it take to pay off the $5,000 debt? The answer is 79 months, or more than six and a half years. You will also end up paying close to $2,900 in interest. That’s a lot of money to pay to borrow $5,000.

Advisor Insight

Credit card debt often represents a risk. It can also be an early warning sign of trouble ahead. “Too frequently, [financial planners] see abusive use of credit leading to financial difficulties,” says Lewis J. Altfest, a certified financial planner in New York whose clients tend to be professionals with large incomes. “Sometimes people just get in too deep.”

Pay Off the Highest Interest Rate First

“Let’s say you have four credit card debts,” said Hughes. “Instead of making four equal payments on all of the cards, consider making the biggest payment on the card with the highest interest rate.” After you’ve paid that card off, move on to the one with the next highest rate.

This technique, called the debt avalanche, is the most financially efficient choice. It contrasts with the other payoff strategy, the debt snowball, in which you completely pay off the smallest debt first (paying just minimally on the others). With the debt snowball, you use your extra money to methodically pay off the rest of your debts from smallest to largest. This gives the psychological benefit of reducing the number of debts you owe through a series of smaller victories until the biggest one is the only one left.

Transfer Your Balances

You may be able to transfer your balances from high-interest cards to lower-interest ones. Such offers often come with a 0% introductory interest rate for six to 12 months. Enticing as that may sound, there are some caveats. Transfer offers tend to require an up-front fee of 3% to 5% of the amount you’re transferring or a flat balance transfer fee. Even so, it could be worth it, especially if you use one of the best balance transfer cards available.

Consolidate Your Credit Card Debt

You might also take out a personal loan or line of credit to consolidate your credit card balances (and other debts) at a lower interest rate. With such a strategy, you could conceivably convert card debt on which you’re paying 15% or more in interest to a loan with an annual percentage rate that is more in the range of 4% to 8%.

Just remember to bank what you save on interest rather than spending it to increase your debt, and be sure to compare different personal loans to find the best one for you. You may also want to work with a debt relief or settlement company to help you reduce the amount of outstanding debt.

Important

One factor credit that bureaus use in computing your credit score is called your credit utilization ratio. That’s how much money you currently owe as a percentage of all the credit you have available to you. High credit card spending can hurt your credit score–even if you use less than your credit limit.

Tips to Avoid Credit Card Debt

Whether you’ve finally paid off your credit card debt or you’re trying to save money and stay on top of your finances, here are some expert ways to stop credit card debt from piling up.

Automate Your Payments

If you find it difficult to pay your credit card on time every month, you’re probably getting hit with late fees. Save yourself the money and hassle by setting up automatic bill pay. You can specify the payment amount, choose the payment date, or automatically pay the credit card balance in full.

Review Your Statements and Credit Reports

Set aside time each month to check your credit card statements for any purchases you don’t recognize or didn’t authorize. Keep an eye out for double charges, too. While you’re scanning your statement, pay attention to subscriptions for services you might want to cancel. You might find you can easily save $20 just by canceling something you no longer need.

You should also make a point of requesting your free credit report—you’re entitled to an annual free credit report from each of the major credit bureaus (Experian, Equifax, and TransUnion). Look for errors on your report since they may be counting against you and dragging your credit score down. A low credit score can cost you since creditors will charge higher interest rates.

If you spot an error on your credit report, you can file a dispute with the credit reporting agency. They’re required to investigate the dispute and report the result within 30 days.

Create Financial Goals

According to a recent Bankrate study, 34% of American workers live paycheck to paycheck. When money is tight, it can be hard to make financial plans, but it’s not impossible. Take a close look at your finances and create a realistic budget. This can give you more control over your spending and prevent unnecessary or impulse purchases.

Once you’ve established a budget, set goals to work toward. You might challenge yourself to pay off your credit cards, stay debt free, or start contributing to an emergency savings account, for instance.

What Is the Best Way to Reduce Your Credit Card Debt?

The first step to reducing credit card debt is to identify and eliminate unnecessary expenses, such as entertainment or luxuries. After that, it is important to pay off as much of your debt as possible every month. The fastest way is to pay off the highest-interest debts first while paying the minimum on every other card. Larger debts can be consolidated or transferred to your lowest-interest card, but this may incur additional expenses.

Where Can I Find Expert Tips for Paying Off Credit Card Debt When You’re Poor?

Investopedia has several free articles with tips on financial literacy, digging your way out of deep debt, and reaching a debt settlement. For more serious cases, one can also consult a non-profit credit counselor to negotiate debt repayment strategies.

How Can I Reduce Credit Card Debt Fast?

For extreme cases of credit card debt, it may be possible to reduce debt with the help of a debt settlement firm. These companies will negotiate with credit card companies on your behalf, usually for an expensive fee. More serious cases of unmanageable debt can be discharged in bankruptcy.

How Should I Negotiate With Credit Card Companies to Reduce Debt?

The easiest way to negotiate with a credit card company is by calling their main phone number and asking for a debt settlement plan. Some credit card companies are willing to forgive a portion of your debt, provided that you agree to pay the remaining amount. This is likely to damage your credit rating, but if a borrower is in truly desperate straits, the credit card company may be better off getting some of the amount due rather than chasing the borrower for the full amount.

The Bottom Line

Most consumers know it’s easy to keep a credit card balance, especially with high interest rates that add to the monthly balance. Fortunately, there are lots of actionable steps you can take to make a meaningful dent in your credit card bill. If you feel overwhelmed by where to start, pick a few actions and focus on them first. Check on your finances regularly and challenge yourself to try more debt reduction strategies.

Read the original article on Investopedia.