19 Nov

17 Commonsense Tips for Mastering Your Credit Card Debt

Flickr credit: danesparza.

Credit card debt is a growing problem for many people, and sometimes it feels like things are getting out of control, thanks to the high interest rates that card issuers often charge. However, it is possible to take control of your debt situation and pay it down.

Current Situation: No Debt or Minimal Current Credit Card Debt

Here are some tips for those of you just getting a credit card for the first time.

1. Use credit cards only for emergencies. Well, that’s great advice but doesn’t always happen in practice, especially if you don’t have an emergency fund. What’s more practical is to get a rewards (or cash-back) credit card with a reasonable interest rate and use it to pay for reoccuring expenses (gasoline, groceries, some bills), and which you usually pay off with cash on hand each month. It’s like being rewarded for what you’re already doing.
2. Pay off your balance in full each month. Again, easy to say, and you might start off with good intentions, though many new credit card owners stray. Make the effort anyway, and if you slip, do your best to pay off as much as you can of the balance each month.
3. Create an emergency fund. This will hopefully take care of some or all of any emergency costs, which reduces how much you need to cover on a credit card, thus saving you some interest. Some people set up their emergency fund to have enough to cover 3-6 months of regular monthly expenses. However, these funds can also be used towards vehicle breakdowns, surgeries, or whatever emergency presents itself.
4. Stay away from 0% cards. These are only for people who are extremely disciplined and preferably have a source of funds to pay their balances off in time. If you’re not disciplined, you might seriously regret accepting such cards.
5. Stay away from fee-laden cards. You know the ones? They’ve not only got a high interest rate, they have one or more of a large yearly “membership” fee, a monthly maintenance fee. They also have a tiny credit limit and usually want their fees upfront. (The U.S. is working on a credit cardholders’ Bill of Rights to reduce the negative effects of such cards and other practices by card issuers.)

Current Situation: Large Credit Card Debt

What if you already have a growing credit card debt?

1. Treat your debt as if it were a mortgage. That is, something you really want to pay down as fast as possible. (Credit card lending rates are typically higher than mortgages, too.) Just think of how much you’re saving in interest overall by paying your credit balances down as fast as possible.
2. Have a plan, set a goal. Ask yourself why you want to pay down your credit cards as soon as possible. Everyone has their own reasons, though “to save on having to pay ridiculous amounts of interest” should be a common one. Another should be to have a savings goal. Except that it’s far easier sometimes to just keep on paying the minimum amount, thinking that you can deal with it later. Give yourself a reason for paying your credit card debt asap. Decide to use the savings towards a goal that means something to you.
3. Pay as much as possible. It probably hurts to think you’re “spending” so much paying down your credit card debt. However, if you have a plan and a personal goal to motivate you, paying as much as possible each time towards your debt means getting closer to your goal sooner. Sacrifice now – i.e., living on less – means rewards later. That’s the way you must look at it.
4. Pay off the highest-rate cards first. Each time you pay your credit card debts, cover at least the minimum with your other cards and pay off as much as you can for the highest rate card. When that one is paid off, do the same for the next highest rate card. This is in fact the conventional wisdom, and it works for some people. If you can pull this off, you are decreasing your overall interest payments.
5. Try snowflaking instead. Unfortunately, for some people, the last tip is ineffective. Paying off small amounts towards monster balances does not feel like progress and can be disheartening and stressful. It might even cause you to slip back to just minimum payments. But remember your goal/ plan, to motivate you. Instead, pay off the smallest balance card first, then the next smallest balance card and so on. This is referred to by some people as snowflaking because the small gains add up and your cards get paid. You do pay more interest than the other way, but when each card is paid off, it’s a good feeling of relief that hopefully motivates you to continue. That’s far more important, that you stick to your plan and pay everything off.
6. Get a consolidation loan. If you’re struggling with payments, you might be able to a get loan consolidation agreement, which would effectively reduce your overall monthly debt payments for all loans and credit cards that you’ve arranged to have covered. The consolidator will negotiate lower rates and/or balances with your debtors. Before you agree to anything or give away your personal details, research the loan consolidator carefully, to avoid being scammed and suffering serious harm to your credit score.
7. Declare bankruptcy. Really, this should be an absolutely last resort, and even then you should think about three or four times before deciding. It’s short-term relief, but can cause many other headaches in your personal, financial and career life for several years to come.

General Financial Tips

Finally, here are some more general tips to consider.

1. Manage your finances. Treat your finances as if you were running a business. Keep track of every receipts, and keep a log of every expense and all earnings and windfalls. Review them regularly until it becomes habit for you. While reviewing, ask yourself if there is any area of expenses that you can cut back on? If so, there’s an extra source of funds for credit card payments.
2. Use automatic withdrawals. This makes it easier to stay in control, provided you do not have cash flow problems in your bank account. (If you get a loan consolidation, as mentioned above, you might already have to agree to automatic withdrawals from your bank acount.)
3. Manage safely. If you pay your bill online, use a secure Internet connection, not free WiFi – even if it’s a neighbor’s. This reduces the chances of someone capture your banking and credit card data.
4. Have multiple streams of income. What this means to you is up to you, but if you have a large amount of debt, find ways to earn extra income – preferably ways that keep paying after your initial effort, not just an extra part-time job. Earn more income beats having to resort to extreme ways to save money.
5. Keep a finance dashboard. Write down on a piece of paper (or type into a computer file that you happen to view every day) four totals: your debts, expenses, income and assets. (Choose whatever time period you want, maybe monthly.) Make sure you see these totals every day, and that you adjust them daily. The idea is to have them foremost in your mind so that you remember your goal. Seeing your debt total slowly decrease and your assets increase will motivate you to continue.

If you stay in control, take things one step at a time, then you can eventually get through your debts and master your credit cards.

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