Using a credit card can help you build a strong financial foundation. However, credit card debt can accumulate quickly. This is especially true in tough times. If you have credit card debt and want to pay it off, this article can help you.
Why is Paying Off Credit Card Debt Important?
The balance you carry from month to month can significantly impact your credit score. In fact, your credit utilization rate, which is the amount you currently owe compared to your total credit limits, accounts for about one-third of your credit score. Experts recommend that you generally try to keep your credit utilization ratio below 30%. This means that if your credit limit on your card is $5,000, you shouldn’t want to owe more than $1,500 at any given time.
A higher credit utilization rate will affect your credit score and make it difficult or even impossible to obtain loans or other credit, especially when coupled with an unstable payment history. A poor credit score can also mean higher insurance rates and even hinder your ability to rent an apartment or get a new job. For this reason, it’s important to pay your credit card bill on time and try to pay down any large balances as quickly as possible.
Of course, your credit score isn’t the only reason to keep a low balance on your credit card. The more debt you carry, the more interest you will also pay, and credit cards often carry some of the highest interest rates in the world, commonly exceeding 15%, and sometimes reaching over 20%. Carrying too much debt means paying a hefty price for that borrowed money. What’s more, credit card interest, unlike mortgage interest for instance, is not tax-deductible. So you will also lose out come tax time.
How Credit Card Interest Accumulates
When you get a new credit card, the issuing company, like a bank for example, will assign you a specific credit limit. The more you use your card throughout the month, the higher your balance will get and the less available amount you will have as part of your credit limits. At the end of the monthly billing cycle, you will be required to pay the minimum set by the card company, which is calculated as a percentage of your total balance.
Paying this minimum – and paying it on time – will keep you in good standing with the credit card company. However, it will also mean carrying over the remaining and unpaid balance on your card to the next billing cycle. At that time, interest and possibly other fees will be added to the amount due.
If you continue to carry over the balance from month to month, you will not only accumulate more interest on your debt, but you will also accumulate interest on the interest on your debt. In this way, your balance can start to grow at an accelerating rate.
Therefore, it’s always best to pay more than the minimum due each month and to work on reducing your balance as much as possible. If you are able, the ideal approach is to pay off your balance in full each month and not owe any interest at all.
If you’re having difficulty making payments, it’s best to reach out directly to your lender. And when all else fails, a reputable debt relief company can handle these negotiations on your behalf to make repayment more manageable. Investopedia recently published a list of the best debt relief companies for 2021.
To reduce
Your credit card debt and interest costs can lead you to consider using cash for purchases whenever possible.
3 Simple Ways to Manage Your Credit Card Debt
If you are struggling to manage your credit card debt, here are some things you can do to get back on track.
1. Pay off credit cards in order of interest rate: If you have a balance on more than one credit card, pay at least the minimum amount due on each and then put any extra money you can gather towards the card with the highest interest rate. Once that card is paid off, move to the next most expensive card, and so on.
2. Avoid new debt: While you work to pay off your credit card debt, it makes sense not to incur any new debt and to avoid falling into a deeper hole. Some bills may be unavoidable, but this would be a good time to postpone big purchases that you would typically pay for with a credit card.
3. Use cash: Studies show that consumers spend less money when using cash rather than credit cards. For example, a study from MIT found that students using credit cards to buy tickets for sporting events were prone to spend up to 64% more than if they used cash. So if you want to work on paying off your credit card balance, set aside your cards and use cash as much as possible. Paying with cash can also serve as a good reality check. While credit cards encourage you to buy now and worry later, when you spend all the cash in your wallet, it runs out.
Conclusion
It’s easy to fall into credit card debt, and hard to get back out. Plan to pay more than the minimum due each month on your card. You won’t be able to use another credit card to do that unless you do a balance transfer. If you carry a large balance, focus on paying it off as quickly as possible. The longer it takes to pay off the balance, the more it will cost you financially.
Article Sources: Investopedia authors are required to use primary sources to support their work. These include white papers, government data, original reports, and interviews with industry experts. We also cite original research from other reputable publishers when appropriate. You can learn more about the standards we follow in producing accurate and unbiased content in our editorial policy.
MIT. “Always Leave Home Without It.”
Source: https://www.investopedia.com/how-to-pay-off-credit-card-debt-5070047
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