Effectively managing credit card debt can be daunting. But with proper budgeting (including responsible spending), attention to due dates, having (and adhering to) a strategy, paying more than the minimum due, and maybe considering consolidation or discussions with a credit counselor, you can conquer credit card debt.
Know How Much You Owe
Make a list of your debts, including the creditor, total amount of the debt, monthly payment, interest rate, and due date. You can use your credit report to confirm the debts on your list. Having all the debts in front of you will allow you to see the bigger picture and stay aware of your complete debt picture. Debt reduction software can make this process easier. Once you have a handle on your debt and your income, you can calculate your Debt to Income ratio (DTI). This ratio tells you how much of your income is going toward debt payments. To find yours, divide your debt payments by your income, and multiply by 100. For example, $1,200 of monthly debt divided by $3,000 of monthly income is 0.4 x 100 = 40%. The lower this number is, the better, and tracking it can help you understand your finances more clearly. Don’t just create your list and forget about it. Refer to your debt list periodically, especially as you pay bills. Update your list every few months as the total amount of your debt changes.
Pay Your Bills on Time Each Month
Late payments make it harder to pay off your debt since you’ll have to pay a late fee for every payment you miss. If you miss two payments in a row, your interest rate and finance charges will increase. If you use a calendaring system on your computer or smartphone, enter your payments there and set an alert to remind you several days before your payment is due. If you miss a payment, don’t wait until the next due date to send your payment, by then it could be reported to a credit bureau. Instead, send your payment as soon as you remember that it was missed. A budget can help you stay out of debt, and it can help you climb out. It allows you to see how much money you earn and where that money is going. Create a bare-bones budget that allows you to pay for necessities like your rent or mortgage and utilities. Set aside everything else to pay off your debt as quickly as possible.
Create a Monthly Bill Payment Calendar
Use a bill payment calendar to help you figure out which bills to pay with which paycheck. On your calendar, write each bill’s payment amount next to the due date. Then, fill in the date of each paycheck. If you get paid on the same days every month the 1st and 15th you can use the same calendar from month to month. But, if your paychecks fall on different days of the month, you’ll need to create a calendar every month.
Make at Least the Minimum Payment
If you can’t afford to pay anything more, at least make the minimum payment. Of course, the minimum payment doesn’t help you make real progress in paying off your debt. But, it keeps your account in good standing, which avoids late fees. When you miss payments, it becomes harder to catch up and eventually your accounts could go into default. While you’re working on paying down debt, stop using credit cards. Start carrying cash instead. Stick to the budget you created and only buy what you can pay for with cash.
Decide Which Debts to Pay Off First
Paying off credit card debt first is often the best strategy because credit cards have higher interest rates than other debts.1 Of all your credit cards, the one with the highest interest rate usually gets priority on repayment because it’s costing the most money. Use your debt list to prioritize and rank your debts in the order you want to pay them off. You can also choose to pay off the debt with the lowest balance first. This might cost a little more in the long run, but knocking off small debts first can build confidence.
Pay Off Collections and Charge-Offs
You can only pay as much on your debt as you can afford. When you have limited funds for repaying debt, focus on keeping your other accounts in good standing. Don’t sacrifice your positive accounts for those that have already affected your credit. Instead, pay those past due accounts when you can afford to do it.
Build an Emergency Fund to Fall Back On
Without access to savings, you’d have to go into debt to cover an emergency expense. Even a small emergency fund will cover little expenses that come up every once in a while. First, work toward creating a small emergency fund—$1,000 is a good place to start. Once you have that, make it your goal to create a bigger fund, like $2,000. Eventually, you want to build up a reserve of three- to six-months of living expenses.
Learn how to use credit cards responsibly
When trying to get out of credit card debt, the first thing you want to do is understand proper credit card use. Credit cards are good to use for things like building your credit history, earning reward points, and as a more secure form of payment than cash. Using a credit card responsibly also means paying your bills on time and for the amount due. Not paying your bill on time will harm your credit, since payment history is the biggest factor considered when calculating your credit score. Large amounts of debt will also reflect poorly on your credit score. Don’t use a credit card to live outside your means. Instead, use credit cards to buy what you need that’s within your budget and ability to pay back.
Know your budget
A budget is a plan for how you’ll manage your money by tracking the dollars you earn and spend. A budget gives you a clear picture of your financial life. It makes you aware of the extra money you have to spend or the lack of money you have to spend. Knowing your budget is an essential part of your debt management because it shows you how much money you have to pay bills on time and pay down debt. Especially when it comes to paying off debt, you’ll need to know how much free cash flow you have to put additional funds towards debt payments.
Pay more than the minimum payment
Over time, paying only the minimum amount will cost you more money. Why? Because as you carry a balance on that credit card, that balance accrues interest daily. If you pay the full balance off by the due date, however, you don’t get charged any interest.
For example, if you have just over $6,000 in credit card debt with an interest rate of 14.99% and a minimum payment of about $20, you could end up paying about $4,000 in interest before you pay off that initial balance, as the chart below shows. You’re probably wondering what credit utilization is. A credit utilization rate is a ratio between how much revolving credit you have compared to how much you have available. If you have $6,000 in credit card debt and $20,000 available to use, your utilization rate is 30%. Your credit utilization rate is a big part of what is used to determine your credit score. A lower credit utilization rate means your credit cards aren’t maxed out and that you’re managing your credit well. A higher credit utilization ratio can indicate you aren’t spending your money wisely and have higher amounts of credit card debt. Ideal credit utilization is somewhere below 30%. If it’s above 30%, make lowering your credit utilization ratio a priority in your credit card debt management plan. Lowering it will decrease your debt and could increase your credit score!
Improve your spending habits
If it’s broken, you need to fix it. Poor habits like spending more than you earn aren’t right. Change your spending behavior to be more in line with your budget. Implementing money-saving techniques like using coupons, buying on sale, and general frugal living can help improve your spending and save more money to put towards paying off debt. Taking the time to develop good spending habits is also part of a long term strategy to manage your debt and finances. You don’t want healthy spending to be a temporary solution. Instead, make it a long-term lifestyle change to help you reach your financial goals.
Review your credit report
Your credit report is a review of all your past and present credit activity. It lets you know every creditor you owe money to. But more importantly, it lets lenders know the history of your debt payments to determine if they want to loan you money and at what interest rate. Your credit report impacts your ability to borrow money, so you want to make sure what it contains is accurate and positive. Mistakes on credit reports are fairly common. Review your report to make sure your personal information is correct and that there are no debts listed that were not taken out by you. Also, review your report to ensure you know all the money you owe. It could be that you moved and owed money to a service provider that you weren’t aware of. It’s worth taking the time to review your credit report. It could save you money now and heartache later by catching problems early.
Negotiate Terms with Your Credit Card Company
It’s often possible to negotiate terms, interest rates, and payments on credit card debt. You can also try to negotiate a settlement of the amount you owe. The steps you take and the options available will depend on your situation and the credit card company you’re dealing with.
Your options might include:
• moving a payment date
• reducing the interest rate
• asking for a temporary payment reduction.
• entering into a forbearance agreement, which requires no payments, for a specified amount of time
• working out a long-term repayment plan with reduced or no interest, or
• paying a lump-sum to settle the debt.
Your negotiating strategy will primarily depend on timing. If you’re not struggling with your payments, you might be able to get a better interest rate. If, however, you’re in financial hot water, you might be able to get better payment terms or dates, perhaps a reprieve from payments, or settle the debt for less than you owe.
How to Negotiate When Times Are Good
If you’re not having trouble paying your debts and you have a good credit history, you might want to contact your credit card companies to ask for a lower interest rate. While the answer could initially be no, if you tell them that you’re considering switching to a card with a lower rate, they might be willing to work with you.
How to Negotiate When You’re Having Financial Problems
While credit card companies encourage you to call them if you anticipate having problems repaying your debt, some are more amenable to working with you than others, and it’s almost impossible to guess how they will react until after you call. With most companies, you should call if you know your payment will be late by a few days, or if you think a change in the regular payment date such as moving it from the first of the month to the middle of the month will make it easier for you to pay on time. Many companies may also provide you with relief if you are temporarily out of work or if a sudden illness or family emergency arises that you need to tend to.
Credit Card Settlement Options
A few of the many options to explore when you’re seeking assistance with credit card payments include:
• moving a payment date
• reducing the interest rate, or
• asking for a temporary payment reduction.
If you need more significant concessions from the credit card company, the company will likely cut off your credit, at least until you’re paid up, but often longer. If you’re having severe financial problems that aren’t likely to be resolved in a few months, you can explore these possibilities with the credit card issuer:
• entering into a forbearance agreement, which requires no payments, for a specified amount of time
• working out a long-term repayment plan with reduced or no interest, or
• paying a lump-sum settlement.
Who Should I Talk to at the Credit Card Company?
Who you talk to depends on what you want to negotiate.
• Change payment date. If you just need a change in the regular payment date (to coincide with your pay day, etc.), you can probably talk to anyone in customer service.
• Interest rate reduction. Asking for an interest rate reduction might require a manager to get involved.
• Your payment will be late. Many companies have a specific department that you’ll be transferred to if you’re calling because you anticipate that a particular payment will be a few days late. You might even be able to have the late fee waived if you call in advance on this.
• Negotiating settlements or long-term payment plans. If you’re calling for a more serious problem, the customer service department probably won’t be able to help you, even if it says it can. Be polite and talk with the representative, but if, in the end, the representative says no to your request, ask if you can speak to another department, or ask for a supervisor. You might need to go through more than one level before you reach someone with authority to negotiate.
If your credit card company won’t work with you, consider getting help from outside sources. These include:
• Credit counselors. Stick with nonprofit agencies that provide free or very low-cost service, like those affiliated with the National Foundation for Credit Counseling (NFCC). Scams abound, so learn which companies to use and which ones to avoid, like debt settlement companies, and take the time to learn about the options you should generally steer clear of, like many debt management plans. If you need help negotiating with creditors, in the vast majority of cases, you’re better off hiring an attorney rather than a debt settlement company.
• Bankruptcy attorneys. A Chapter 13 bankruptcy can allow you to keep your property while paying all or part of your debt over three to five years, often even if a creditor doesn’t agree. Many debtors can file for Chapter 7 bankruptcy and lose little or no property, and discharge their credit card debt.
Finally, call us if you need to file for bankruptcy. We are here to help you.
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West Jordan, Utah
84088 United States
Telephone: (801) 676-5506
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