How to Pay off Credit Card Debt?
The popularity of credit cards does not mean that users know how to use it and avoid debt that grows by leaps and bounds thanks to the Annual Percentage Rate (APR for its acronym in English). These interests that constantly add to the debt almost always lead to problems.
Whether you have credit card debt of $ 1,000 or $ 100,000, it is important to keep up, but to do so you must have a strategy that guides you on how to pay off credit cards. Any strategy must be aimed at paying off the debt at the end of each closing of the banking cycle.
Keeping Credit Card Debt Under Control
Having debts is not a negative thing, the problem is when they get out of control. Fortunately, we have ways of how to tell when we are about to lose control or how to write off debt. The debt-to-income ratio is a formula that measures our level of indebtedness. If your debt-to-income ratio is less than 30%, it can be said that you have our personal finances under control. Another sign that your credit card debt is under control is spending less than 10% of your monthly income to pay off your cards. If you use more than 10% of your income to pay off credit card debt, this is a red flag.
The ideal thing that you can do in this situation is to save with the goal of paying the total debt in the next closing of the banking cycle. This will take a worry out of your mind, keep your credit card debt from growing, and most attractively, it will free up cash that you can use for whatever you need, whether it's saving for family planning, investing it, or starting that fund. emergency savings you've always wanted.
What to do if your Credit Card Debt Has Gotten Out of Control
If the aforementioned calculations exceed the recommended limit, it is time to take immediate action to regain control of your personal finances and avoid the cycle of indebtedness. If you wait longer without doing anything, your situation may get worse.
If you cannot pay the full amount due at the end of the month and continue to use your credit cards, it will reach a point where you will reach your credit limit and the minimum payments will increase. Remember that banks charge you an interest rate that is calculated on the amount owed, and many times the minimum payment is not enough to cover the payment of principal plus interest. This means that if you continue to use your credit cards and keep them with balances, you will be constantly growing your debt and this will make it difficult for you to pay off your credit card debt.
Stopping using credit cards can be a difficult decision if you don't have enough money to pay all your bills, but it is the best solution, since otherwise your situation will get worse and you will be involved in the debt trap.
When you stop using the cards, you should sit down and analyze your finances. Create a budget using a spreadsheet or sheet of paper, put in all your income and all your regular expenses, find all your credit card statements, and put how much you pay on each one. Take the monthly amount of what you pay in debts and divide it by the total amount of your income, this will give you the debt to income ratio if this percentage gives a value greater than 30%, then you need professional help. Now, if when making your budget you realize that you are spending more than what you can afford, then start cutting expenses, start with those that are not necessary such as magazine subscriptions, satellite radio, etc.
Developing a budget will allow you to know how much money you have for each thing and if your credit cards monopolize more than 10% of your monthly income. When you know the amount of money you can have to pay your credit card debt, you can take the next step.
You can Try Other Options to Pay Off Credit Card Debt
This option is for those who are unable to pay their bills and full credit card debt at the end of the month. Perhaps the only help you need is a lower interest rate to start the process of paying off your debts. However, debt negotiation is highly dependent on your history and credit score as you must assure your creditors that you have a good payment record.
This involves transferring your credit card debt with the highest interest rate to one with a lower rate. This gives you the advantage of having to make only one monthly payment per month and your debt will stop growing rapidly. This financial option also depends on your credit, as your score will define how low your interest rate can be.
Debt Consolidation Loan
This process allows you to pay off existing balances on your high-interest credit cards and keep those with a lower rate. With a loan of this type, you may be able to obtain it with better interest rates, which makes this a good option for the relief of your debts.
Debt Management Program
If you do not have a good credit history, you will not qualify for any of the options mentioned above. However, a debt management program may be your best option, and at the end of the process, you will see an improvement in your credit score. Upon signing up, new terms will be proposed with your creditors and a payment plan will be created that fits your budget, with a lower APR and with a single monthly payment among all your debts entered into the program.
There are cases in which the debt is so large that neither the debt management program is sufficient to get out of the financial commitment, it is here that a standard debt settlement agreement or a formal proposal for creditors can be the most effective outputs. Both options allow you to pay off the debt for less than what you actually owe, meaning you pay an agreed amount or subscribe to a new, more flexible payment plan. In order for creditors to accept this option, you will need to show write off debt, show them that your debts are very large and that you have exhausted all other options to pay off your debt.