If you are like most American citizens, you probably have credit card debt that has piled up over time and represents a problem at the end of each month when your bills and monthly payment statements are due. Being in debt is never a good feeling – in fact, it is stressful, and takes a lot of time to get out of.
But there is something so attractive about credit cards that it makes people get in debt deeper with each and every month. Of course, not all people act this way, but the average American citizen has problems with overspending habits. Proof of this is that an average household owes around $15,000 in credit card debt alone.
With regular monthly payments and high-interest rates, they will have to repay almost double the amount – this means that for each thing they bought using a credit card, they pay double the price – and that is something that no one wants.
If you have a big credit card debt to your name, it can represent a barrier to getting a secured mortgage or auto loans. Credit card debt highly affects your credit score, and if you are having trouble paying it off, it can only lower your chances of getting a desired loan in the future.
But how you can fix this, and is there a way out? While being in credit card debt might seem like a dead-end street, you shouldn’t give up just yet. In fact, effectively repaying your credit card debt is possible with certain habit changes and careful budget planning.
Without further ado, let’s take a look at a few tips and strategies on how to approach and cope with your credit card debt problem.
The first step in solving your credit card problem is to accept it. While being in debt sucks, it is quite common, and you shouldn’t be embarrassed about it. Instead of thinking about the past, you should be in the present moment and move forward to a solution.
The What Lies In Your Debt program offers a number of strategies and financial tips on how to set realistic goals and cope with your growing debt. Once you have accepted the problem, it is time to sit down and write your expectations and financial goals down on a piece of paper. Without identifying the root of your problem, you will not be able to solve it.
Overspending lies behind most of credit card debts – while it is easy to use your credit cards as a paying instrument, repaying the debt will take time and effort. You should put an end to your bad spending habits and figure out an effective budget plan. Consulting with a financial adviser can come in handy, especially if you are not familiar with financial principles and tools.
Your budget plan should be split into a few different sections: essential life costs; monthly payments; wants; and savings. An effective budget plan would look something like this – 40% would go on your essential life needs, 20-25% on your monthly repayments, and the rest should be divided between the wants and the savings section.
While creating an effective budget plan doesn’t represent a problem (if you have a financial adviser by your side), sticking to it will be a challenge, taking in consideration your spending history and the fact that your credit card accounts are still open. Closing your credit card account is always an option and it should be your way to go if you can’t control your spending urges.
Your best bet is to put your credit cards away (for the time) and use them once a month (buying something as cheap as a snack) just to let the credit card company know that you don’t want them to close your account.
By putting your credit cards away you will have to pay by cash and that has two major benefits; first, you don’t always have cash on hand which means that you will stop buying unnecessary things out of impulse.
On the other hand, holding a certain amount of cash in your hand will make you more conscious about your spending habits (when you are paying with a credit card, you don’t realize the real value of the money you are spending).
If you still feel comfortable with using a credit card and think you can effectively manage your habits, we recommend that you completely pay off one card and turn it into your financial tool.
The reason? By using a credit card with no balance for regular purchases, you will not pay additional interest rates, and you save money which you can then use to make extra payments towards other credit card debts.
Unless you have to make mortgage or car loan payments, which should always be on top of your list due to the fact that they are backed with collateral and you might lose property or a valuable asset as a consequence, you should put credit card debts on top of your debt list.
What you can do is to call your credit card company and try to negotiate lower interest rates or get a waiver on late fees.
While you can hire an agency to do this for you, we always recommend a debtor to do it personally, and the What Lies In Your Debt program provides great strategies on how to approach negotiation process (as well as informs you on a number of relevant options and instruments).
The idea of making your credit card debts a priority is to start off by repaying the most expensive credit card, move to the second one and so forward.
This doesn’t mean that you shouldn’t pay other credit cards until you are rid of the highest interest one – but rather make minimum payments for all credit card debts, and then make extra payments from the money that you have left.
As we mentioned above, it is critical to correct your spending habits in order to effectively repay your debts and get back on your feet.
This includes cutting down on both your essential and wants/needs expenses, as well as coming up with an effective budgeting plan that you will strictly follow.
Instead of going for a morning coffee each day, wake up a bit earlier and prepare one yourself – chances are it will feel better and you will be saving around $100 a month by cutting just a single spending habit.
Along with that, you should quit gym and club memberships (especially if you are not often a visitor) and figure out a home workout program that will be cheaper and more effective.
Step out of your comfort zone, put in a bit more effort, and in a matter of a few weeks you will see great results and extra cash at the end of the month. That is a positive consequence of healthier spending habits.
Put your free time to use and earn some extra income by cashing in your skills. If you enjoy article or blog writing, or you are good at graphic designing, search for freelance options and contribute to your monthly income with only a few extra work hours a week.
Apart from earning extra money you are improving your skills as well, which can eventually turn into you quitting that 9-to-5 job and pursuing your dreams.
Earlier, we suggested that the best way of effectively repaying your credit card debt is through paying off expensive credit cards first. Still, this doesn’t always have to be the case. While such a scenario is a mathematically advantageous one, some people don’t get motivated by it and they feel like they are not making any progress (as more expensive credit cards take longer to pay off).
Alternatively, the snowball method might provide a powerful psychological effect and motivate you to keep up with conscious spending habits and clear your credit cards in a matter of a few months. But what is the snowball method all about?
The snowball method is the opposite of paying high-interest credit cards first. Instead, you should start by making extra monthly payments to the credit card with the smallest owing amount. Do this until you clear one credit card of your debt, and then move to the next one and repeat the process.
Each and every month you will get visible results of your financial progress and better motivation to continue with responsible behavior.
Along with that, by making payments two times a month instead of once, you will pay a lower interest rate due to the fact that credit card companies determine interest rates based on the daily balance.
Bearing this in mind, the most effective method would be to make one payment each week, but for most of the people that is not a realistic approach. However, if you can, this is the route you should take.
If you are like any average person, you probably make monthly contributions to your savings account. While it is always wise to keep funds in your savings account, putting it to good use and using funds from it to make extra payments towards your credit card debt will be an effective way to get back on your feet in a matter of just a few months.
Yes, irregular expenses can happen and that is why you shouldn’t clear your savings of all funds. Instead, make a conscious financial plan, and include 50% of your monthly saving contributions in extra payments.
While debt consolidation is always an option, for most people it doesn’t seem to work. Applying for debt consolidation loans is a long-term strategy, but it can’t be effective unless you are willing to cooperate and be honest about your spending habits.
First, certain debt consolidation loans have hidden fees or even higher interest rates than your credit card debt. What this means is that you might end up paying more than what you would if you just continued making regular monthly payments towards your credit card company. That is why you should carefully inspect and educate yourself on terms and conditions, as well as instruments that you can use in the program.
The same is true for transferring your debt to zero-interest credit cards. Still, both these options represent a risk for people who can’t control their spending urges. If they continue with their overspending habits once they manage to repay the debt through a balance transfer or debt consolidation program, it can only result in higher interest rates and more stress.
Lastly, you can always make that call to your credit card company. Before doing so, we recommend that you educate yourself and know all of the possible settlement options. Will it be a lump-sum payment or a debt management program? Are you asking for a short- or a long-term payment waiver?
Becoming a member of What Lies In Your Debt will allow you to get a lot of valuable knowledge and consult with experts on how to approach the negotiation process. Once you are ready and you have your proposal, debts, and customer service numbers written down, it is time to make your call. Don’t give up if they refuse you at the start.
Be persistent and insist on their understanding (while being polite and calm). If you manage to negotiate a deal, be sure that it is in written form so you have proof of your settlement in case any kind of dispute occurs.
Becoming a credit card debtor is easy – paying it off is not so easy. Still, you shouldn’t get demotivated because, with few habit changes, and by having a good plan, any debt problem is solvable.
Figure out a strict monthly budget, cut down on unnecessary expenses, and apply some of the above-mentioned strategies, including negotiating better interest rates, going for the snowball method, or applying for a debt consolidation loan.
Stay determined, and you will succeed.