Credit cards are a convenient way to pay for purchases. Roughly two thirds of purchases each year involve a credit card transaction. Part of what makes credit cards so appealing is the fact you do not have to pay off the entirety of your credit card. Many individuals fall into the trap of only making minimum payments while continuing to use their credit card. This quickly accrues credit card debt. The longer it takes to pay off your credit card, the more interest builds into your spiral into debt.
Credit debt is unfortunately common in the United States. Many adults are unable to pay off their debt, requiring them to take out additional credit cards to try and ease their expenses. This creates a vicious cycle, where you manage to get out of debt on one card at the cost of burying yourself in debt with another. While credit debt may seem intimidating, there are several methods you can use to reduce your credit debt. Listed below are common pitfalls to avoid as well as financial options to get out of debt.
Holding Multiple Credit Cards
There are several benefits to owning multiple credit cards. Many credit card companies encourage you to create a new account by offering generous rewards upon approval. For example, you may get a $50 gift card or receive a number of free reward points if you make enough qualifying purchases during the first month. Having multiple credit cards also allows you to balance your spending. Instead of putting all your debt onto a single credit card, you can spread it among multiple cards. This keeps you away from your maximum and gives you more freedom when paying off your cards.
However, it is easy for these benefits to turn into a problem. If you lose control of your spending, you risk falling heavily into debt with both your credit cards. Exceeding a certain limit on your card, typically around 30 to 40 percent has a negative impact on your credit score. The longer you remain in this area, the more your credit score suffers. It becomes even worse if there are fees associated with your card, such as yearly maintenance. If you are going to have multiple credit cards, consider getting an app to keep track of payments, so you know where you stand before you use each credit card. Also, prioritize cards without any additional fees. Even if the signup benefits seem worth it at first, you do not want to get stuck paying high fees at the end of the year.
Check your Credit Report
While the main purpose of your credit report is to check your credit score, it also includes a detailed breakdown of your spending. Your credit report also tells you what credit cards are currently active. In some cases, you may have shut down a credit card, but your credit report did not update to reflect the change. This has a negative impact on your credit score. While this may not seem important to your debt, several of the methods to clear or reduce your existing debt are based on your credit score.
It also provides updated information on which credit cards are hurting your credit score the most. Every year, you are able to request a free credit report from the major bureaus. These are Experian, Equifax and TransUnion.
Debt Consolidation
One of the best ways to get out of credit debt is consolidation. Debt consolidation lets you pay off all your existing credit debt by taking out a loan. Instead of having to owe multiple payments on all your credit cards, you can focus all your budgeting on paying off a single loan. During the consolidation process, you also get the opportunity to negotiate the terms of your loan. This allows you to set up a new payment plan and determine your minimum payments. Ideally, you can negotiate for lower minimum payments than you were previously making on your credit cards. You may also be able to get a small grace period where you do not have to make any payments for the first few months. There are a few different methods to achieve debt consolidation
Debt Management Plan
Debt management plans are available through credit counseling agencies. These groups operate as nonprofit agencies. Instead of charging you money for their services, they receive a percentage of your interest rate from your credit companies. Instead of paying off your credit cards each month, you make a single payment to the counseling agency. Your agency will negotiate with your creditors to come up with more favorable payment plans. Because companies feel more secure working with a counseling agency, you end up with more favorable rates on your repayment plan.
In order to get approval, you must go through an interview process with the counseling agency. The agency reviews your financial history, including your current debt, what you make each month, how much you can afford for minimum payments and your overall credit score. While a high credit score is not required, it may help with negotiations. Once your agency makes a plan, they present it to your creditors. Your creditors either accept the plan or renegotiate until a deal is reached.
Credit Card Balance Transfer
Another method of debt consolidation involves taking your existing credit debt and transferring it into a consolidation card. Unlike a traditional credit card, debt consolidation cards offer low interest rates, with many providing 0 percent interest for six months to a year. There may be an additional transfer fee to get all your debt moved from your existing credit cards onto the new consolidated card. Eligibility is determined by your credit score, with some companies requiring a minimum of 670 to apply. Typically, a balance transfer can only be performed once. Even with a high credit score, companies are likely to deny you if you try to apply for a second transfer.
Best Egg
Best Egg is a debt consolidation service specializing in personal loans to pay off your credit cards. They offer customizable plans and do not have as high of credit scores as other services. Unlike other lenders, they also allow you to pay off your debt early without any fee, allowing you to accrue less overall interest. They are also one of the quicker consolidation companies, providing loans within a day or two of approving a new applicant.
Payoff
Payoff is managed by Happy Money. While the company offers many financial services, Payoff is specifically for credit debt. The application and approval process can be performed entirely online. If you are approved, you are allowed to change your payment due date once every year. You also gain access to a free credit report each month. Payoff has stricter credit score requirements compared to other services, but you can still get approved with a score of around 640.