In all the financial advice you see from experts, there’s a consistent message to avoid credit card debt. They remind us of the high-interest rates, the never-ending payments, and the impact on our credit scores.
And they are right. Credit card debt is not a good thing, and we truly should try not to accrue it. But for any of a variety of reasons, we nevertheless can find ourselves in a situation where we are carrying a balance, and how we handle that has a big impact on our financial future.
We can’t make the mistake of lumping ourselves in with the people who nonchalantly pile up debt just because we can’t lump ourselves with those who carry no debt. There are smart ways to manage credit card debt, and there are dumb ways.
The smart way involves three important steps: minimizing interest, maximizing payments, and avoiding new debt. Here’s how to go about those three steps.
When you start thinking of eliminating debt, you should begin by finding options for transferring credit card balances. Most cards have a high rate for purchases, so if you begin to carry a balance, you are paying a lot of money just for the privilege of not paying the debt right away.
The impact can be huge, and the larger your debt, the larger the impact. It is surprisingly easy to input the numbers into an online calculator and find out just how large that impact is. When you see your balance reduced by the full amount of your monthly payment, that’s when you know things are improving fast.
It’s important to note promotional interest rates here. You may have made a large purchase, such as an appliance or furniture, with a zero-interest promotional rate. Those are great options, but just make sure that you are paying enough each month that the balance is zero before the promotion expires. If you miss that date, you will be paying accrued interest in an amount that may shock you.
Now that you’re making the most of each payment, do what you can to make each payment larger. With a zero-interest card, it’s easy to see the impact of an additional dollar. Another $20 per month–the cost of a fast food meal for two–will peel $240 a year off your outstanding balance. Can you go without twelve burger-and-fry combos a year to see that impact? Probably so.
You want to pay as much as possible, but be smart. Budget your month correctly and make sure you don’t overpay. It doesn’t do you any good to pay more on a credit card only to find yourself broke before payday and possibly having to use credit to cover groceries and gas. Allow for things like a well-budgeted vacation, holidays, and emergency funds, and then hit your balances hard with a payment you know you can sustain.
Avoiding New Debt
That carries over to our last tip. It does you no good to pay more on one credit card if it forces you to charge more on another one, or if you simply choose to start running up a new balance! Lock up the cards. You will find that if you don’t carry them with you everywhere, you won’t use them. Preventing impulse purchases (and subsequent impulse debt) is vital to keeping your payoff plan on track.
Additionally, you may find yourself in need of a car, a major appliance, or significant home repair that you can’t avoid. So even if you’ve been comfortable with the pace of your payoff, you need that extra room in your checkbook in case something that exceeds your emergency fund comes along.
Having credit card debt is not ideal, but you can have a payoff plan that is. Eliminate your interest, pay aggressively, shut the door on new debt and you’ll soon have it all paid off.