Credit cards can be a great tool for earning reward points, establishing credit or protecting large purchase. But they can also create a bad habit of spending beyond your means. You can also incur more debt when you carry debt on your credit card month over month as the interest charged builds up. Carrying high balance on your credit card will also negatively impact your credit score.
The average US household owes more than $8,000 on credit cards. So if you have credit card debt you are not alone. But don’t panic…there is a way out. Follow these 5 steps to put yourself on the road to debt freedom.
- Watch your spending. Keep track of where your money is going. Use an app like Mint.com or even a pen and paper to keep track. Every dollar you spend is money that you are not putting towards paying down your debt. Look for small items that you can cut back on and apply the money you are not spending towards paying down your debt. Setting a concrete goal like paying down an extra 100 per month will go a long way to helping you cut back each month.
- Create an emergency fund. Many times we end up in credit card debt because we have emergency expenses that come up. Having this savings means you won’t need your credit card to cover living expenses in the event of job loss, illness, or other financial emergency. Getting out of credit card debt takes a lot of work so make sure that you are setting yourself up for success by setting up this fund.
- Check your credit score. Credit can impact everything, from your ability to rent an apartment to the interest rate you’ll pay on an auto loan. (There are even some employers who check the credit of their candidates!) Credit card debt typically has a negative impact on your score, so it’s good to know where you stand.
- Get organized and choose a payoff strategy. If you have multiple credit cards or different types of debt, get organized by comparing the terms in one place. Using paper or a spreadsheet, write down each loan type, interest rate, minimum monthly payment, and remaining balance. Always pay the minimum payments. Then, if you have a little wiggle room in your monthly cash flow, decide which loan you’d like to tackle first with extra debt payments. There are two common approaches for determining where to start, called the “avalanche” and “snowball” methods. In the avalanche approach, you attack the debt with the highest interest rate first, resulting in less interest paid over the life of the loan. In the snowball method, you attack the debt with the lowest remaining balance (for example, the $300 balance on your Home Depot card). Doing this enables you to fully pay off one debt — which will feel good and hopefully create momentum to tackle the next when you can. Both methods are effective ways to decrease your overall debt.
- Do a balance transfer. Many cards will offer 0 percent interest on balance transfers for a set period of time (sometimes a year, sometimes 18 months—it depends on the promotion). If you review your budget and can make a plan to pay off your debt within this promotional window, a balance transfer might be a useful technique for avoiding interest charges and putting every dollar paid directly toward the outstanding balance. Watch out, though—after the 0 percent interest promotional period ends, the applied interest rate may actually be quite high, so be sure your plan gets everything paid off before the interest kicks in. Furthermore, be mindful that establishing a new line of credit has implications on your credit score—some negative, some positive.