A credit card is a payment card issued by users to allow the cardholder to pay a person for goods and services the user purchased on credit. A credit card will allow you to borrow money to buy things. There can be a cost to this borrowing, like the interest, and you may also receive benefits, like you may earn rewards and build your credit.
A credit card allows you to borrow money from the bank to make purchases. It may even be for a burger or a trip to London. As long as you pay the money you borrowed within 25-30 days, you would not have to pay extra. But if you do not pay back within the period, you would have to pay interest, a percentage of the money you owe the bank, and the money you borrowed. And that is where the problem lies. People do not pay that money in time, and that leads to debts. Debts may be easier to ignore at first, but your unmanaged credit card will haunt you at every step of your life. It may sound like an unsettling task, but you can pay off your debt with dignity. Here are some steps to pay your debt effectively.
Start by Developing a Budget for Yourself
It is not wise to throw a random payment at your credit cards every month. Develop a budget instead. Put it in writing and budget your other expenses around the credit card. Start saving your pocket money and use it only when you need it the most. Your savings may help you in the future. Check if you qualify for food assistance. It is not glamorous, but it is better than being short on money. Reduce your expenses by cutting costs in different areas of your life. Spend less on gas and make sure that your car is running efficiently.
Target One Debt at a Time
Target only one debt at a time and start by targeting the debt with the highest rate of interest first. For example, if one credit line is charging you with 13% annual percentage rate (APR) and the other is charging you with 10% APR. Focus on the debt with the 13% interest rate. Pay that debt first before even touching the other debt. The other one will accumulate interest in that period, but you are paying interest anyway, so might as well start with the lower percentage. If this process is too hard for you, try snowballing your debt. If all your interest rates are roughly the same or you are overwhelmed by the number of payments you have to make each month, make minimum payments on all. But start with the lowest balance so that you are done with that debt quickly. Once you are done with it, add all the payments you would have paid on the lowest debt to the minimum payment on your next lowest debt, till you are done with it. Repeat this until all your debts are cleared. You will feel satisfied by paying fewer payments each month, and it will help you achieve your goal.
Pay More than the Minimum
Credit card companies love it when you pay enough to get through every month. At that rate, you are paying the interest and not even touching your actual debt. Look at your recent credit card statements to get a ballpark figure on what your monthly interest is, then budget your payment as you can over that amount to see a difference in your statement. If you want to know how much more than the minimum you should pay, remember what your interest is. Interest is the price you pay for money, and creditors always want you to pay the interest before anything else. So the minimum payment is usually enough to keep your interest from compounding your debt to keep where it is. You may want to try to pay enough each month to get beyond the interest and the amount. While credit cards offer you the benefit of paying only the minimum amount, it is advisable to pay more than that. Paying the minimum amount would allow you a long tenure to pay off your credit card dues. Paying more than the minimum will let you pay off debts at lower interest rates.
Combine and Conquer
Merging your debt will let you combine several higher-interest balances into one with a lower rate so that you can pay your debt faster without increasing payment amounts. There are two ways to do it.
- Take advantage of a low balance transfer rate to move your debt off high-interest cards. Balance transfer fees are 3%-5%, but the savings from the lower interest rate may be higher than the transfer fee. Remember this when you are considering this option.
- If you have equity in your home, you can use it to pay down credit card debt. A home equity line of credit can offer a lower rate than what your cards charge. Be aware that the closing costs often apply, but the extra benefit is that home equity interest payments are often tax-deductible.
If you do merge, keep in mind that it is important to control your expenses to avoid a new debt on top of the debt you have just merged.
Reprioritize Your Budget
Start by categorizing your monthly spending like groceries, transportation, etc. Your credit card statements may be helpful too. Look for areas you can cut down your expenses. Then take the money you have freed up and use it to pay the debt.
Make sure you follow the above-mentioned tips. Do not stretch your debt and pay it on time.
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