Credit card debt is one of those things that easily gets out of hand. It starts out with charging a tank of gas and then a dinner out with friends and before you know it you have a card or cards that are charged up.
The catch is that you were probably only using those cards because you did not have enough money to cover your expenses. Now, you still do not have enough money but you also have a bunch of minimum credit card payments to pay every month. The easy solution, open another card. It is easy to become trapped in this cycle and allow your debt to skyrocket.
Are you sick of the debt cycle and wasting money on credit card interest? Tired of making minimum payments on cards and never seeing the balance drop? If the answer is yes, then it is time to make some changes and get a plan. Take a look at a few time tested strategies that can help you get rid of that debt forever and keep more of your money in your pocket.
1) Credit Card Balance Transfer
This is essentially refinancing your debt. You obtain a credit card with a lower interest rate or one with an introductory low rate offer and then transfer your balances over to the new card. You can then go about paying off your debt at a reduced rate of interest or even at no interest.
Looking For A Transfer Offer
If you are looking to go this route, and it is a smart one, choosing the “right” card to transfer your balance to is very important. Not all cards or balance offers are created equally.
The first thing that you want to look for is a good introductory offer. Ideally, you would get a 0 percent transfer offer for 12 to 18 months. Second best would be a very low rate for a long period. Be careful of the default interest rate of these cards and the term of the promo rate. The last thing that you would want would be an introductory rate that expires too soon and then defaults to a rate higher than what is on your other cards.
Next, look at any transfer fees that might be associated with the new card. Many card issuers will provide fee free transfers, but just as many will charge a set fee, or even worse, charge a percentage of the balance. That could very quickly negate a portion or even all of the savings of transferring these balances.
Finally, have a plan for dealing with the paid off cards. If the cards have an annual fee, it might be worth closing them to save the money. If they have no annual fee though, you should keep them open so as not to harm your credit score. Just cut up the physical card and keep the accounts open.
How Will This Affect Your Credit
Everyone’s credit is different but opening a balance transfer credit card will have minimal negative effects on your credit score and, more likely, will have a very positive effect.
Initially, you might see a drop of a few points due to the new account. In most cases, this will be very slight and is due to both the inquiry and the reduction in your average age of credit accounts.
The increase in credit available and the lowering of your credit utilization should have a positive effect within a few months. This is assuming that you do not make any new charges on or close any of your old paid off credit cards.
2) Debt Consolidation Loan
A debt consolidation loan is simply a large personal loan that you can use to pay off all of your credit cards at once. You are in essence combining all of your credit cards into one account. It is similar to transferring a balance to one single card but the account will not be a revolving credit account. Once you pay it off, it will be closed.
Consolidation Versus A Balance Transfer
Both a consolidation loan and a balance transfer accomplish simlar goals but there are some major differences.
When you transfer a balance to a credit card with a low APR or even no interest, you are opening another revolving credit account. It is just another credit card that can be charged up again if you like. You will typically receive a nice introductory interest rate but this rate will default to a much higher one once the trial period is over.
With a consolidation loan, you are opening an installment account. You can not chare it back up and once it is paid off, the account will be closed. The advantage to an installment loan over a balance transfer is that you will receive the lower APR over the entire course of the loan. Where a balance transfer might have a great rate for a year, an installment loan could have a low rate for 3 years or more.
If you have a lot of credit card debt and can not pay it off in a short amount of time, a personal or installment loan is often the better choice.
What Makes A Good Consolidation Loan?
Just lumping all of your credit cards together is not the main goal of a consolidation loan. Sure, it will make things easier to pay, but the goals should be to lower your monthly payments and to lower the total amount of interest that you will ultimately end up paying.
The first deciding factor in a loan should be the interest rate. Take your average credit card interest rate and compare it to what you are offered. If your interest rate is currently around 18 percent for all of your cards and you are offered a 16 percent interest loan, the savings will probably not make the loan worthwhile, especially if there are origination or other fees involved. Get an interest rate below 10 percent though and you are probably in business.
Next, take a look at the length of the loan and the resulting payment. You want to pay off your debt ASAP to avoid the most fees, but you also want a livable payment. No use making your life hell over the next 12 months when you could potentially stretch the terms out another year and live more comfortably.
How Will This Affect My Credit?
Everyone’s credit profile is different and result may vary but a good debt consolidation loan should have a generally positive effect on your credit score as long as you accumulate no more debt. This means pay the cards off and keep them paid off.
The new installment loan could actually improve your credit score by creating more credit diversity. Creditors like to see a good mix of different credit types.
In addition, because you are not taking on new debt, your total debt is not increased, it is just moved around. Of course, this could take several months for the credit bureaus to straighten themselves out so you could see a brief dip in your score, followed by a return to normal.
Finally, because you will be paying off your revolving credit, your credit utilization will drop drastically. If you are paying off all of your cards, it will drop below 10 percent, which should boost your score.
3) Paying Down Your Cards
If you have the credit to either qualify for a debt consolidation loan or a balance transfer with an introductory rate, you should choose one of those methods. The drastic cut in the interest rate would help you pay off your debt much faster.
Unfortunately, debt consolidation loans and those super low interest offers have one thing in common, you need to have a good credit score. The catch to that is that if your credit cards are charged up, you probably do not have a good enough score to qualify. What are you to do?
The only thing left to do is to roll up your sleeves and do things the old fashioned way. You are going to have to pay off your cards one by one. Here are two ways to go about it, choose the one that fits your personality best.
The Debt Snowball Method
By far the most popular method because it appeals to our impatience. You got into credit card debt because you could not wait to save and needed money right this second. Now, you will use the need for immediate gratification to get yourself out of debt.
With the Snowball Method, you will need to organize all of your cards and sort them by the amount owed.
Next, start paying the minimum on all of your cards except for the one with the smallest balance. On this card you will pay as much as you can. By paying as much as you can on the smallest balance card, you will get that card paid off very quickly.
Paying off this card fast is the reward. The satisfaction of earning this reward will then encourage you to continue. Once you have paid off the smallest card, repeat the process with the next smallest card. The process will continue or keep “snowballing” until all of your cards are paid off.
The Debt Snowball Method is a powerful method that you can use to pay off your debt quickly because it keeps you motivated. It is not necessarily the most efficient method however, because the lowest balance card is not always the one with the highest interest. Still, if you need the motivation, go this route.
The Debt Avalanche Method
This method is not as popular, but it will help you pay as little interest as possible and will ultimately allow you to pay your debt down faster if you are strict. If you are a logical person, this is the method for you.
With the Avalanche Method, you will take your credit cards and organize them by interest rate. Instead of paying the lowest balance card down first, you will pay as much as you can on the one with the highest interest. On the rest, you will pay the minimum. Once the highest interest card is paid off, you move on to the next highest.
The benefit to this method is that you are paying down the highest interest first. This will result in less wasted money and faster overall debt elimination. The only issue with this method is that it can be less motivating. The highest interest card could be one with a higher balance and it takes dedication to keep paying on a card month after month without seeing big results.