At some point in their lives, most people find themselves getting a little too much credit-card debt built up and are trying to find a way to get themselves out.
But most people are more used to comparing cards for rewards programs or considering drastic methods like debt consolidation, settlements, or even bankruptcy.
Here are seven things you should know when it’s time to get your debt under control.
Checking your credit score
We hear over and over that checking your credit score hurts your credit score. That’s only partially true. When you check your own, it doesn’t do that. It’s considered a “soft check” and leaves everything the same.
But when you’re applying for credit in any form, that does hit your score (about 5% but it varies each time). So when you’re considering transferring balances or getting a loan to help in the short-term, know that you are impacting your score. And be sure to take advantage of the free annual reports so you don’t work to get down your balance just to find a bad surprise on your report.
It’s not just your cards that affect your score and your finances. If you co-signed on a credit card, you will always be liable for that debt. Even if that was years ago, you have to keep those debts on your radar. If the person you co-signed for hits money troubles of their own, you can find yourself paying that debt, too. So it’s best to keep your own house in order enough just in case. And it’s important to only co-sign for someone you trust to be honest with you about their financial situation. It may put you in a tight place to help them out, but it’s better for both of you in the long run.
Pay it off as you go
This is old advice that we don’t seem to hear as often. Only use credit cards to pay for things you can pay off the minute the bill comes. You don’t want to retain a big balance. Using credit cards can help build your credit score and all the different rewards programs get you the most bang for your buck. But this is a dangerous game to play. It’s critical that you stick to the plan of paying it off each month or else you’ll see the debt and interest rack up quickly. If you aren’t sure you can stick to the plan, use your cards instead for bigger purchases that you can pay off over a couple months so you’re still building your credit but not charging so much that you find yourself drowning in debt.
Pay off the highest as you go
Maybe you’re debt has already piled up and you’re ready to kick it out completely. Great! Make an action plan so you know how much extra you put into your card payments each month. And pay off the highest interest rate card first to get the most out of it. Putting all your extra money into one card will get it paid off quickly and if you prioritize by interest rate you can save the most amount of money in the long run. It may be tempting to pay more on each card, but it’s not going to get you the same bang for your buck.
Ask to lower interest rates
If you’re in really dire straights, you can call your card companies to ask for a lower interest rate. When you call them, be completely honest about your situation. Most companies would rather work out a plan with you than lose their money because you can’t keep paying. If they aren’t willing to lower interest rates, they may be willing to work out a payment plan where you stop spending on the card and treat it as a loan you’re paying off. It may not be the most pleasant conversation to have, but it can get you a great benefit.
Be wary of choosing cards for gimmicks
Transferring balances can be a great way to start a payment plan. There are cards that offer no interest for a set amount of time, often a year. That gives you some breathing room. But before you apply for one of those cards, make sure you can actually transfer your balance. Not every card allows that. And when you do it, make sure you actually pay off the balance. Especially if the new card has a higher interest rate than the one you’re paying off. Otherwise you end up with even more debt than you started with.
Know the consequences of not paying
There may not be a debtor’s prison any longer. But there are still some steep consequences for not paying. Your credit score of course will take a big nose dive and getting things like a mortgage or a new car will be incredibly harder. You’ll be hounded by debt collectors which may or may not straddle the line of legality. And if your creditors take you to court, you can find yourself in court and having your wages garnished in order to pay off your debt. If you’re able to work out a payment plan, you can remain in control of your finances rather than having a court force a payment plan on you.
Credit cards can be helpful when it comes to growing your credit score and handling small emergencies. But they are full of mines that can destroy your finances if you’re not careful. Countless people hit these walls in their lives, some harder than others. It can be easy to be overwhelmed by it. Stay calm and write out an action plan. Go through your finances with a fine-toothed comb and know how much money you can truly save and put toward your bills each month. It’s a slow process but when you pay off your last card, the relief will be worth the work.