Managing Credit Card Bills So It’s Easier to Stay Afloat

Don’t let credit card debt drag you down.

Even if you have a budget in place and you’ve balanced your expenses against your income, credit card bills have a way of piling on to weigh you down. When this happens, traditional monthly payments usually do little to pay down your balances. You may need a specialized strategy to reduce your debt, so the bills become more manageable.

Why are credit card bills so problematic?

When it comes to revolving credit, minimum payment requirements are not designed to pay off balances efficiently. In fact, they’re really designed to keep you in debt, since this maximizes the credit card company’s profits. They have as many months as possible to apply interest charges, which is how these companies make money.

Credit cards also come with the added issue of high interest rates. Depending on your credit score and the type of cards you use, you may have interest rates that are 20% or above. With rates that high, roughly two-thirds of every minimum payment you make goes to cover accrued monthly interest charges.

For example, let’s say you have a balance of $5,000 on a credit card with 20% APR. If your minimum payment requirement is 2.5% of your balance, your minimum payments would be $125.

It might seem like you can knock the debt out in a fairly reasonable amount of time. But in reality, it would take over 21 years to pay off the balance in full.

That’s because out of your $125 minimum payment, over $83 would go to cover accrued monthly interest charges. You pay off less than $42 of the actual debt you owe, known as the principal. You’d pay over $8,600 in interest charges to pay off $5,000 in debt. In other words, you pay more to cover interest charges than what you originally charged.

This means that if you want to pay off credit card balances efficiently, you can’t rely on minimum payments. You need a better strategy.

Reducing debt within your budget

In some cases, you may be able to use your budget to develop a strategy that reduces your balances efficiently. This involves cutting expenses to free up as much free cash flow as possible. Then you use that money to make larger payments on one debt at a time until you pay each one off. There are two basic strategies that you can use to do this.

Debt avalanche – start at the highest point, then come down quickly

The first method of reducing credit card debt is the most cost-effective. You prioritize your balances for repayment based on APR. You pay off the highest APR debt first, then the next highest and on down until you reach the bottom and become debt-free. This is known as the avalanche method of debt reduction.

Here’s how it works:

  1. Review your budget to temporarily cut or cut back as many expenses as possible.
  2. Check your credit card statements and write down the current balance and APR of each debt you owe.
  3. Prioritize the debts for repayment, ordering them from highest to lowest APR.
  4. Each month, you should make the minimum payment requirement on all of your credit card bills, except for the debt with the highest APR.
  5. For that debt, you make the largest payment possible, so you can pay off the balance as quickly as possible.
  6. Once you finish paying off that balance, it eliminates one bill you need to pay.
  7. Then you move onto the debt with the next highest APR and repeat the steps.
  8. Continue this process until all of your balances are paid off.

Debt snowball – start small, then roll up to gain momentum

If you see that your highest APR debts also happen to be your biggest balances, the avalanche method may not work efficiently. It may take too long to eliminate the first balance, which can be extremely demotivating.

In this case, you may be better off using the snowball method of debt reduction. In this strategy, you follow the same steps listed above. However, at step 3, you prioritize the debts from lowest to highest balance. So, you pay off the lowest balance first.

This method helps you gain momentum and motivation to knock down your largest balances. You get a few quick wins by paying off your lowest balances. That eliminates a few small bills, so you can focus on the biggest balances with a little more financial power.

Solutions for paying off credit card balances faster

If you only owe a few thousand dollars between a few credit cards, then the above methods may work effectively to help you become debt-free. However, if you owe more than $2,000-$3,000, then debt reduction tactics may not be effective. In this case, you may need a solution that will make it faster and easier to pay off your debt.

This usually involves finding a way to reduce or eliminate the interest charges applied to your balance every month. This will allow you to focus your monthly payments on paying off the principal (the actual debt you owe).

Several solutions can do this. Two of them you can use on your own, as long as you have a good credit score and the right amount of debt. The last solution requires professional help. The good news is that none of these solutions will damage your credit score when done correctly

Option 1: Transferring your credit card balances

The first option you can use to minimize interest charges is to open a balance transfer credit card. This is a special type of credit card that’s specifically designed to pay off existing debt.

Balance transfers offer low APR on debt that you transfer from other accounts. If you have a good or excellent credit score, you can even qualify for a 0% APR period when you first open the account. This allows you to pay off your debt interest-free for up to 6-18 months, depending on your score and the card.

The 0% APR period is what makes these cards so beneficial. The goal should be to pay off the transferred balances in full before the 0% APR period ends.

This means that you should total up your existing balances and then see how big your payments would need to be to pay off the balance in 6, 12 or 18 months. See if you have the money available in your budget to make payments in that amount. If so, then this could be the solution you need.

Make sure to shop around for a balance transfer card that offers the 0% APR period you would need. You should also look for a card that offers a low balance transfer fee. This is the fee that will apply to each balance transferred. Fees generally range from 3-5% of the balance transferred.

Additionally, once you transfer your existing balances, make sure not to make any new charges on your existing cards. Otherwise, you can end up with more debt instead of less!

Option 2: Using a debt consolidation loan

Another option is to use a debt consolidation loan to pay off your credit card balances. Loans offer two big advantages over credit cards:

  1. They tend to have lower interest rates.
  2. The monthly payments are installments, so you know exactly how much you need to pay each month.

A debt consolidation loan is an unsecured personal loan. You use the money from the loan to pay off your credit cards and other existing debts. This leaves only the consolidation loan to repay.

This option also requires you to have a good or excellent credit score, so you can qualify for the lowest interest rate possible. You need an interest rate that’s significantly less than the APR on your credit cards. Otherwise, you won’t get the benefit of consolidating. In most cases, you want to aim for APR of 10% or less.

Most personal loans have a term of 12 to 48 months. The term you choose will also determine your monthly payment.

  • A shorter-term will allow you to save money overall because there will be fewer months to apply interest charges. However, this will mean higher monthly payments.
  • A longer-term will lower the monthly payments but will increase the total cost of getting out of debt.

You want to choose a term that allows you to get out of debt as quickly as possible, with payments that won’t put undue stress on your budget. In other words, you want to make sure you can afford the loan, so you won’t be at risk of missing loan payments and damaging your credit score.

Depending on your budget and how much money you have available to cover the loan payments, this solution typically works best if you owe less than $35,000.

Option 3: Enrolling in a debt management plan

If you don’t have good credit or you owe more than you can afford to pay off with a do-it-yourself solution, you may need professional help. In this case, your best option may be to enroll in a debt management plan through a credit counseling agency.

Nonprofit consumer credit counseling services exist to help consumers who are overextended with credit card debt. The service starts with a free debt, budget, and credit evaluation. The goal is to see where you stand and make sure a debt management program would be your best option to get out of debt.

Since these services are nonprofit, by law they are required to tell you if there’s a better solution for your unique financial situation. This can help you confirm that you need professional help to get out of debt.

A debt management plan is usually the best option if you have the means to make monthly payments to pay back everything you owe, but you can’t qualify for low interest rates on your own.

If the plan is your best option, the credit counseling team contacts your creditors and works with them to eliminate or reduce the APR applied to your balances. Once all your creditors agree to accept payments through the program, your plan will start. You make one payment to the credit counseling agency, then they distribute the payment to your creditors on your behalf.

Debt management programs pay off your debt in 36-60 payments, on average, and reduces your total credit card payments by up to 30 to 50%. Even better, as long as the program is set up correctly and you make all the payments on time, it won’t damage your credit. In fact, many consumers see their scores improve by successfully completing this program.

What to do if you can’t pay everything you owe

In some cases, you may get so overextended with credit card debt that you can’t reasonably expect to repay your debts in full. When this happens, it means that you may need to explore options that would allow you to get out of debt for less than you owe.

To do this, you can enroll in a debt settlement program or decide to declare bankruptcy.

What is a debt settlement program?

Unlike a debt management program, a settlement program only pays back a portion of what you owe. A debt settlement company sets up an escrow account and helps you set a budget to set aside as much money as you can afford each month.

This generates the funds that the company needs to make settlement offers to your creditors on your behalf. So, even with this solution, you still need to make monthly payments. Once you have enough funds in the account, the company starts to contact each of your creditors to make settlement offers.

They offer the company a certain percentage of what you owe. Once they reach an agreement, they pay the creditor or collector using the funds in the escrow account. They also take out their fees, which are generally a percentage of the original balance.

Since debt settlement damages your credit, this solution works best if you aren’t concerned about damaging your score. Each debt settled will generate a negative notation in your credit report that sticks around for seven years.

However, if you already have bad credit and simply want a clean break from debt, this can be a good option. Settlement can also work for more than just credit card debt. You can settle medical bills, collections, and even some private student loans.

Filing bankruptcy

If you simply want a clean break from your debt or creditors are unwilling to negotiate settlements, then it may be time to declare bankruptcy. There are two types of personal bankruptcy filings that you can use:

  • Chapter 7 bankruptcy is also referred to as “liquidation” bankruptcy because it liquidates any assets that don’t qualify for exemption. The funds from the sale of these assets are used to pay off your creditors, then your remaining balances are discharged.
  • Chapter 13 bankruptcy is also known as “wage-earners” bankruptcy because the court arranges a repayment plan that lasts 3-5 years. The bankruptcy trustee determines what you can afford to pay each month, then you are expected to make those payments each month. Once you complete the payments, the remaining balances are discharged.  

When you file for bankruptcy, you will go through a means test, which compares your income to the federal poverty line in your state. This will determine whether you can file for Chapter 7 bankruptcy or Chapter 13.

Chapter 7 bankruptcy is typically preferable unless you have assets that you need to protect from liquidation. Chapter 7 can be completed in as few as 90 days, although it can take up to a few months. However, this is often preferable spending 3-5 years in a court-ordered repayment plan.

The bottom line…

Credit card balances are best controlled by paying them off in full every month. If you start and end every billing cycle with a zero balance, interest charges will never apply. You can enjoy all the benefits of using credit cards without the added costs of interest charges.

If you start to carry balances, take every measure you can to keep them under control. Your minimum payment requirements should never exceed 10% of your take-home income. If they do, you need to find a way to stop charging and focus on getting out of debt. Use the solutions above and try to avoid damaging your credit, if you can.

If you have to use a solution that hurts your credit score, the good news is that the damage won’t last forever. You can use our credit guide to recover as quickly as possible.

Achieve a high credit score that helps you stay afloat »

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