By Matthew Rodrigues
Credit Card Debt is a prevalent issue in the United States, with the average American household averaging $7000 in credit card debt. Credit card debt can accumulate quickly, leading to an outstanding balance. And no, not outstanding in a good way. Though, like payment plans, there is more than one way to pay back your debt.
You might not want to start completely paying off your credit card debts from the largest one. Instead, start at the smallest one. This way you can pay off the debts that are possible without them accumulating interest while giving yourself momentum to build confidence in paying back debt. Another advantage of paying off these debts early is that while you are working towards being debt free, you are also building back your credit score by paying off tinier debts bit by bit. Your social credit isn’t guaranteed an increase though. The only disadvantage of this method is that while you pay off your smaller credit card debts, the interest rate on your larger debts is increasing.
If you have the necessary capital to start paying off the biggest debts, this is a viable strategy as well. While the aforementioned strategy of paying off your smallest debts first has many benefits, there is a definite sense of security in being able to pay off your largest debts, such as student loans. This will relieve a decent amount of stress as well, as you will be able to see the possibility of being debt free far easier than if you were to start with the smallest debts. For graduates just entering the workforce, this is likely not a possibility, but for the people who may have saved enough money to pay off all their major debts at once or the people who don’t have very large debts relative to the amount of money they can make, this is a possible scenario. This method can be extremely cost-effective in the long run as well, as the only interest that is accumulating is the interest on your smaller debts, which will cost less money to pay than the interest on your larger debts. Both methods allow you to build a credit score over time as you pay multiple debts.
More General Advice:
Pay beyond the minimum:
When paying credit card debt, you will have a minimum amount of debt that you will have to pay per month, which is approximately 2-3% of the total debt of the loan. The issue with only paying the minimum is that the debt will remain for a longer period of time, which will increase the interest rates, increasing the total amount of money you will have to pay on the debt. While this may be good for your credit score, you probably don’t want to pay more money than necessary for a large debt.
Automating your payments:
While it may seem simple, automating your payments can go a long way. By doing so, you can avoid ever having to pay late fees. Regardless of the strategy, you choose to pay off your debt, starting big or starting small, automating your payments will definitely be useful.
In the event that you have already built good credit but have outstanding debt, you can consolidate your debt into a single account. This way, you only make one payment a month to pay off your debt.
A better way to consolidate your debt would be to, as counterintuitive as it sounds, apply for a new transfer credit card. Specifically, a 0% transfer credit card. By receiving and transferring your debt to the card, you won’t have to worry about interest on your debt anymore and will only have to pay off the balance on the card. While you won’t be interest rate free forever, a 0% transfer credit card can offer you 0% interest for up to 15-18 months, it should be enough to pay off a decent amount of your debt --if not all of it-- interest-free.
Working with creditors:
Another possibility if you have good credit is to work with your creditors to have a debt hardship program: where an uncontrolled circumstance such as sudden unemployment, or an accident hinders your workability. This program will allow for low-cost interest rates or waived fees. Help can also be found at non-profit debt counseling agencies, which negotiate new terms for the debt while consolidating your debt on a single account. Though, you will have to pay the agency a fixed rate of the debt, while your other credit accounts may be suspended.
Worst Case Scenario:
The worst-case scenario would be to have to file for bankruptcy or settle your debts. Chapter 7 bankruptcy would wipe away the majority of your debts clean, with the exception of government debts and student loans, at the cost of a negative permanent impact on your credit score. Chapter 13 bankruptcy restructures a debt over 3-5 years, but will remain on your credit report for 7-10 years. Though by filing for Chapter 13, your credit will be able to recover within a few months. Even in this worst-case scenario, it’s definitely possible for you to recover your credit in a timely matter and get back on your feet.
Although managing your credit card debt can be especially difficult, it’s definitely possible to navigate out of it. At any given time, continue your budget plan and possibly make new ones so that you are prepared to navigate debt even in difficult financial situations.