Credit Card Debt

Most people have some amount of credit card debt that they are attempting to pay off, but it is impossible to wipe those bills clean without a basic understanding of how the debt accumulates and what can be done to stop accruing more debt.

Credit Card Debt vs. Consumer Debt

By themselves, credit cards represent a significant portion of an individual’s debt, but they are not the only source. Consumer debt is the total sum of all debts owed to purchases, including mortgages, car loans, and other outstanding liens. Credit card debt refers to the balances on cards alone, whether they are store-specific cards, gas cards, or major credit cards. This is often the most notorious type of debt, however, due to extraordinarily high interest rates and penalties. The total amount of balances on different credit cards can impact an individual’s credit rating, and a high, unmanageable total may result in denials for other loans or credit extensions.

Estimating Your Current Debt

The first step in estimating your current credit card debt is to add up the balances on every card you have – department store cards, gas cards, major cards, etc. That is the number you must pay off if you were to have the funds available at that moment, but in reality that number is far lower than what you will actually pay in order to remove all the debt. To get a better estimate of your actual debt, you must take into account the type of spending you do with credit cards – cash advances, for example, incur immediate fees as well as higher interest rates than regular charges. Do you routinely charge utilities and other regular bills to your credit cards? Do not forget to factor those figures into your estimate.

Paying Down the Debt

Once you know how much you owe on various credit cards, you must take immediate steps to reduce the total.

• Begin by removing automatic charges for utilities – even if you are able to pay more than the cost of that utility each month, you are still adding to the overall balance and allowing your credit card debt to accrue greater interest.
• Immediately stop using the cards with the highest interest rates; these should also be the cards you attempt to pay off first. If possible, transfer their balances to cards with lower interest rates.
• Pay more than the minimum balance on each card every month; this will reduce the amount of interest that accumulates.
• Avoid late payments that will tack on additional fees to your unwieldy balances.
• Budget carefully for other required payments (rent, mortgages, loan payments, and other bills) so that you do not lapse on other obligations while you pay down your credit cards.

Tricks to Stay Out of Debt

Simply paying down your credit card debt is not enough to enhance your credit rating in the eyes of banks and lenders. You must stay debt-free in order to improve your history and qualify for better loan interest rates and deals in the future.

• Close credit card accounts that you will no longer be using. Simply cutting up the cards and not using them does not close the account and only makes fraud easier.
• Pay for most items with cash. If you don’t use the credit cards at all, you won’t risk getting back into debt.
• Pay credit card bills off in their entirety. Leaving balances to roll over to following months only adds interest payments to already hefty bills, making the balance even higher the next month.
• Examine your monthly statements thoroughly to detect signs of unauthorized use and fraudulent charges immediately. The sooner you are able to put a stop to such activity, the better your chances of recovering from the incident.

Not All Credit Card Debt is Bad

Many people assume that any credit card balances at all are a bad omen for financial stability, but that is not necessarily the case. Loan officers and banks understand that emergencies happen: you may not have the cash readily available to pay for car repairs, or you may be planning to pay for a vacation over several months once you have made the travel arrangements. By developing a history of paying off balances without adding additional interest, you can improve your credit rating even if you still have a moderate amount of credit card debt. The key to successfully managing your debt is to not let it get out of control to the point where you miss payments or accrue additional interest.