How to Reduce Credit Card Debt

Here are ten tips to help you reduce your debt.

Live Within Your Means

It’s obvious, but it’s worth mentioning. When you live within your means, you don’t need to use credit:

  • If you use the budget you created in Module 3 and you continue to spend less than you make, your financial situation will improve.
  • Your credit score will begin to rise.
  • You will eventually be offered better (lower) interest rates on credit cards and Installment loans.
  • And when you have an unexpected expense, you can afford to use credit and repay it quickly.

Pay Your Bills on Time

When you pay your bills on time, you are building your credit history and putting yourself in a better position to obtain credit at lower rates in the future. But when you don’t pay your bills on time, not only will you have to pay late fees of up to $39 or more, but also you’ll be hurting your credit score. If you find it difficult to pay your credit cards on time because you have too many accounts and too many payments, you may want to consider bill consolidation.

Pay More than the Minimum Payment on Your Credit Cards

The minimum payment is usually about 2% of the principal owed. So if you have a balance of $2,000, your minimum payment will be about $40. If your interest rate is 8%, do you know how long it will take to pay off $2,000?

Over 30 years!

And can you guess how much interest you will have paid?

Nearly $5,000! And that’s if you always pay on time and don’t add another dollar tothe balance.

Here’s why your monthly minimum payment is primarily covering the interest chargedon the loan; the outstanding principal still remains, against which you will charged interest in your next payment.

If we offered you a $2,000 loan that would cost you $7,000, would you think it was a good deal? Well that’s the kind of deal you’re signing up for when you pay only the minimum on your credit cards.

3 Easy Tricks to Get Out of Credit Card Debt

Here are a few tips to help you pay off credit card debt brought to you by Money Minute

Avoid Credit Card Add-on Programs

As we mentioned in Module 9, credit card companies offer various services and products to their customers. Some of the more popular ones are: credit card registration services, credit card insurance, and credit card loss/theft protection. Most of these add-ons cost money, and most of them are unnecessary for the typical consumer.

Don’t Chase Lower Rates by Transferring Balances

This is a tricky process that often involves a lot of fees, penalties, and “catches” and usually ends up costing more money than it saves. We strongly recommend that you stick to the tips in this module, just use credit sparingly, pay off your balances as soon as possible, and don’t get seduced by add-ons that you don’t need. Here are just some of themany downsides of transferring balances:

  • Balance transfer offers almost always have a low teaser rate that is NOT FIXED; it quickly jumps up into the high double-digits.
  • The introductory rate can also rise less quickly. For instance, you may have one rate after your introductory rate ends, then three months later you may have a higher rate, and in another three months an even higher rate. Pretty soon, your great rate is gone, and you could be paying an even higher rate than the one you transferred from!
  • There are often fees from the company you are moving your balance to AND the company you are moving from.
  • The new card company still has the right to change the terms of your agreement, including your rate, by providing you with an updated credit card agreement.

Know the Terms of Your Credit Agreements

This is the best way to position yourself to pay the least in fees and have the fewest surprises. Even the most well-intentioned consumers end up paying fees because they weren’t aware of the fine print in their credit agreements.

Here are some examples of fine print that triggered fees for unsuspecting customers:

  • A penalty of 32% for making three late payments within six months
  • An increase in interest rate to 32.6% for two late payments in a year
  • Penalties for payments due on weekends or holidays, when it’s impossible to process payments on those days
  • A hike in your rate may be the result of you no longer meeting the “credit standards” of the creditor, yet those standards aren’t clearly spelled out
  • An increase in interest rate for late payments on a different creditor’s account
  • A $15 inactivity fee for not using an account within a six-month period (and it can be charged every six months)
  • A cancellation penalty interest rate of 24% that is assessed on the unpaid balance when the account is cancelled
  • A cash advance fee of 21% for the first usage, which then jumps to 24% for usages thereafter.

As soon as you get a new account, read the entire agreement, under a strong light, andwith a magnifying glass, if necessary! Know when fees are triggered and memorize the rate structure of your account! Specifically:

  • If the account has an annual fee, what is it and when is it billed?
  • What is your billing date/statement date/closing date?
  • What is your due date? (And it might even have a time, such as 2 p.m.)
  • Do you have a grace period, and if so, what is it?
  • How is your minimum payment calculated? Is it two percent of the principal? Three percent?
  • What is the creditor’s policy for merchandise returns and errors?
  • Under what circumstances can the creditor assess a fee or raise your rate?

Pay off Accounts with the Highest Interest Rates First

This is a guaranteed investment that you can’t even come close to in the stock market.  When you pay your credit card balance, it’s like making an instant return on your money. So if you have two credit cards—one with an interest rate of 18% and one with an interest rate of 24%—and you pay the 24% balance first, you’re instantly making anextra 6% on your money. (You’d still be paying at least the minimum on your 18% card).

Don’t Get Too Much Credit

If you’re like most people who are recovering from being deeply in debt, your mailbox is full of offers for new credit cards and loans.

Why is that? Don’t the creditors know that you’ve already experienced difficulty paying off money you borrowed?

Yes, they do. And that’s precisely why they’re offering you more credit: because they know that you are likely to use it. And that means you are likely to pay lots of interest and maybe even lots of fees. In other words, you’re a great prospective customer!

So what do you do?

  • As soon as you see what it is (usually it’s obvious), cut it up and throw it in the trash. Don’t even open the envelopes.
  • You should open mail from companies you already have an account with, as you wouldn’t want to shred a statement and risk being late with a payment.
  • But once you see that it isn’t a statement, cut it up and dispose of it immediately.  And the cutting up part is important, because your statements—and even many offers for new credit—contain important information about you.

“But what about the 0% ones,” you ask?

Shred and dispose of them, too, as anyone who has had a troubled credit history won’t qualify for 0%. And if you do, it is likely to be a teaser rate that lasts a very short time before quickly rising to a much higher rate.

Review Your Credit Card Statements

Please monitor your creditor statements monthly to verify payments are posting to your accounts each billing cycle. Remember, InCharge does not receive a copy of your monthly creditor statements or any regular updates from your creditors. It’s up to you to keep our records up-to-date and alert us if any billing cycle closed without a payment posting, provided you made your payments to us by your due date. With your assistance, we can research the account to resolve the cause.

Review Your Credit Report

Managing your credit responsibly requires ordering your credit report at least once a year and reviewing it carefully. If you haven’t seen your credit report recently, you don’t know what’s on it. Recall that in Module 6 we discussed your credit report:

  • It’s basically a list of what’s being said about you regarding your ability to repay your debts. It’s a snapshot of the way you’ve handled credit.
  • Studies have shown that more than half of all credit reports produced contain errors. And remember that you have reports from three different credit bureaus.
  • You are responsible for the accuracy of the information in your credit report.
  • Nothing impacts your credit score positively more than making consistent monthly payments to all of your accounts.