How to Manage Credit Card Debt with pink piggybank floating upside down in water

How to manage credit card debt

Most of us will at some point in our life succumb to the pitfalls of credit card debt. Credit cards are way too easy to get and way too easy to abuse. The buy now and pay tomorrow is so enticing, however, tomorrow always comes and so does the bill.  Getting into debt can be easy but it is so much harder to get out of it. Most of us who are out of debt learned how to manage credit card debt effectively.

1 in 5 millennials with debt expects to die without ever paying it off.

CNBC

We have learned that excessive credit card use along with interest rates is harmful to your financial independence.  We know that high balances and interest rates make it very difficult to eliminate debt.  Interest rates increase the cost of every purchase you make. The average credit card interest rate is 19.11% per Wallethub.com. Interest has a huge impact on paying down debt.  Especially if you are only paying the minimum payment. Therefore, it is important to find ways to reduce the interest rate, consolidate credit cards, stop using credit cards, and begin to save. This is the wise way to attack credit card debt.

The average person has $92,727 worth of debt.

2020 Experian Study

How to manage credit card debt wisely

To manage your credit card debt wisely, you need to understand how interest rates and minimum payments work.  Per Experian – Only a small percentage of a minimum payment is applied to the card’s principal balance—the remainder takes care of the accrued interest and fees. So, if your credit card has a 21% interest rate and a $4,000 balance, paying the minimum of 1% plus interest each month will keep you in debt for 257 months. This equates to 21.4 years of being a slave to the lender.

Therefore, I suggest you begin to pay more than just the minimum payment on your credit card balance.  Stopping the use of credit cards is also how to manage credit card debt.

Man holding several credit cards

How to manage credit card debt smartly

The smart thing to begin doing is Living Below Your Means. Start by creating a budget and eliminating every expense that is not essential.  Pay yourself first by depositing funds automatically into your savings account. Therefore, building up savings for unexpected expenses. Hence, you will not have to rely on credit to get you to the next paycheck. Next, track your debt and determine the best route to reach your goal of being debt-free.  Finally, if you have savings, use it to pay off some of your debt. Did you know that Debt-Free is the New Rich?  Read this blog to find out how this could be you.

Your Plan to manage credit card debt

You are going to need a plan and you need to set goals and milestones to praise yourself. There are a variety of ways to pay down debt. You can use the Snowball Method or the Avalanche Method. If you are able financially you can just pay more than the minimum on each credit card with a Targeted Date to be out of debt.  For example, if you want to be out of debt in two years or less you will need to calculate the monthly payment including interest.  Using the example above again. Say you have a $4,000 balance with a 21% interest rate, and you wish to pay off this balance in 24 months.  Therefore, you would need to pay $205.00 per month.  Use this handy Debt Repayment Calculator for how to manage your credit card debt.

Blue Stacked Credit Cards

How to Manage Credit Card Debt with 0% Balance Transfer

Another option is to consolidate credit into a 0% interest balance transfer. If your credit is in good standing, you can apply to transfer all your debt to one credit card.  While it is interest-free there is a one-time transfer fee that could consist of 3 to 5% of the balance. Also, note there is a limited time to pay the balance off.  Typically, six to eighteen months. You will not pay any interest during this time.  However, once the time has expired you will be required to pay interest on the remaining balance. Or if you are able, you can use a different credit card for an additional balance transfer until the balance has been paid off.  I have done this twice when we purchased solar panels for our home and had to carry a balance until we could pay off the panels with the government solar panel tax rebate program. Yes, the government subsidized our solar panels.

Girl holding credit card with a phone, notebook, and pen

How to manage credit card debt with a consolidation loan

Applying for a personal loan for consolidation typically has a lower interest rate than credit cards.  However, it is based on your current credit score.  Therefore, there is no guarantee that the interest rate will be lower than your credit cards.  Many lenders will allow you to prequalify before you apply, thus you will be able to know beforehand if this will work for you.  Finally, make sure the loan’s monthly payment will fit into your current budget. Therefore, you should no longer use your credit cards. The decision to commit to this plan is how to manage credit card debt for a prosperous future.

Debt Management Company to pay off debt

If your credit is in bad shape seek a reputable debt management company for credit counseling.  They will contact your creditors to let them know you are using their services.  They can help you avoid collection and bankruptcy which can negatively affect your credit score significantly.  Debt management is not expensive but there can be upfront and monthly fees associated with this type of service.  Do your due diligence to avoid being scammed. Start by checking online reviews with the Better Business Bureau in your area.

Home Equity to Pay Down Debt

If you own a home and have equity in your home, you can tap into this type of fund.  This is called a home equity line of credit or a HELOC.  Your home equity is the difference between the current value of your home less what you owe.  For example, if your home is worth 250,000 and you owe about $100,000 on your home, the equity is $150,000.  You can take a loan against this amount to make repairs and renovations to your home. You can also use it to pay down high-interest loans and credit card debt.  Typically, the interest rates are lower than a loan or credit card interest rates. You can pay down the HELOC while you live in your home or pay off the balance when you sell your home.  Please note that the current market dictates how much your home is worth, hence it will determine the amount available to pay off the HELOC after you satisfy your mortgage.

We were able to use our home equity for consolidating credit card debt. We sold our home for way more than we paid for it and owed very little on our mortgage.  As a result of this financial transaction, we have remained debt-free.  We only use our credit cards when we know we have the funds to pay them off each month.  We are committed to controlling our spending and living within our means. This is how we learned to manage credit card debt going forward.

Credit Card with a hook on keyboard

How to manage credit card debt in collection

Whether the debt in Collection is new or old follow these steps:

  1. Know what you owe and to whom
  2. Review the Fair Debt Collection Act – Know your rights
  3. Have a plan for what you can afford to pay
  4. Check the statute of limitations because some debts can expire
  5. Don’t admit to any debt or make a payment (initially) – Beware of scammers.
  6. Request a debt validation letter to prove they can legally ask about this debt
  7. Listen to their offers and counter with your plan
  8. Important: Request in writing that they will remove any derogatory statements from your credit report once the debt has been satisfied.

Note: Negative statements on your credit report older than two years do not affect your current credit score as much as the most recent information.

How to use Credit to manage debt

Having credit can be a wonderful tool to obtain the things you need.  However, it is very important to think about how you are going to pay the bill when it arrives.  Ideally, you would already have the money available to pay off the balance when the bill arrives.  However, if you do not have all the money to pay your credit card you have to have a plan to be able to pay it off in as little time as possible.  I would say within a month or two. Any longer than that you now have a reoccurring payment that will have to be added to your budget.

We have been credit card debt free for over 15 years.  We have been car loan free for about four years.  Once we pay off the house, we will be completely debt free.  Hopefully, within the next seven years. Living within our means, budgeting, and planning for each purchase is how to manage credit card debt. However, there is more to credit than just managing debt.  It is the way to build and maintain credit so that you can purchase a home or anything else you desire within your budget. How does one go about building credit and avoiding the credit card trap?

Bad Credit Sign on Spreadsheet

How to manage a credit card to build credit

You need credit to build your credit score.  Where does one begin?  Most major financial institutions will extend your credit if you simply apply.  However, it is best to establish a banking relationship by having a checking or savings account first.  Be consistent by setting up auto-deposit of your paycheck with your employers or regular deposits into your savings account.

You can also apply for a department store or a gas card these are gateway credit cards when establishing credit. These establishments offer low balance credit between $500 and $1000 but they come with very high-interest rates. 

Apply for a secured credit card where you are required to leave collateral of about $500.  It works exactly like a credit card, but your funds are used for collateral should you default.  Some of these companies will evaluate your payment history and step you up to an unsecured card if you meet their requirements.

It can take about six months of credit activity to establish enough history to obtain a FICO credit score. A FICO credit score is used by 90% of lenders. FICO scores range from 300 to 850. A score of 700 is considered a good score. Scores over 800 are considered excellent. Hence, the first six months of using your credit cards and loans are very vital.  You want to pay off your balances on your credit cards each month and on time.  As for any loans you have, such as a car loan, you will want to pay those on time each month. 

Fico scores are based on the following:

  • Payment history (35% of your score)
  • Utilization (30% of your score)
  • Length of credit history (15% of your score)
  • New credit (10% of your score)
  • Credit mix (10% of your score)

Read How to Raise Your Credit Score 100 points in 45 days to learn about each of these bullets.

Credit History Report & Score

Best way to improve credit

I do not know one person that has not gotten into trouble with their credit card. It is like an aphrodisiac, the power of walking into a store and buying whatever you want.  You feel powerful and rich. Anything you want is yours.  All you need to do is pull out that credit card. However, if you overextend yourself and get behind in your payments you will see your credit score begin to tank.  There are strategies to improve your credit score.  The best way to improve credit is to improve your payment history.  You can start by satisfying your debt.  Payoff what you owe, and you will begin to see improvement in your credit score as soon as one or two months after you pay off debt. 

However, please note the larger the creditor the faster your credit score will improve.  Since they tend to report user activity monthly, you could see improvement within 30 days.  Hence, if the creditor is smaller, it could take a little longer as they may update the credit bureaus quarterly.  Therefore, make every effort to pay off your balance each month.  If this is not possible always pay more than the minimum payment.

Most people should shoot to be debt-free before they retire.  This includes credit cards, car loans, and mortgages.  For us, all credit card debt and car loans are done.  We are just working on paying off the mortgage within seven years. Hence, we are striving to be completely part of the debt-free is the new rich community.

Tracking Credit Utilization and Hard Inquiries

 Another way to boost your credit score is to reduce your utilization.  One of the best strategies to improve your credit score is to request that your creditor increase your available credit limit.  Also, if this is not possible then you must pay down what you owe until you are at or below 10% of your balance.  If your credit limit is $1,000 you should never charge more than $100. If you do, pay it off before the next billing cycle. However, if you increase your credit limit to $1,500 and you charge $100.  Your utilization is now under 10%.

Finally, save your hard inquiries for when you need something important like a car or a home.  A hard inquiry requires your social security number and will sit on your credit score for two years.  This is 10% of your credit score for two years. Therefore, use them sparingly and wisely.

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How to Manage Credit Card Debt Pin - Girl in a pink top holding a phone and a credit card

Credit Card Management app

How many credit accounts are too many or too few? Credit scoring formulas don’t punish you for having too many credit accounts, but you can have too few. Credit bureaus suggest that five or more accounts — which can be a mix of cards and loans — is a reasonable number to build toward over time.

How do you manage all your credit cards?  For instance, in my house, we have a joint credit card that is used for all household expenses.  It is budget driven so it must stay within the budget.  Then we have personal cards for each of our expenses, and it is driven by each person’s budget.  We use the honor system trusting that the other person is not spending excessively and racking up debt. Having been married for about 30 years we have not had any problems because we both believe in being debt-free and living within our means. We communicate our financial goals for the home and each other.  Read The Purpose of a Budget to learn why a budget is more than something that restricts your spending.  It is first and foremost a communication tool on how to manage finances and all types of debt.

Three free Apps to help Manage Credit Card Debt

Using a credit card management app can help you get clarity on your credit use without having to sit down and analyze mounds of bills and statements per U.S. News.  Here are three free credit card management apps that you can download via the App Store or Google Play.

Mint provides a broad view and a detailed look at your credit cards and overall finances. However, the set-up time may require a few hours for tracking and categorizing each transaction.

Prism is a top choice for people who want help keeping track of what they owe and when.  This app makes it easy to pay with your credit cards. However, it doesn’t have an autopay feature.  You will need to log in each month to set up the payments.  I would use the auto-pay feature through my lender. I have all my credit cards set to pay the balance in full each month.

Debt Payoff Assistance is for anyone with revolving credit card debt. The app allows you to choose which payoff method is best for you. The Snowball method of payment is its target but there is the flexibility to customize. This app unlike the others does not pull in your balance and interest information directly from your creditors. You will have to update this information on your own each month. The Debt Payoff Assistance is free but with ads.  The cost is 99 cents to eliminate the ads.

Let no debt remain outstanding, except the continuing debt to love one another, for whoever loves others has fulfilled the law

Romans 13:8 (NIV)

Final thoughts on how to manage credit card debt.

The best way to avoid the credit card debt trap is to use your card in place of money you have already saved. Therefore, you should be paying off your balances every month.  However, credit is great when you need to make a huge purchase, rack up points for future purchases, earn cash-back, or build up frequent flyer miles credit cards are a great tool. Credit cards when used wisely have many benefits. That is the real truth about how to manage credit card debt.

I hope you found this information helpful if you want to get out of debt or just want to have more information before you test the world of credit cards. Here are a few takeaways:

  1. Credit cards are one tool to use when you need to make a purchase
  2. Save first for the things you want and use credit cards to make a purchase
  3. Apply for cards with the lowest interest
  4. Stop using your credit cards If you find yourself in trouble
  5. Use any savings to pay off the debt
  6. Consolidate your credit card debt
  7. Seek help from a reputable debt management company
  8. Begin to repair your credit score
  9. Commit to remaining debt-free

Here are additional resources:

Financial Literacy For Beginners – 5 Basic Components

Living Stingy

How To Build Wealth From Nothing By Investing?

Let’s Budget, Spend, and Live!

Sabrina

10 thoughts on “How to manage credit card debt”

  1. Great post! Debt is super hard to clear. When I was in college, I accumulated a crazy amount of debt as I decided to not work and just study my last year! I’ve thankfully cleared it now but it was a lot of sacrifices. Thanks for sharing! x

    Lynn

    1. Debt is always easy to accumulate but it takes forever to dig your way out of it. Glad you made the sacrifice to get it done.

  2. This is a very informative and well articulated advise on financial behaviour. The writer successfully breakdown piece by piece all the essentials to consider in understanding the topic.

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