Debt freedom is on everyone’s minds this year. In SoFi’s 2019 Year in Review, 61 per cent of Americans said debt repayment was their number one financial goal this year. This is not new; consumers have been in pursuit of debt freedom for decades, and many industry-leading experts reiterate the dangers of amassing credit card and personal loan debt. Credit card debt in the U.S. has risen to $930 million this year, meaning the average household is currently carrying $8,701.
For many of those in debt, credit cards are one of the highest debts behind their mortgages, and with the climbing interest rates, delinquency rates have climbed to 5.32 per cent.
So if you’re looking to get out of debt now, paying off those credit cards is a great way to start.
Why Should I Worry About The Impact Of Credit Card Debt?
It has been well documented that the balances on your credit card and your payment habits determine your credit score.
This measure of financial trustworthiness is often seen as the golden ticket to both short and long term lenders, and even employers.
Carrying too high credit card debt means your utilization rates increase.
Your credit card utilization rate accounts for up to 30 per cent of your credit score.
Adding revolving credit like credit cards can also increase your credit mix.
Credit cards allow you to make minimum payments and carry over the balance, which means interest is continuously charged on your debt.
However, this does not necessarily have to be a bad thing.
Adding credit debt to your credit mix is a good way to illustrate that you can manage different kinds of credit – as long as you can properly manage them.
Therefore, if you’re looking to boost your credit score, paying off your credit cards is an effective go-to strategy.
There is also the revolving effect of carrying card debt.
Higher levels of debt impact your credit score, which in turn inflates your interest rates on future loans, home mortgages, and even auto loans.
Loan options and conditions presented by Crediful show that most lenders offering unsecured loans or debt consolidation loans ask for a minimum FICO score of 640.
Therefore, neglecting to pay off your credit card debt may mean you are facing a tougher time to secure a home mortgage in the future.
Consumers with lower credit scores pay two points more in interest, according to the Bank Of America.
There is also the impact on your financial security and retirement readiness.
Larger amounts of credit card debt can overwhelm your finances thanks to interest rates eating up large parts of your monthly repayments.
This makes it harder for you to save or put money away for your life goals after retiring. The average credit card interest rate was 19.02 per cent in January this year.
This means the average household is paying $1655 in interest every year.
The amount paid in interest each month can be put towards repaying your other outstanding debts or put towards building an emergency fund.
Almost three in 10 Americans currently do not have emergency savings.
For these reasons and more, taking charge of your credit card debt today is one of the best steps you can take in your bid for financial freedom.
1. Move Your Balance To A Lower Or Promotional Rate Card
Many finance experts recommend trying to lower your credit card interest rates.
This allows you to make more progress on repaying the principal borrowed amount rather than a larger portion going towards interest payments each month.
Swapping to a lower-rate credit card can help you do this.
Using a credit card comparison website can give you information on available credit offers, with lower rates or lenders offering promotional periods such as 0 per cent balance transfers.
If you do opt for this strategy, it’s important that you can pay off the balance (or as much of it possible) before the promotional period ends.
2. Rank And Pick A Card
The average American has 4 credit cards, according to the 2019 Experian Consumer Credit Review.
While the number and mix of credit cards you have are entirely dependent on your preferences, having too many of them can mean split attention when you have to try to pay them off.
Instead, it is better if you devise your own ranking and prioritization system so that you can focus on paying off one card at a time.
You can rank them either by interest rates, highest/lowest balances or using the time left on those balance transfer offers.
This means you continue to pay your minimum balances due on your credit cards each month with any additional money going to one card until it is paid off.
This is also a great strategy to keep you motivated, as you can see the results quicker.
3. Reach Out To Your Credit Card Lender
While most new credit card offers will allow you 0 per cent interest for an allotted time, there is a very real possibility that you may not be able to pay off the entire amount if you did a balance transfer.
If this happens, you are then in a similar position as before – battling with exorbitant interest rates while trying to reduce your credit card balances.
In fact, almost 50 per cent of people who capitalize on these balance transfer offers do not pay off their balances within the promotional period, according to research by CompareCards.
You can also be saddled with transfer limits and conditions attached to these offers, including balance transfer fees of around 3 per cent.
In this case, it can also make more sense financially to reach out to your current credit card company and request a break from the interest rates, or alternatively, negotiate a lower rate for being a long term customer.
This removes the cost of balance transfer rates while giving you the benefit of reduced financing costs.
As a bonus, staying with the same lender lengthens the age of your credit account – a key factor for lenders and your credit score.
4. Separate Your Business And Personal Credit Cards
This may seem to be an unusual suggestion, but with 25 million Americans launching or running their own business, the separation of personal and business finance is becoming much more relevant as time progresses.
Approximately 51 per cent of small business owners use credit cards for their businesses, and more importantly, 23 per cent of them say that they mix personal and business expenses on their business credit cards.
A stunning 51 per cent of small business owners even finance their business expansion plans with the help of their personal credit.
However, doing this can have an impact on your personal credit score and ability to be debt-free.
Personal credit cards tend to come with a higher interest rate and unsuitable offers for business use.
On the other hand, split business expenses mean you are able to clearly differentiate personal credit from commercial credit, and you avoid taking on credit card bills attached to the business.
5. Find A Cost Reduction Strategy That You Can Maintain
There are many debt repayment strategies out there.
A quick search on Google will show produce multiple results from the debt snowball method to cash envelopes and debt avalanche.
While they all have their merits, it’s important that you choose a strategy that works for you and your specific circumstances.
The debt snowball method is great for visualization and allows you to remain motivated throughout your entire debt journey.
Meanwhile, debt avalanche focuses purely on the numbers and prioritizing the credit card with the highest interest rate first.
Similarly, you should adopt expense reduction and budgeting methods you can maintain.
Going to extreme measures can only backfire and leave you unhappy, demotivated and with more debt than when you started.
Credit card debt repayment does not happen overnight – it can take years.
Adopting strategies and habits you can keep up will not only see you through your repayment period; it will also set you up for good credit card usage habits in the future.
Finally, implement the art of budgeting into your daily life with the help of mobile personal finance and budgeting apps and a conscious effort to keep track of what you’re spending.
While using credit cards is not a bad thing, you need to be sure that the purchases you opt to finance using them are accounted for in your current and future budget.
In other words, don’t buy what you know you cannot afford.
It is well known that using credit cards is one of the most expensive ways to borrow money.
However, it’s also one of the most convenient ways.
With 35 per cent of credit cardholders kick-starting 2020 with more credit card debt than they did in 2019, there’s no doubt they have become a go-to option for us all.
The good news is that getting rid of credit card debt is possible by simply using a few of these tips.
The sooner you can do this, the closer you are to debt freedom.