There really is only one way to get out of credit card debt: by paying the balance. But there are many pitfalls along the way to making the withdrawal more expensive than it has to be.
If you’re one of those consumers who paid off $ 108 billion in credit card debt in 2020, you’re in good hands! That leaves $ 820 billion, however. So it is in your best interests to do whatever you can to contain the debt that costs you each month with double digit interest rates.
Choosing a method of paying back the balance should be your first step – there are many options including avalanche, snowball, and lasso – but there are mistakes that you should avoid to ensure you get the maximum value out of the one you choose Pull method.
We’re here to help you avoid the most common – and costly – mistakes people make when working out their debt. Let us help you make the best money decisions as you progress.
7 Mistakes to Avoid With Credit Card Debt
You are ready to pay off that credit card. That’s great! But just paying back money randomly with no strategy could cost you more money.
1. Forego a budget
You know how if you don’t plan a day off you end up wasting it bingeing on Netflix instead of doing something productive?
The same goes for paying off debts. If you just go ahead and go without a plan, there’s a good chance all of your good intentions – and additional payments – will be spent elsewhere.
How do you keep the money from disappearing? By creating a budget.
Stop whining – it’s no different than planning a vacation route. Instead of blowing your money on new shoes, create a plan of attack and pay off your debt faster and with a clear direction.
Never miss an invoice – and incur late fees – by automating payments. Many service providers and banks offer automatic withdrawals for invoices every month on certain dates.
By reviewing a monthly budget, you can determine where you may be over-spending in certain areas (how much did I spend on takeaway?!?) And make a commitment to apply that money to your credit card debt instead.
Even if you’ve never lived with one before, we can help you create a budget that suits your lifestyle and financial goals.
2. Never apply for a personal loan with a lower interest rate
Don’t make the mistake of assuming that replacing credit card debt with a personal loan is just swapping one debt for another. The interest rates can make a huge difference.
How much difference? For example, let’s say you have $ 5,000 in credit card debt and you commit to paying $ 400 each month.
If your credit card interest rate is 17%, it will take you 14 months to pay the debt and you will pay $ 542 in interest. Alternatively, if you take a 4% soft loan, it will take you a month less to repay the loan and you will pay $ 116 in interest – a saving of $ 426.
3. Ignoring balance transfer offers
When you cash out credit cards and you know you are close to wiping them out, you could be throwing money away for interest by not looking for short-term options.
By opening a credit transfer credit card, you can save yourself a bundle of interest. Top-up transfer credit cards generally have lower introductory rates for a set period of time (plus any transfer fees). The rates will then increase to a higher annual percentage after the promotion period ends.
If you are ready to pay off your credit cards within the promotional period it would be a huge financial drain gaffe Not to make additional efforts to research balance transfer offers.
By consolidating your credit card balances, not only can you save money with a lower interest rate, but you can also stick to a more livable payment schedule, avoiding the annoying late payment fees.
4. Only focus on saving instead of making money
If you’ve cut your spending but still haven’t received any additional credit card payments, think about the other half of the financial equation: money coming in.
Having a sideline to transfer extra money for payments can meaningfully speed up your payout schedule. Keep this in mind: if you make an extra $ 50 every week, you can add another $ 600 to credit card balance after just three months.
An exit plan that defines clear financial goals can keep you from using gig work money to meet basic needs and keep you from getting stuck in an endless hustle and bustle.
One of the keys to making the side gig work for you is to create a specific goal for the money you want to make or the time you want to spend on work. If you come up with an exit plan for your side gig, you’re not going to burn out and spend all that extra money on ways to make up for the overhaul.
5. Refuses to ask for help
When you feel like you’ve tried everything – or nothing because you’re too overwhelmed – it’s time to swallow your pride and seek help from a professional.
A credit counselor can review your financial situation and make recommendations for improvement. Depending on your situation, they can help you organize your credit accounts, get a credit report, draw up a budget, or even come up with a plan to pay off your debt.
If your credit card debt is more temporary but more urgent – think you were laid off and your water heater just died – you can also ask your credit card issuer to take a break through a credit card hardship program.
The under-promoted support option may suspend your minimum payments or temporarily lower your interest rate. But you won’t get help if you don’t ask for it.
6. Forget remaining interest
For example, let’s say you’ve been paying off your credit card balance for a few months (or years). You will receive an email explaining that your current balance is $ 1,000 and you are ready to withdraw it.
You go online to make the payment in full but schedule it for 10 days later as you are waiting for payday.
When you get the statement for the next month, you’ll find that you have been charged $ 1,000 in interest for the 10 days between the closing date and your payment (and probably a few extra days for the time it took to get the statement to arrive in the bank statement mail). This is known as the residual interest (or follow-up interest).
It might be just a few dollars, but if you fail to pay the balance of interest – which can easily happen if you think the balance is paid in full and you ignore the next statement – interest will still be earned on that amount.
Failure to pay will result in late fees and a negative impact on your creditworthiness.
Instead, call your credit card company to receive the full withdrawal amount from the date the issuer receives the payment, and then monitor your credit card statement for at least a few months to make sure the remaining interest has been paid out.
7. Lose sight of your future
Paying back your credit card bill is important. But this is your future.
If your last penny is spent on credit card payments, you could be preparing for a major financial emergency.
In the short term, this could be due to unexpected costs and no emergency fund to cover the costs.
In the long term, you could lose your retirement assets if you don’t invest early and compound interest helps your nest egg grow.
And when you’ve made the final payment – oh, joy! – You will understandably want to party.
But you should also think about life after debt, including following the good strategies that got you out of debt instead of going back into bad habits that got you into debt in the first place.
Tiffany Wendeln Connors is an associate and editor at The Penny Hoarder. Read her bio and other work here, then catch her on Twitter @TiffanyWendeln.