Getting out of credit card debt is almost the same as climbing out of a bottomless pit with your bare hands. While many people have good intentions of starting the process, they make mistakes along the way and never seem to get anywhere. Emotions, interest rates, and financial responsibilities collide, making it easy for anyone to get tripped up.
If you’re trying to pay off your credit card balance, avoid the biggest mistakes associated with this task. Avoiding them is the fastest way to get free and leave you with more cash in your pocket.
Ignoring Interest Rates
Credit cards are different, and some have incredibly high interest rates, making it impossible to pay off the balance. This means you may be throwing money away if you don’t check your rates each month. Make a smarter move and pay off the card with the highest rate first, and keep making minimum payments on the others. The avalanche method is a way of saving money on interest in the long run.
Closing Accounts Too Soon
Once the card is paid off, you could even feel the urge to cancel the account. However, hold your horses, as closing a card can hurt your credit score. Your credit utilization ratio (the ratio of how much of your credit is currently used relative to how much credit is available) plays a significant role in your credit score. Keeping the account open with a zero balance will help you maintain a low ratio.
Dipping Into Your Emergency Fund
Although it may sound like a great idea to eliminate your credit card debt by dipping into your savings, that could also backfire. An unexpected expense may occur, and you may end up using your credit card again, which will bring you right back into debt. The better approach is to pay off debt while also having an emergency fund of a few hundred dollars.
Use New Debt to Pay off Old Debt
Balance transfers and debt consolidation loans are helpful tools, but they are not magic wands. While it may seem like a win to transfer a balance to a 0% interest card, if the balance is not paid off before the promotional period ends, you may end up with a higher rate applied to the balance than what you started with. It’s even worse if the only way you can pay off your cards is by using a personal loan because there’s a possibility you’ll spend more money if you are not careful.
Not Having a Budget
Attempting to lose weight without paying attention to what you eat is comparable to trying to pay off debt without a budget. Without knowing where your money is going, you won’t be able to make extra payments. Setting a realistic budget and tracking expenses will allow you to put additional coins toward debt each month.
Skipping Negotiation With Creditors
Credit card companies are not always villains. Many are willing to work with cardholders who are serious about repayment. According to a report, 76% of people who asked for lower credit card interest rates received one. A call will save you hundreds in interest.
Failing to Automate Payments
Anyone can fall behind and miss a payment at some point in life. However, even one late payment can lead to fees and penalty interest rates that make the debt almost impossible to pay off. Always paying the minimum automatically helps you avoid unnecessary penalties and stay on the right track.
Paying Only the Minimum
It’s hard to resist paying just the minimum each month, believing that you’re making progress, but this goes nowhere. Credit card companies set these payments low to extend interest over time. Paying only the minimum on a $5,000 balance with a 20% APR would take more than 30 years to pay off. Paying more than the minimum, or as close to the maximum as you can afford, will lower the interest cost and bring the process to a quicker finish.
Not Tracking Your Progress
When you don’t celebrate small wins, paying off debt feels like running on a treadmill. Simply seeing that your balance goes down, even a little bit, is a motivating factor. A free technique is to use a small spreadsheet in an application or, if you prefer, a piece of paper to track your progress. Each dollar repaid is a step towards financial freedom.
Falling Back into Old Habits
Once you have eliminated the debt on your credit card, the last thing you want to do is spiral back down to the same place you once were. Without a plan, many people go back to swiping and erase all their hard work. What matters is only using credit for what you can afford to pay back each month. Credit cards are like knives; used correctly, they’re a tool. Used recklessly, they’re dangerous.
Disclaimer: The Finance Key does not provide and does not intend to provide financial, investment, tax, or legal advice. The information contained in this article is for informational and educational purposes only. This list is solely the author’s opinion based on research and publicly available information. The inclusion of links to third-party content is not an endorsement by The Finance Key of such content or services. Please do your due diligence and use your discretion.
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