SAN JOSE, California–(BUSINESS WIRE)–Credit cards offer added convenience and security for your day-to-day spending, and many even offer sign-up bonuses and rewards to add even more value.
But if you’re not careful, you can easily get into debt with credit cards, and as your balances grow, they become more difficult to pay back, especially when interest rates rise. If you’re currently struggling to keep up with your credit card debt, here are some potential solutions to follow from myFICO.
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Look at your budget
If you don’t already have a budget, you should create one now. Start with the average of your income over the past few months, then list and categorize all of your expenses so you can better understand where your money is going.
This practice will help you determine if there are areas in your spending where you can save and put the money on your credit card balance instead. Setting monthly spending goals with your budget will also make it easier to stick to your debt-payment plans and make adjustments as needed.
List your debts
If you only have one credit card, the withdrawal process is relatively easy. But when you have balances on multiple cards, you want to know what you’re dealing with.
Login to each of your online accounts and get the balance, minimum monthly payment and interest rate for each card. This will help you know which cards to target first.
At this stage, it’s also a good idea to stop using your credit cards so that the interest-free portion of your balance doesn’t continue to grow. Keeping using your cards while trying to cash them out can feel like your tires are spinning.
Talk to your credit card issuer
Depending on the situation you are in, you may be able to get short-term relief from your credit card company. Some card issuers offer forbearance programs that allow you to pause your payments while you get back on your feet financially.
You may also be able to request a lower interest rate or a modified payment schedule to make your payments more affordable.
While there’s no guarantee your credit card company will help you, it doesn’t hurt to ask while you’re trying to figure out what to do next.
Consider the debt snowball or debt avalanche method
The debt snowball method is a popular approach to paying off multiple debt accounts. With this strategy, you start by making the minimum monthly payment on all your accounts, and when you have extra cash to use towards your debt, you add it to the card with the lowest balance.
Once you’ve cashed out that card, you take the amount you wagered on it and add it to the minimum payment on the card with the second lowest balance. You will continue to do this, with the monthly payments continuing to increase with each balance paid out, until you have paid off all your cards.
The debt avalanche method is a similar approach, but instead of focusing on the cards with the lowest balances, start with the cards with the highest interest rates.
The snowball method is designed to give you some wins early in the process as you pay out smaller bank balances. But over time, the avalanche method could save you more interest.
Add the Debt Snowflake method
The debt snowflake method can be used in conjunction with either the snowball or the avalanche method. With this approach, you take any extra money you get throughout the month and put it towards your debt.
On a larger scale, this could include your tax refund or performance bonus at work, but it could also be smaller things like a job.
Consider another financial product
If your FICO® score is still acceptable, you may qualify for a balance transfer credit card or personal consolidation loan.
Balance transfer cards typically offer 0% APR introductory promotions that allow you to move debt from the original card to a new one and pay off interest-free for a period of time. Even if you can’t pay it off in full by the end of the promotion, you can still save hundreds of dollars in interest.
That said, balance transfer cards come with an upfront payment for the balance transfer, so you’ll want to crack some numbers to make sure you’re still saving money. Even if you’re not disciplined with your payments, by the end of the promotional period and the start of the card’s regular APR, you may still have a lot of debt.
You won’t get a 0% APR on a personal loan, but if you have good credit, you might be eligible for a single-digit rate. Also, unlike credit cards, personal loans have a structured repayment period, so there’s no risk of settling for a small minimum payment and getting into debt. Just make sure you can afford the monthly payment and watch out for the upfront origination fees.
Contact a credit advisor
With a free consultation, a reputable credit counselor can help you understand your situation and walk you through some of the options available to you. You can find nonprofit agencies through the National Foundation for Credit Counseling or the Financial Counseling Association of America.
If you’re really struggling and your FICO® score is too low for a low-interest personal loan or money transfer credit card, your credit advisor may offer help with a debt management plan.
A debt management plan allows the agency to negotiate a lower interest rate and monthly payment with your credit card issuer. Then you get a payment plan, which usually lasts between three and five years, and make a payment to the agency, which distributes the money to your creditors.
In return, you must close all your credit card accounts. In addition, there is a modest upfront payment as well as a small monthly fee. However, this option can help you avoid some of the damage to your FICO® score that debt settlement and bankruptcy would do.
Think debt settlement or bankruptcy
While these options aren’t ideal, they may be necessary if you’re already far behind on your payments.
By paying off debt, you agree to pay less than what you owe in one lump sum. If you don’t have the money now, you may be able to work with a debt settlement company or debt relief law firm to build up enough cash over time. Make sure you research each debt settlement institution you are considering and read all of the “fine print” on their application. Once the settlement is complete, the card issuer will accept your payment and cancel the rest of the debt.
Bankruptcy, on the other hand, could wipe out the debt entirely, or at least help you get a reorganized payment schedule that fits your budget.
Only consider these options as a last resort. While they may seem like an easier fix, they can corrupt your FICO® scores and make it difficult to get credit when you need it. If you are considering debt settlement or bankruptcy, first speak to a reputable credit advisor for expert advice.
The final result
Credit card debt can easily become a significant financial drain, so it’s always a good idea to try to pay off your balance in full each month. But if your debt has already started to spiral out of control, create a budget and carefully consider all your options.
There is no single best way to pay off credit card debt, so develop your strategy based on what works best for you.
myFICO makes it easy for you to understand your credit with FICO® Scores, credit reports and alerts from all 3 bureaus. myFICO is the consumer division of FICO – get your FICO scores from the people who create FICO scores. For more information, visit https://www.myfico.com/