Excessive credit card debt is a problem affecting millions of consumers every day, and they are as damaging as ever. Failure to pay off credit card debt can wreck a consumer’s credit profile. Taking on a credit card and handling a balance isn’t necessarily a bad thing, but many consumers who find themselves in trouble struggle to implement a repayment plan or strategy to rid themselves of debt.
Paying down credit card debt is not as easy as most people would like it to be either. When you owe on multiple accounts, you’re dealing with multiple interest rates that are often high. The compounded monthly effect can prolong the time it takes to become debt free. Your first priority should be assessing your current position across all credit accounts then developing a plan to resolve your outstanding debts.
Assess the Standing of all Your Credit Accounts
Before you can develop a plan of action for repaying your credit card debt, you must first evaluate the total amount owed across all of your credit accounts. Depending on how many open accounts you have as well as their standing should be a good indicator on a path forward.
Your first priority should be to bring all accounts into good standing if they are not already. This means just making a minimum payment on each account. After your accounts are in good standing, then you can start thinking about how you want to tackle the collective debt.
Consider a Balance Transfer Credit Card
A balance transfer credit card is a popular option to debtors who have somewhat low collective credit card debt at a high interest rate. The main point of a balance transfer is to pay a significant portion of your debt in a short period of time by taking advantage of a low introductory interest rate. Here’s how it works.
Let’s say you have $2,000 in credit card debt over a couple or few credit cards. Normally, this wouldn’t be too much of a problem depending on your finances, but this time, you’re getting crushed by multiple high interest rates. In short, this debt is running away from you as you’re making payments.
This is when the option for a balance transfer credit card comes into play. If you do some research, you’ll find a few credit cards that come with special introductory offers; almost every company has them. They’ll have a highlighted deal that touts a zero percent rate on balances for a set period of time – usually six to twelve months.
If you want to do a balance transfer, then you apply for one of these cards. Upon approval, you request to transfer the balances on your old cards to this new card. In effect, you’ve just transferred this high-interest debt to a no-interest debt. Now, you’re in a position to pay this debt down without the capitalization effect each month. On top of that, your high interest cards shouldn’t have a balance anymore.
This sounds great, but there are several things you should consider before jumping to it.
For starters, you need a decent credit history at least to make the move. After all, you need to apply and get approved for a credit card. On top of that, you need to qualify for a credit limit that can cover most or all of your credit card debt; this makes your credit history an even more important factor.
On top of all that, transferring the balance is the just the start to the solution. You will be required to cover fees for the transaction, and you’re still on the hook for your debt. If you don’t start making significant progress with payments, then you may find yourself in the same situation from the start.
Debt Consolidation Loan
If you are facing credit card debt to the extent that a balance transfer is not going to work, you may want to consider consolidating all of your credit card debt. In order to consolidate your debt, you would normally take out a personal loan. A personal loan can be used to pay off your balances, and you are left with installment loan debt to pay off.
With this personal loan debt, you are hopefully stuck with an interest rate that is lower than the weighted average of your previous credit card rates. This is the whole point – to get a lower interest rate on your debt. This is what will make repayment cheaper over time. After that, you just need to make payments according to your repayment schedule.
Like before, there are a few things to consider before jumping into a debt consolidation loan. Similarly, you need to have decent enough credit to qualify for terms that make the loan worth it, meaning you need to qualify for a low enough interest rate.
Additionally, if you start spending like crazy again, then you’ll have a harder time paying off your loan. This could land you in a worse spot than where you started.
Understand What is Best for You
For every person it is different, your unique circumstances will determine what strategy is best for you when dealing with excessive credit card debt. A balance transfer works great for short-term scenarios where you want to blast away your credit card debt in a year or sooner.
However, a balance transfer may not be best for someone with significant credit card debt across many accounts. In that case, consolidating credit card debt for a long-term solution could be the move.