If you’re saddled with too much credit card debt, you’re not alone—far from it. A recent study based on Federal Reserve and Census data found that 41% of households carry a credit card balance, and that their average balance is $5,700.
Considering that the average credit card interest rate hovers around 17% , that average balance could be costing Americans quite a bit in interest.
Not only could reducing your credit card debt allow you to stop making hefty interest payments on your balance but because 30% of your FICO ScoreⓇ is determined by your debts owed, reducing your debt could potentially help improve your credit. If you’re working on getting out of credit card debt—and staying out of credit card debt—here are a few tips on being a savvy credit card user.
1. Using cards for convenience and to earn points—if you don’t carry a credit card balance.
Again, with average interest rates around 17% , credit cards can be a very expensive way to borrow. It’s extremely important to pay off your statement balance in full after each billing cycle if you want to avoid dealing with high-interest charges.
If you’re already in the habit of paying your balance in full when it comes due, you could consider leveraging your credit card spending to earn favorable reward points, such as points toward travel or cash back rewards.
2. Cutting your interest rate if you have credit card debt.
If you have a large balance or multiple cards, paying off your credit card debt is likely top of mind. It could help to consolidate your credit card debt with a personal loan, as consolidating your credit card balance(s) with a personal loan might help you pay off your debt at a lower interest rate.
Furthermore, when you pay off a credit card, you are still able to spend using that card, which would increase your balance even as you’re trying to deplete it. That’s because credit card debt is revolving debt—which is debt you can continue to grow even while paying some of it off.
However, if you consolidate your credit card debt with a personal loan, you’d be paying off your debt in monthly installments without adding to that debt and, hopefully, at a lower interest rate. A personal loan is considered installment debt, which is debt that’s has a set, regular payment schedule until the balance reaches $0.
3. Paying on time.
This one may seem like a no-brainer, but it’s still worth discussing. Paying your statement balance after the due date may mean that you’re incurring late fees or other interest charges. And because payment history is 35% of your FICO Score , paying late can also potentially hurt your credit.
4. Try to build an emergency fund so you don’t have to use a credit card in a financial emergency.
Emergencies happen, and ideally, you’d be able to turn to your savings instead of leaning on a credit card to take care of an unexpected expense. If you don’t have an emergency fund yet, it might be a good goal to prioritize once your credit card debt is under control. In general, an emergency fund makes for a much better safety net for these situations.
5. Using the “snowball method” to help pay off your debt balances more quickly.
Haven’t heard of the snowball method? This is what it looks like:
• Targeting the account with the smallest balance to pay off first
• Paying the minimum on all other accounts on time to avoid late fees
• Paying as much as possible on the target account in hopes of eliminating the debt ASAP
• Once the target account is paid off, adding the amount that was being allocated to the old target account to the minimum payment of the account with the next lowest balance, and making that the new payoff target
• Repeating until all debt balances are paid off
For many, this method works by providing incremental victories from knocking out their smaller debts, which can help give them the momentum to tackle their larger balances. This free calculator can help you figure out a game plan for eliminating your debt with the snowball method if that sounds like a good strategy for you.
6. Keeping the credit card open even after you pay off the debt balance.
Having access to available credit that you don’t use can help improve your FICO Score, because you’ll be using a smaller percentage of your available credit. Remember, “amounts owed” accounts for 30% of a FICO Score , and credit utilization is a component of part of your score!
That’s why, once you eliminate your credit card debt balance, it could be worthwhile to keep the credit card open.
To keep your available credit as high as possible, even if you make the occasional purchase or automate a bill on the card, you’d probably want to pay the purchase off on or before the due date.
7. Trying an all-cash diet if you’re trying to reduce your credit card spending.
It’s not just credit cards that make it easy to pay for things; the prevalence of mobile payment apps certainly add to the temptation for many. Paying in cash instead can, paradoxically, be easier to track: if you only withdraw a certain amount of cash to spend for the week, it could potentially help you reduce unnecessary spending.
To try this method, you’d want to decide how much you need to spend each day and put that amount of cash in your pocket. When it’s gone, you’re done spending for the day. It could take a lot of discipline, but paying off your credit card debt could make it worthwhile.
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