Credit cards are great tools that can open doors to the world around you. They can take you to far off places, help you hone your craft, be a lifeline in a stressful situation, or buy that thing that’s going to make your life so much easier. Yeah, credit cards are pretty great. BUT. There’s always a but when we talk about using credit, because if not used properly, it could cost you everything. To create an infallible plan to pay down credit card debt, take a look over these 5 common mistakes to avoid.
5 Credit Card Debt Repayment Traps:
1. Making Only the Minimum Payment
2. Overusing Your Credit Line
3. Paying More Than You Can Afford
4. Not Taking Advantage of Lower APR Offers
5. Not Setting Firm Repayment Goals
MAKING ONLY THE MINIMUM PAYMENT
Years back, the standard minimum payment for a credit card was 5% of your total credit card balance. Over time, this standard decreased to 2% and for two main reasons. If we’re looking at it with rose-colored glasses, the first reason is relatively positive for consumers. It gives them flexibility in their monthly budget. A low monthly credit card payment means you have less financial stress that will help you avoid defaulting on higher-priority debt obligations. You know, like your mortgage payment to keep the roof over your head, or the car loan so you can continue driving to work to make the money you need so you can make all the payments.
The second reason is that a credit card company makes more profit on “revolvers”, people that carry a balance on a credit card. Only making your minimum monthly payment each month ensures that other people make money off of you because you’re going to take a while to pay off the full balance. When you have extra cash, use it to pay down your balance rather than getting stuck paying forever when you could have been done in a fraction of the time.
How long will it take to pay off a credit card? Take a look at the example below and test out your own credit card payoffs here.
Now, all of that calculation is based on the assumption that you never use your card again after the initial $2,000. That leads us to number 2.
OVERUSING YOUR CREDIT LINE
When you’re trying to pay down a credit card balance, the worst thing you can do is continue to use the card. Yes, yes, I know. The points! There’s a lot of advice out there recommending you to use a credit card for every single purchase to rack up the points, and we agree – as long as we’re looking at the other half of that advice: Pay the balance in full each month. If you can’t afford to do that, you’re basically just paying extra money in interest for those points, making the entire point of earning points useless. Get the point?
Do what you have to do to avoid using that card until you’ve paid it in full. Freeze it in an ice block, remove it from your mobile wallet, put it in your safe deposit box. You don’t want to close out the credit line, because that can hurt your credit score, and it’s still good to have it available for an emergency, but the goal here is to make yourself do Olympic hurdles that really force you take a minute and think about whether using your card will be worth it in the long run.
NOT TAKING ADVANTAGE OF LOWER APR OFFERS
Game the system! Corporations aren’t the only ones that can use the system to their benefit. Credit companies, banks, and (yes, us too!) credit unions all want your business, and they’ll make some great deals to earn it. This one is hard for a lot of people because if you’re already worried about the amount of debt you currently have, you’re probably walking promotional mail straight from your mailbox to your dumpster. Am I right? I know I’m right because I’m speaking about myself from a few years ago.
You can’t let the fear of a change in your financial routine keep you in debt. Whether the fear is about submitting an application, or working with a new lender, or any other deviation, do not let that stand in your way of taking advantage of something like a low balance transfer offering 0% for a fee that is less than a couple months’ worth of the interest you’d already be paying on your credit card. A low-interest personal loan is an even better option when trying to pay off high debt amounts because there’s usually no additional fee, it avoids the seductive temptation of another open credit line, and both your interest rate and your payment are fixed, giving you more structure.
Play with the numbers to see how consolidating credit cards and other high-interest loans can save you hundreds of dollars with a low-interest personal loan.
NOT SETTING FIRM REPAYMENT GOALS
It all really boils down to this one. Without a plan, nothing’s gonna go quite right, and that’s a lesson you can apply to pretty much anything in life. There are a few decisions you’ll need to make, but once that’s done, you’ll be beaming from ear to ear with all your newfound financial freedom.
● Decide on your budget. How much can you afford to pay each month?
● Decide on a timeline. When do you want to have this completely paid off?
● Decide on where you’re going to pay this off. Are you going to keep the credit card with the same company or are you going to pay it off with a balance transfer to another credit card or a personal loan?
● Decide how you will make your payments. Are you going to set them on autopay or make them manually each month?
There are a lot of little ways debt can creep up and throw your financial plan completely out of whack, from unexpected expenses to fluctuations in the economy and interest rates. That’s why it’s so important to identify the major traps, so the little ones won’t throw you so off balance.
However, more important than anything is to simply use your credit lines responsibly and ask for help from a friend or trusted financial advisor when you’re not quite sure what your options are. With a little forethought, you can still reap the rewards of using credit cards without compromising your financial freedom.
Debt doesn’t have to be a life sentence. SunWest can help you consolidate debt with a low-rate personal loan. Plus, enter to win $5,000 during our Picture Your Life in Color contest until February 24, 2023!
Published by SunWest Credit Union
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