How To Reduce My Credit Card Debt
The fastest way to pay off credit card debt: Pay the card with the highest interest first. Invest the extra money you have each month to withdraw your card at the highest interest rate and pay at the lowest interest rate. Don’t use your cards. The easiest and fastest way to get rid of credit card debt is to stop using credit cards. Is being organised. Prepare a budget. Ask for a lower interest rate.
Keep An Eye On Your Credit Report
McClary recommends checking your credit score before and after you close a card. Youll get an idea of the size of the impact tand how much repair you need to do. Its also just a good habit to regularly check your credit report and dispute any errors, says McClary, especially nowduring the COVID-19 pandemic, you can get weekly reports for free at annualcreditreport.com.
Disclaimer: The opinions expressed by the interview subjects are not necessarily those of Earnest.
How To Consolidate Credit Card Debt On Your Own
- 1. Check your budget and cut unnecessary expenses. When consolidating debt, you want to pay it off as quickly as possible. That’s not how you walk
- 2. Calculate your credit card debt.
- 3. Determine if you can pay your entire balance without interest.
- 4. Buy a prepaid credit card.
- 5. Open a new account, consolidate your debt and leave.
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Should You Get A Personal Loan Or A Credit Card
With a personal loan you know exactly how much you pay each month. Plus, bundling credit cards into a single loan means fewer payments and lower interest rates to worry about. This strategy can cut your budget and help you keep track of your bills. However, taking out a loan is not always the best solution.
Keep The Card For Small Regular Payments
If you dont want to swap, upgrade or downgrade your credit card but arent currently using it, you can keep the account active without much effort. If you choose to keep the credit card open, put one small recurring charge on it every month and set up automatic payments so that your statement balance always gets paid on time. This way, your credit card remains active without much effort on your part.
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How To Consolidate Credit Card Debt Without Ruining Your Credit
Whether or not debt consolidation makes sense depends as much on your personal financial situation as it does on the type of debt consolidation you’re considering. Consolidating debt with a loan can lower your monthly payments and provide short-term relief, but a longer term could mean paying more interest overall.
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Write A Letter For Your Records
To cover all your bases, it can be a good idea to have a form of written proof that you requested the account be closed and when you closed it. Because your credit score is so important and hard to build, having written proof leaves little room for error that could have negative repercussions. You may even enclose a check for the last payment on the card. Send the letter via certified mail or request a receipt to prove that the bank received it.
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Reasons You Should Close A Credit Card
Despite the potential downsides of closing a credit card, there are some very good reasons to close a credit card. Here are five reasons you might want to close a credit card:
What To Do Before You Cancel Your Credit Card
Before you cancel your credit card, read the terms and conditions carefully. Ensure that you are not obliged to pay anything if you terminate the card. Be aware of any fees for closure or balance transfer before doing anything else.
If you are enrolled in a 0% installment program or have the remaining total amount due for the next billing cycle, ensure that you settle all your bills. If you have an active installment plan and want to cancel it early, the bank will require you to pay the remaining balance on top of the processing fees.
If youre earning rewards points from that credit card, better redeem them for vouchers or gift certificates so you can use them when you shop online. Otherwise, you will lose them if you cancel your card soon without checking the redeemable rewards points.
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How Canceling A Card Can Hurt Your Score
How much credit you’re using. Canceling your cards with the highest credit limits could potentially do the most damage. Close to a third of your FICO score the one most often used for individual credit decisions comes from the portion of your credit limit you use, called . Thats calculated both per card and overall. And using just a fraction of your available credit is best for your credit score.
Personal finance experts recommend avoiding using over 30% of your available credit ever the highest scorers generally use under 10%. Say you have three credit cards two with $5,000 limits and one with a $10,000 limit and a balance of $2,000. Youre using 10% of your combined credit limit.
If you canceled the card with the $10,000 limit, you would cut your overall credit limit in half, which would double the percent of available credit you are using. That could hurt your credit score.
With credit, older is better. The average age of your credit cards also affects your score. The impact is not nearly as large as credit utilization, but the age of your account does matter. A card youve had for a long time helps your credit as long as you keep it open.
How To Refinance Personal Loan Debt
- Check your credit history. When refinancing a personal loan, the first thing to do is verify your creditworthiness.
- Purchase conditions. If your credit standing is in good shape, look for traditional and online lenders that offer personal loan refinancing.
- Apply for a loan and wait for a subscription.
- Pay off your original loan.
- Start paying off your new loan.
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How To Consolidate Credit Card Debt
What can I do to reduce my credit card debt? Pay the current minimum amount or more into your account each month. Since the balance will decrease and the minimum amount will decrease as a result, you should not decrease the minimum amount. This is one of the easiest ways to reduce your credit card debt. Take advantage of unexpected profits to boost your credit card payments.
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Consider Alternatives To Canceling Your Credit Card
Even if closing a credit card wont affect your lifestyle or credit profile too much, it still might be easier not to close the card. In fact, there are several alternatives that could end up being less risky.
Put the card in a drawer. Maybe youve decided you just dont like using credit cards. If thats the case, consider keeping the card and putting it away instead of closing it. This course of action might seem obvious, but keeping the account open while removing the temptation to use the card could be a straightforward way to keep the card without harming your credit. Find another way to handle mounting debt. If youre trying to get out of credit card debt and dont want to add new payments, you might be considering negotiating to close the card account with your issuer. But you might also be able to pay off your debt with a balance transfer credit card or personal loan. These options might offer a more manageable way of paying off your debt. Downgrade your card to avoid an annual fee. If youre paying an annual fee on a card you dont use, you could ask your credit card company if it can keep the account open while downgrading you to another card with no annual fee.
How Much Does Closing A Credit Card Hurt Your Credit
People should think very carefully about canceling a credit card on which they have developed a positive payment history, says Freddie Huynh, who logged 18 years as FICOs lead data scientist before joining San Mateo, Calif.-based Freedom Financial Network as its vice president for credit-risk analytics.
The longer you hold such an account, Huynh says, the more valuable it is in your credit score determination. This is because more credit history provides prospective lenders with more information on a borrowers financial behavior over time.
If you close any card older than your average account age, youll reduce your average and your score will take a whack. For instance, a consumer has five credit cards, 15, 12, 7, 3, and 2 years old, resulting in an average account age of 7.8 years. Close both the older cards and the consumers average account ages slips dramatically, to 4 years. Thats not much credit history Huynh says and FICO will respond negatively.
Shut down a card with lots of available spending room credit limit $5,000 or higher, for example and youll squeeze your credit utilization ratio.
And you guessed it thats another whack at your credit score.
But, worried about the temptation to spend more, he closes the $10,000 card. That means hes spending $7,000 on cards with a total credit limit of $13,000 and his credit utilization soars to 54% .
Hes well over the recommended credit utilization of 30% and his FICO score will take a hit.
Check Your Credit Report To Ensure The Account Is Closed
You may want to get a free copy of your credit report to make sure the account is marked closed. It will take seven years for any late payments or delinquencies associated with that account to disappear from a credit report. The good news is that good credit history will remain on your credit report longer. A closed account that was in good standing will remain on your credit report for ten years. This will help shift the majority of your credit information to positive as time passes.
The Case For Closing Credit Cards
If an open credit card has high annual fees, it makes sense to ditch it. But what if theres no fee? Why not just keep the card open and not have to worry about credit score repercussions?
Its all about financial peace, says personal finance speaker and author Anthony ONeal. ONeal started his own shift away from credit cards when he found himself in $35,000 of debt at age 19. Today, he doesnt have a single credit card.
His view: For most people, having extra credit cards lying around is just a temptation to overspend. 98% of Americans say theyll get a credit card and only use it for emergencies, or use it and pay off the total credit card balance every single month on time. 98% of cardholders dont do that, he says.
When it comes to financial well being, removing that temptation and committing to living within your means is more important than a good credit score, argues ONeal, an advocate of closing all credit cards.
But if youre just looking to downsize to one card and simplify your lifenot eschew mainstream credit entirelythere are ways to do it without putting your score at risk.
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Is It Better To Let A Credit Card Expire Or Close It
Again, it depends on who you ask. If you ask the credit reporting systems, theyll say its always better to keep your credit card account open for as long as possible. Somehow, , keeping your card open shows that youre responsible with credit. If you let your card expire, you probably wont get penalized for it. But if youre not going to use credit, what do you need the account for? Yepits time to close that thing for good.
Send A Cancellation Letter
It may seem old-school to mail a cancellation letter after you just called, but it’s a key step that shouldn’t be overlooked. Odds are the representative you spoke to closed your account, but there’s always the chance of a mistake or computer glitch.
Follow up with a brief letter to your card issuer stating your desire to close the credit card. Include that you want the account to be “closed at consumer’s request” and include your name, address, phone number, account number, and the details of your call with the bank’s representative.
As an added layer of protection, send the letter via certified mail so you can prove it was delivered. You can also ask for written confirmation that your account has been closed with a $0 balance.
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Destroy Your Old Card
After your account is officially closed, you can destroy your card. The simplest way to do this is to put your card in a shredder. You can also cut it into tiny pieces.
If your card is made out of metal instead of plastic, such as the American Express® Gold Card, these options won’t work. You’ll need to contact your bank and request a prepaid envelope that you can use to mail your old card back. Once received, your bank will safely dispose of it.
How Your Credit Score Is Calculated
Lets review how your credit score is calculated. Remember that credit is a tool you can use to pay for something without physically having the cash in your wallet, on the promise that you will repay it. Typical forms of credit include: credit cards, lines of credit, mortgages, and student loans. How you use your credit is ultimately what determines your credit score and is calculated based on the following key criteria:
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What Is The Best Way To Refinance Credit Card Debt
The obvious answer to any refinancing is that you want to refinance for as long as possible at the lowest possible interest rate. This results in a minimum monthly payment and reduces the interest charged over the life of the loan. Unfortunately, most people have other complications.
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Keep An Eye On Your Online Account
Again, the account has been closed, but it is possible for transactions to show up. This is especially common in the case of refunds. If you return an item you purchased with the card or the card issuer refunds a portion of your annual fee, it can show up as a credit. If this happens, contact the card issuer to ask for a refund check.
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Check To Be Sure Your Account Is Closed
In a few weeks, check your credit report to make sure the credit card is reported as closed by you. You can check your credit report for free by going to AnnualCreditReport.com or by using a free service like Credit Karma, Credit Sesame, or WalletHub.
It won’t necessarily hurt your credit score if it’s not reported as closed or if it’s reported as closed by your credit card issuer. Still, you want your credit report to reflect the status of your account accurately. Contact your credit card issuer or file a dispute with the credit bureau if your credit card account isn’t reported as closed.
Before You Close The Account
Before you actually close your account, you need to assess the negative consequences this might have on your credit score. There are several factors that make up your credit score. One of the most important factors is your debt utilization. This is the amount of debt you have compared to your total available credit. Experts say it should be a maximum of 30%. A higher percentage could damage your credit score.
Eliminating a , even if it is unused, can have a fairly dramatic impact on your debt utilization. To illustrate, lets say you have a total of $20,000 in available credit on all of your credit cards and balances that total $6,000. If you close an account you never use with a $8,000 credit limit, your debt utilization is going to go from 30% to 50% . That will certainly have a negative impact on your score. If that credit card does not have an annual or monthly fee, it may be much more advantageous to keep the account open. Simply use the card once every month to buy a lunch to make sure the account is active so the issuer wont close it.
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