Tuesday, October 4, 2022

How To Decrease Credit Card Debt

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Understand How The Debt Happened

How To Get Out Of Paying Credit Card Debt | Gamez Law Firm

Figuring out how you got into debt might help you avoid overspending in the future. Try going over your credit card statements from the past few months to find patterns in your habits. Are there places where you can make some changes to your daily or monthly spending?

For example, maybe you can cancel the gym membership and work out at home or you can cook more of your meals instead of dining out.

If your credit card debt was the result of a large, unexpected expense, you might make a plan to create an emergency fund. This can help you cover big bills in the future without going into debt.

Create A $1000 Emergency Fund

It’s really important to have an emergency buffer while you reduce credit card debt. This way if something happens, you can use this cash instead of going back to your credit cards. Plan to contribute to your emergency fund a little bit at a time, e.g., $100 a paycheck. Also, consider opening dedicated savings account like a Christmas Club Account for your emergency fund. This will help you to avoid accessing the funds until necessary.

Use The Avalanche Methodthe Most Popular Way To Get Out Of Credit Card Debt Some Claim Its The Best

Many people have found that the Avalanche Method was the best way for them to get out of credit card debt.

Heres how it works. After paying debts that are on fixed monthly payments , make the minimum payments on your credit cards with the lowest interest rates and maximize your payments on the credit cards with the highest interest rates. Once a debt is paid, use this extra money to pay down the credit card with next highest interest rate.

The Avalanche Method will save you money and help you pay down all of your debts faster.

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Review Your Spending Habits

This tip might seem apparent to some, but you cant make something better if you dont know how it works. Typically, people in credit card debt fail to look at their spending and lifestyle, but that is the first area they need to improve to get out of credit card debt.

Many Canadians only account for a little over 70% of their spending, while the rest gets lost in the details. The remaining 30% of expenditures contain critical information that throws light on how you got into debt in the first place.

Whether it is pedicures at the salon, or a round of drinks after work, knowing all the details about your spending will enable you to plot a strategy against future financial entrapment.

Create $500 To $1000 In Savings

6 Ways To Reduce Credit Card Debt

Its much harder to get out of debt when youre relying on credit. To change your mindset and permanently get your finances onto the right track, you need to learn to operate out of your own money rather than relying on someone elses money. When you rely on credit, your ceiling is your credit limit. Once you hit it, you cant spend any more. So you stop. You need to change this. Your spending limit needs to be the money you actually have in your chequing account. Once its gone, then you shouldnt spend any more. Once you refine your spending plan and learn to follow it, you should be able to always keep a buffer of $500 to $1,000 in your chequing account. You will occasionally need this money when an unexpected expense pops up . Think of this money as your new credit limit. If you hit the max on your credit cards line of credit, youd have to sacrifice and economize until you paid it down enough. The same is true with your $500 to $1,000 chequing account buffer. Once you use it up, youll need to tighten your belt and spend less until it is built back up.

To find the $500 to $1,000 saving buffer youll need, have a look above at the How to Free Up Some Money section. There are lots of ideas there. It may take you a number of attempts to learn how to live off of your own money. Breaking old habits is hard. But learning to rely on yourself and ending your dependence on credit is worth it.

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Beware Of Debt Settlement Scams

Some companies offering debt settlement programs may engage in deception and fail to deliver on the promises they make for example, promises or guarantees to settle all your credit card debts for, say, 30 to 60 percent of the amount you owe. Other companies may try to collect their own fees from you before they have settled any of your debts a practice prohibited under the FTCs Telemarketing Sales Rule for companies engaged in telemarketing these services. Some fail to explain the risks associated with their programs: for example, that many consumers drop out without settling their debts, that consumers credit reports may suffer, or that debt collectors may continue to call you.Avoid doing business with any company that promises to settle your debt if the company:

  • charges any fees before it settles your debts
  • touts a “new government program” to bail out personal credit card debt
  • guarantees it can make your unsecured debt go away
  • tells you to stop communicating with your creditors, but doesnt explain the serious consequences
  • tells you it can stop all debt collection calls and lawsuits
  • guarantees that your unsecured debts can be paid off for pennies on the dollar

Build Up Personal Savings

In addition to paying down your debt, make sure that you’re putting aside some money to build up emergency reserves, said Scherer. This is to keep you from accumulating more debt while you’re working to pay off your existing balance.

“You get it paid off, but then the transmission blows or the refrigerator takes a dump on you and now you’re back on the credit card for another thousand bucks,” he said.

If you want to keep your credit cards open so you don’t mess up your credit score but not use them as much, Orman suggests hiding them from yourself.

“What you might want to do is take all your credit cards, put them into a plastic bag and put them in the freezer,” she said. “Do not tempt yourself.”

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Pay More Than The Minimum

Let’s say you owe $5,000 on a credit card and are paying 15% interest. Your credit card company might allow you to make a modest minimum payment, such as 2% of your balance, or $100 a month. But just making that minimum payment will result in years of debt and many hundreds of dollars in added interest.

Assuming you make no new purchases on the card and pay that $100 minimum each month, how long will it take to pay off the $5,000 debt? The answer is 79 months, or more than six and a half years. You will also end up paying close to $2,900 in interest. That’s a lot of money to pay for borrowing $5,000.

Track Your Progress Each Month

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To make sure you are actually reducing your debt, its important to add up your debt balances each month and write them down. By consistently tracking your progress each month youll be encouraged, and youll be sure to actually reduce your debt. If you get too relaxed because your plan is going well and you start spending more money than you should, youll instantly notice at the end of the month when you add up your debt balances and see that you arent progressing as you would like to.

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Researching Debt Settlement Companies

Before you enroll in a debt settlement program, do your homework. Youre making a big decision that involves spending a lot of your money money that could go toward paying down your debt. Check out the company with your state Attorney General and local consumer protection agency. They can tell you if any consumer complaints are on file about the firm youre considering doing business with. Ask your state Attorney General if the company is required to be licensed to work in your state and, if so, whether it is.Enter the name of the company name with the word “complaints” into a search engine. Read what others have said about the companies youre considering, including news about any lawsuits with state or federal regulators for engaging in deceptive or unfair practices.

Finding Better Ways To Reduce Debt Fast

If you cant pay off your debt in 60 payments or less, dont panic. There are other ways to reduce debt quickly that wont damage your credit score. The best way to reduce debt fast when traditional payment methods wont work is through debt consolidation.

Debt consolidation works on same principal as debt reduction. You reduce or eliminate interest charges, so you can focus on quickly paying down principal. But instead of trying to pay off one debt at a time, you roll them all into one payment at the lowest interest rate possible.

There are three ways to consolidate debt:

Any of these options will consolidate your debt so you can pay it off efficiently with one monthly payment. The first two options work by taking out new financing either a credit card or loan that pays off your existing balances. The last option is a professionally assisted form of debt consolidation. You still owe your original creditors, but a credit counseling helps you set up a payment plan and negotiates on your behalf to minimize APR.

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Trim Your Expensesfree Up Some Cash To Pay Debt Faster

Speed up your debt repayment and get out of debt fast by reviewing your monthly expenses and looking for ways to cut your costs.

Start by tracking your spending for the next two weeks to find out where exactly your money is going . You might be surprised to learn that making your morning coffee instead of buying a $3 specialty drink will save you over $1,000 a year!

Check your spending to see if you can find more ways to save some money. Every little bit will help you get closer to a life free from credit card debt.

If youd like more ways to save on expenses, we have tons of ideas on our educational website, MyMoneyCoach.ca. Here are some great resources:

Struggling with credit card debt?

Get help from an expert.

Trying to pay off your credit card debt can feel overwhelming, but you dont have to do it alone. One of our professional credit counsellors would be happy to review your finances with you, work with you on making a solid budget for successfully repaying your debt, or work you on special debt repayment solutions if they fit your situation. Speaking with our certified counsellors is always free and confidential.

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Pay Off The Highest Interest Rate First

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“Let’s say you have four credit card debts,” said Charles Hughes, a certified financial planner in Bayshore, N.Y. “Instead of making four equal payments on all of the cards, consider making the biggest payment on the card with the highest interest rate.” After you’ve paid that card off, move on to the one with the next highest rate.

This technique is called the debt avalanche, and it’s the most financially efficient choice. It contrasts with the other payoff strategy, the debt snowball, in which you completely pay off the smallest debt first . Then you use your extra money to methodically pay off the rest of your debts from smallest to largest. This gives the psychological benefit of reducing the number of debts you owe through a series of smaller victories until the biggest one is the only one left.

High credit card spending can hurt your credit scoreeven if you use less than your credit limit.

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If You Can Make Two Minimum Payments Each Month

Card issuers typically charge interest on a daily basis, “so the sooner you make a payment, the faster your average daily balance is reduced, which translates into fewer dollars in interest that you ultimately pay,” says Gerri Detweiler, the former director of consumer education for , a personal finance website.

If you’re on a tight budget, go ahead and pay the minimum due each month, then try to make the same payment again two weeks later. Keep making a payment of the initial minimum-due amount twice a month until your debt is paid off. To keep track, put a reminder on your calendar.

Case in point: Say you charged $2,000 on a card with a 17 percent interest rate. If you make only the minimum monthly payment , it will take more than 5 years to pay off the balance. But if you make an additional payment of the original amount two weeks later, you will be debt-free in less than three years.

Negative Consequences Of Debt Settlement Include:

  • There is no guarantee that a creditor will settle at a certain percentage.
  • The IRS could require paying taxes on the amount saved after a .
  • Late fees and interest can cause balances to increase over the programs first year.
  • A creditor could issue a person a summons to go to court, and although this is rare, it could happen.

Contact Golden Financial Services Today, and We Can Help You Get Approved For the Lowest Possible Payment.

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Use The Snowball Methoda Highly Motivating And Popular Debt Reduction Strategy

Another method a lot of people like to use to get out debt is to pay off small credit card balances first. This can have a powerful psychological effect on many people because they can feel like theyre making progress sooner. This can be very encouraging and provides a lot of people with motivation to keep paying down their debt. Heres how it works:

1. Use any extra money you can come up with to pay off your credit card with the smallest balance first . Paying off this card will give you a quick win and a sense of satisfaction and accomplishment.

2. Dont pocket the minimum monthly payment that you used to pay every month on your smallest credit card. Instead, start paying down your next smallest credit card balance with that money. You should of course throw all the extra money you can at this debt to get it paid off as quickly as possible, but the key is to free up money as you pay off your smallest credit card balances first. The monthly payments you free up will help you pay down the next smallest credit card even faster.

3. Repeat the process: focus on paying off your next smallest credit card balance using the money freed up from the smaller cards you paid off earlier. With the snowballing monthly payment this method creates, your debts will get paid down faster and faster as you go, and youll get more and more motivated as you pay off one card after another.

Why Being Debt Free Is Important

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Credit card debt can impact your overall financial health in several ways. Your balance may grow larger over time because of interest charges. If youâre making only the minimum payment each month, it could take a long time to fully pay off the debt. Plus fees for any late or missed payments can add up.

A large credit card balance can also negatively impact your credit, since credit scores are partially based on your . And using too much of your available credit can push you past the 30% utilization rate experts recommend.

Another perk of paying off your credit card debt is potentially having more room in your budget for saving money and rewarding yourself every now and then.

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Pay Above The Minimum

Though it might take donkey years to pay off your credit card debt paying only the minimum, that only means more profits to the bank and more money finding its way out of your pocket. Your best strategy is to find additional money and add it to your payments. With consistency, youd achieve significant results.

Refinance With A Personal Loan

Ask your credit union or bank if you can roll all your card debt into one lower-interest loan. The average rate on a two-year personal loan from a bank was under 10 percent at the end of 2020, according to the Federal Reserve. That may be a better deal than you can get from your card issuer. Don’t borrow against your home or your car to pay off your card that creates a new risk of losing your possessions. And don’t grab at debt consolidation loans from companies you’ve never heard of. Chances are too high that they’ll load you up with new fees or, worse, scam you.

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How Much Credit Card Debt Can I Consolidate

There isnt a limit on how much debt you can consolidate, but there are situations where it makes more sense to do so, depending on how much you owe and the terms of your potential new loan. If youre considering consolidating your debt, speak to your credit card issuer before you decide. Find out how long it will take you to pay off your debts at their current interest rate and compare that to the potential new loan.

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