How Debt Affects Your Credit Scores
The first thing you should understand is that debt has a ripple effect across your entire financial life, including your .
In this article well discuss two types of debt revolving and installment.
Revolving debt primarily comes from credit cards where you can carry, or revolve, a balance from month to month. You can borrow as much money as youd like up to a predetermined and interest rates are subject to change. Your monthly payment may vary on revolving debt depending upon how much you currently owe.
Installment debt comes from mortgages, car loans, student loans, and personal loans. In most cases, the amount of money you borrow, the interest rate, and the size of your monthly payments are fixed at the start.
With both types of debt, you must make payments on time. When you miss a payment, your lender could report it to the credit bureaus a mistake that can stay on your for seven years. You may also have to pay late fees, which wont impact your credit scores, but can be burdensome nonetheless.
Aside from your payment history, the way each type of debt affects your credit is quite different. With installment debt, like student loans;and mortgages, having a high balance doesnt have a big impact on your credit.
But revolving debt is another matter. If you carry high balances compared to your credit limits on your credit cards from month to month, it will likely have a negative effect on your credit scores especially if youre doing it with multiple cards.
Apply For A Debt Consolidation Loan
If you have good credit, you may be able to get a debt consolidation loan, which is a personal loan used to pay off credit card debt. Some personal loans charge higher interest rates than credit cards, but their rates are lower on average.
What’s more, debt consolidation loans have set repayment terms, which can help ensure that you become debt-free by a certain datethat can be more difficult if you have just a low minimum payment every month.
Just make sure you can afford the monthly payment. Many personal loan companies offer prequalification, which doesn’t impact your credit and offers you a quote for the amount you want to borrow. You can also use a personal loan calculator to figure out how much you’d need to pay each month and how much interest you’ll pay by the time your debt is paid off.
Paying More Than The Minimum
Paying more than the monthly minimum helps accelerate your debt payoff and is a more active approach.;
When you pay more than the minimum each month, you are chipping away a larger chunk of your debt and thus shortening the amount of time it will take to pay off.
Unlike just focusing on one credit card balance, paying more than the minimum;is harder to do if you are juggling multiple credit cards with revolving balances. For this scenario, we recommend the popular;‘snowball’ or ‘avalanche’ debt repayment methods. We outline each below:
When deciding what method works best, there is no right or wrong answer. Choose the method that motivates you the most: seeing results quickly by paying off low credit card balances or saving money by paying down high-interest debt.
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Look For Ways To Earn Extra Money
If youre still struggling with how to pay off debt with no money, look for opportunities to make more money. For better or worse, the gig economy has created a variety; of opportunities online, including dog-sitting, ride-sharing, food delivery and graphic design. If you can find creative ways to maximize your free time, put that extra cash toward your debt.
Credit Card Debt Consolidation
If the minimum payment requirements for your credit card debts are too high, consolidate!
Debt consolidation loans often lower your monthly payments. However, since it also reduces your interest rates, you can get out of debt faster even though you pay less.
If you use a debt consolidation loan, then the term you choose determines the monthly payment requirement. Choosing a longer term will lower the monthly payment.
Most lenders will let you go up to a 48- or 60-month term on a consolidation loan. This can significantly cut your monthly payment requirements.
Ideal for: Up to $25,000 in credit card debt
If your total monthly credit card payments are too high prior to consolidation, you may need to opt for a personal loan with a longer term.
In this case, a 3 or 4-year term may be the best solution to give you lower monthly payments, while still allowing you to get out of debt faster. Its also worth noting that this is only the best solution if you have good credit .
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Don’t Confuse Wants And Needs
It’s easy to convince yourself that you “need” to purchase a new tv or that you “need” to go on vacation. The truth is, there aren’t that many true needs in life. You;need;food, shelter, clothing, transportation, and things like that. You;want;steak, a nice house in the suburbs, designer labels, and a luxury car, for example.
Other Ways To Pay Off Credit Card Debt
The WalletHub method for getting out of credit card debt isnt the only option available to you. Its just the best way to go about it, in our opinion. With that being said, here are a few other items in your debt-repayment toolbox.
|Declares you cannot pay your debts and provides legal protections.
This should be a last resort, as it can ruin your credit.
Whether or not any of these individual options is a good idea depends on their interest rates, fees and other terms. In other words, you need to crunch the numbers and figure out which route will save you the most money.
However you decide to proceed, youll need to address the elephant in the room: what caused you to get into debt in the first place. For most people, that means reevaluating spending habits to cut back on unnecessary expenses. We also recommend checking out your free personalized credit analysis. Improving your credit score could help you get out of debt faster, if you can qualify for a 0% balance transfer credit card. And a higher credit score will help you stay out of debt by reducing your overall financial burden.
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Why Is Credit Card Debt So Difficult To Manage
Credit cards are a revolving type of credit. A credit card company extends you a credit line that you can borrow against as needed. Each month, you must make a minimum required payment equal to a small percentage of the current balance you owe.This creates the first challenge with credit card debt, that the payments can be unpredictable. The more you charge, the more you must pay each month. For most people, credit card debt is easy to manage when the balances are low. When the balances get high, the bills begin to eat away at your income, leaving you less money to save and cover emergencies. You end up in a cycle where you live paycheque-to-paycheque and every emergency expense goes on a credit card. compared to other forms of credit. Those high rates mean that a large percentage of each payment you make gets used to cover accrued monthly interest charges. At an average interest rate of 19.99 percent, more than half of every minimum payment you make covers interest.The result is that it takes a long time to pay a balance down with minimum payments. When a credit card balance is high, it can take years or even decades to pay the balance off. Even if you pay more than the minimum, it can be difficult to get ahead.
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Get Professional Help If You Need It
Certified financial planners arent only useful for managing assets and investment accounts. The right one can work with you to assess your finances and create a budget that can help you reach your short- and long-term financial goals and set you up for a debt-free future. Sometimes an outside eye can help you focus your strategy and alert you to options you may not have considered before.
If youre falling short on income to cover minimum payments, not making income at all or supporting family members as bills mount, it can feel impossible to imagine a life of financial freedom. But asking for help can be a good first step.
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Stop Using Your Credit Cards
If you want to get out of credit card debt, its time to break up with your credit cards. And you dont have to have a nice dinner or a big conversation with them. Just put them on the table and say, Its not meits you . . . Youre bad for me, my finances and my future. Goodbye. And never look back.
If you stop using these credit cards, youll never run the risk of a credit card balance. Ever. Again. Start using a debit card and cashyour own real moneywhen you pay for things. Do this for you, your finances and your future.
Make Sure To Send Your Minimum Payment
Sometimes money gets tight, but thats just a fact of life. While a lot of times this is out of your control, what is in your control is the ability to make at least the minimum payment on your balances. By making the minimum payment on your credit card balances each month, you greatly improve the chances of your credit score not being completely ruined. In addition, failure to pay the minimum payment on your credit card balance each month runs you the risk of being hit with even higher interest rates.
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Pay More Than The Minimum
Look at your credit card statement. If you pay the minimum balance on your credit card, it takes you much longer to pay off your bill. If you pay more than the minimum, youll pay less in interest overall. Your card company is required to chart this out for you on your statement, so you can see how it applies to your bill.
Simple solution: Pay a bit extra each month. Every dollar over the minimum payment goes toward your balanceand the smaller your balance, the less you have to pay in interest.
Prioritize Your Debt By Balance
What if you order your debt from highest interest rate to lowest and find that your highest interest rate debt is also the one you owe the most on?;That might seem discouraging, and you haven’t even started to plan yet.
If this turns out to be the case, and you’re looking at a mountain you don’t think you can reach yetand aren’t excited to reachthen you might be better off with the debt snowball method. Instead of interest rate, you focus on paying off the debt with the lowest balance first;and then work your way up.;
No, you’re not going to save as much money this way, but getting out of debt is often an emotional experience, not a logical experience. You should choose whichever method makes you the most motivated to kick your debt to the curb. If getting a small win every so often is more appealing, then the snowball method is the way to go.
Let’s take a closer look at how these debt repayment methods work as there’s more to them than meets the eye.
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Take Out A Personal Loan
With today’s low interest rates, it’s also a good time to consolidate with a personal loan. This strategy may seem counterintuitive at first: Why take out another line of credit to pay of an existing line of credit? Because personal-loan interest rates can be as low as 6% to 7%, compared to 17% to 24% on a credit card.
A personal loan will give you quick access to cash, which you can put directly toward your outstanding balances. After that, you’ll have one fixed monthly payment to repay your loan. You can find personal loans easily online through lenders like SoFi or loan comparison sites like Credible.
I Sold Unused Frequent Flyer Miles
On a related note, if youve collected a substantial amount of frequent flyer miles, there are websites that will buy them from you. Like anytime you sell something;to a third-party broker, you get far less than the miles are worth, but if youre in debt, cash is far more important than a few frequent flyer miles.
I will say that this is a somewhat sketchy move, as the airlines prohibit it. I didnt actually sell my miles; rather, I exchanged them for points that could be used for gift cards at places like Amazon. This site describes;how selling frequent flyer miles works .
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Home Equity Line Of Credit
Its never a good idea to borrow money against your home. You risk losing your house if you cant pay back the loan on time. No thanks! Its not worth a risk like that. Forget it, and just dont do it.
At the end of the day, these types of debt reduction options are dicey at best, only treating the symptoms of your money problems. Theyll never help you address the root issue of why you landed here in the first place. You dont need to consolidate, settle or borrow to deal with your debt. Plain and simple: You need to change how you handle your money. It will never change until you do!
Tips For Paying Off Credit Card Debt
Ready to learn the best ways to pay off your ? Its easy to feel stuck when youre struggling to make minimum payments and frustrated with how far your financial goals seem to be. However, no matter how bad you think your situation is, theres a way out that will work for you. Here are 10 practical ways you can quickly tackle your maxed out cards and take your first real steps towards getting out of debt.
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Pay Off Your Most Expensive Loan First
Your most expensive loan is the loan with the highest interest rate. By paying it off first, youre reducing the overall amount of interest you pay and decreasing your overall debt. Then, continue paying down debts with the next highest interest rates to save on your overall cost. This is sometimes referred to as the avalanche method of paying down debt.
Six Strategies For Paying Off Credit Card Debt
Take Charge America Team
People faced with high credit card debt face another challenge, too: picking and choosing from various ;strategies to paying off credit card debt.
There are many approaches, but the right strategy for paying off credit card debt depends on your financial habits and motivation . The six most popular creidt card payoff strategies include:;;
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There Is A Difference Between Being Broke And Overspending
Did you use all your money to buy things that werent essential? Well, this doesnt mean to be broke. It means more than you took a bad decision when it came to spending your monthly budget. So, you should not make the situation worse by making even further decisions.
By prioritizing your purchases, buying only what is really necessary you will be able to make some room in your budget for your credit card debt. So, you are not broke; you just need to be more careful when spending money.
Find A Way To Cut Your Monthly Expenses
Dont you know where your money flies every month? Well, you can always check your monthly bank statements and see how and on what you spend your money. While looking at each purchase, do ask yourself it is was really necessary to make it.
Most certainly you will find some expenses that can be cut from the list, so you will be able to get more money for covering your credit card debt. Keep in mind that getting rid of debt is a goal, so you need to be committed to and understand that you are not cutting costs for anything.
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Penalty Interest Rates And Fees Are Evil
If youre drowning in credit card bills, it may be tempting to focus on one card at a time and forget about the rest. Bad idea.
Miss two consecutive minimum payments on your credit card and your card issuer can, and probably will, hike your interest rate to its penalty interest rate. The average interest rate on credit cards in 2014 was around 15%, while the average interest rate was around 28%.
Heres another way to look at it. If you have a $1,000 on a credit card with a 15% rate and make payments of $25, it will take you 56 months to pay it back, and it will cost you $395 in interest. Thats bad enough, but miss a couple of payments and things get really crazy.
With a 28% penalty rate it will take you 118 months of minimum payments to repay the $1,000. By the time you finish, the total interest paid will be $1,935. A total of nearly $2,935 in credit card bills to repay a $1,000 loan.
Bottom line: Never miss a minimum payment on your credit card.