Using credit cards is very convenient. However, even if you are responsible for credit obligations; as a result, you can get huge debts and damaged credit history.
There are eight things you should know about credit card debt, but the main recommendation is to spend wisely and quickly return capital. If you are already struggling with financial obligations, below, you will find helpful information on how to reduce your debt.
All disadvantages of credit card debt
There are several reasons why you should not get into large debts or not have them at all, including:
Credit card interest is much higher than other types of loans. On average, the interest on a credit card is two to three times the interest rate, for example, on a mortgage. Such costs severely cut the monthly budget.
Howard S. Dvorkin, chartered accountant and co-founder of Consolidated Credit, argues that people should not spend more than 10 percent of their net income to pay off consumer debt (including mortgages). High spending means you have to limit yourself in many ways.
Lewis J. Altfest, a professional financial planner in New York, who usually works with wealthy clients, informs us that credit card debt represents a considerable risk; it may also be the first sign of emerging problems. Lewis says that often financial advisers notice that the abuse of credit leads to financial ruin. People go too far in their debts.
Unlike other types of debt, credit cards are tax-free. On the contrary, the interest you pay on a mortgage or user loan is deducted from your total income.
Lower credit rating
When calculating the rating of each client, a financial institution considers the credit utilization ratio. In other words, how much money he owes this minute as a percentage of the total available credit. For instance, if the credit card limit is $20,000 and the amount of debt is $4,000, your credit utilization ratio is 20%. A credit utilization ratio above 30 percent is considered a negative credit rating.
The most common ways to reduce credit card debt
If you're planning to reduce your credit card debt, we've put together some tips, how to break in with a credit card cycle.
Try to pay more than the minimum
Let's say you owe $4,000 at 17% per annum. Your credit card issuer allows you to make a small minimum payment of only $120. However, if you make the minimum payment, the debt will stretch for many years, and you will have to pay additional hundreds of bucks in interest.
Pay off the highest interest rate first
Charles Hughes, the certified financial planner in New York, offers a simple example. Imagine that you have debts on three credit cards. Instead of making equal payments, return the most significant amount of money to the card with the highest interest. After liquidating the debt on this card, move on to the next card with the highest rate.
Such technology is called the debt avalanche; it's the most effective method of dealing with financial obligations. The opposite option is the debt snowball strategy; it assumes that first, customers pay the smallest debt in full (for the rest, they make minimal payments); the additional funds' clients can use to pay off other debts, ranging from the smallest to the largest. Such a method provides a psychological advantage as the amount of debt is reduced through a series of small victories to significant success.
Avoid new credits
Leave credit cards at home and make all purchases with cash; this allows you to analyze cash flows to understand where large amounts of money go. You will surely notice unnecessary expenses that you can refuse.
Manipulate the balances
Transfer balances from cards with higher interest to cards with more loyal rates. Such offers often have a zero rate during the promotional period (six to twelve months). It's essential to remember that such translation options often require an advance payment of 3 to 5% of the amount you're transferring or a flat fee for transferring the balance.
Don't give up on debt consolidation
You can also open a loan or line of credit for credit card debt consolidation at a more loyal credit rate. This solution allows you to convert card debt, which you pay 15 percent or more, into a loan with an annual interest of 4 to 8%.
Credit card consolidation helps you save on interest instead of spending it on increasing your debt. Experts recommend comparing different loan options to find the best option.
The most effective way to reduce credit card debt
First, you need to identify and eliminate unnecessary costs, including entertainment or purchasing luxury goods. Then try to pay off as much of the debt as possible each month. It's best to pay off the loans with the highest interest rates first and make the minimum payments on the rest of the obligations. You can consolidate credit card debt or transfer it to the lowest-interest card.
How to negotiate with your credit card issuer?
The easiest way is to call the specified number and ask to adjust the debt recovery plan. Some financial organizations agree to partial credit card debt forgiveness if you can pay the rest. Such a procedure will worsen your credit score. Still, if the borrower does not have the opportunity to repay the loan in full, the lender will receive at least minimal compensation.