Wednesday 3 June 2020

2020 Guide To Getting Rid of Credit Card Debt

Sometimes, the honest truth can be a bit ugly. Consumer debt in the United States hit a record of $14.3 trillion; credit card and consumer debt are trending upwards in other countries, too. In Canada, household debt was $2.16 trillion last year. While the COVID-19 pandemic has reduced credit card spending for many of us, that’s largely a result of unemployment and business closures. In other words, things are looking a bit bleak.

2020 Guide To Getting Rid of Credit Card Debt

With that in mind, now is the time to reign in your credit card debt. You’ve probably already begun to reduce spending, so now it’s a matter of reducing your debt load as well. Why is now the time to do this? Due to the pandemic, there are a number of government supports in most countries around the world that are in place to ease you through these challenging times. If those supports go away, we may find ourselves in a world with record unemployment. There are a number of accounting considerations related to COVID-19. You want to be in a strong position in the current environment so as to be in a strong position in the future - low levels of debt are the place to be.

Look at the Details

The first step you need to take is to evaluate the debts you have on each of your credit cards. Each credit card will have a different interest rate, and your balances on each will lead to different minimum payments. Figuring out which card to pay off first will take some calculating, but it’s well worth it.

The balance on your card and the interest rate are both important to consider - a low interest rate card with a very high balance can end up costing you more than a high interest card with a low balance. Keep in mind that interest on cards is compounding, so every month that you’re only making minimum payments means more debt in the long run. A card with a 20% APR that you have a balance of $100 on will lead to less total interest than a card with a 10% APR but a $1000 debt.

Pick a Strategy

There are three general debt payment strategies - all of them are snow-related, perhaps because of how cold and stormy debt can make you feel? 

The first method is the snowball method, where you pay your lowest card off first and then work your way up. This isn’t the most beneficial method in many ways - debt will be adding up on your highest interest and balance cards while you pay off the lower ones. Why would you use this method? Easy wins. Credit card debt can be an emotional burden, and by paying off cards completely, you’ll be getting into healthier spending habits and feeling good about reaching your goals.

The second method is the avalanche - start at the highest and go to the lowest. This is generally the most financially prudent method, but it can feel a bit like climbing a mountain. You won’t have a credit card paid off quite as quickly, but you’ll be making a good decision for your financial health.
The third method is the blizzard - you combine the snowball and avalanche, simultaneously making payments on your highest and lowest cards. You’ll get wins and pay down debt - it’s a great middle-ground route.

Keep in mind that with any of these methods, you should always be making your minimum payments on all your other cards, or you’ll end up getting very bad credit.

Make a Budget

Without a budget, all of this tracking and calculating would be for nothing. This is where the cold, hard facts come in - you’re going to have to reduce your spending in one way or another. First, take a look at what you’ve spent your money on over the course of the last few months. Figure out what’s superfluous and can be cut out. Figure out what’s essential. Now, take your net monthly income and spread it out among a number of categories.

You’ll have essential spending: food, bills, and the like. Determine how much of your monthly income goes towards those things. Keep in mind that if over half of your net income goes towards housing-related expenses, you’re probably living in a place that’s out of budget for you. Look for discount grocers, clip coupons, and shop around for deals on phone plans and other essentials. 
Then, look at discretionary spending. You shouldn’t have to eliminate all of it, but reducing some can help you get your credit cards under control. Cut back on your cable and internet plans. Go out to eat less. Reduce your alcohol spending. Find places where you can cut back, and do so.

Use the money you’ve found to start paying down your credit card debts. You should prioritize paying down debts over saving when you have to choose between the two - your credit card interest rates are bound to be much higher than your savings account interest rates.

Ask for Help

You might have taken all of the above steps and realized you still need help. There are a number of tools at your disposal: Credit counselling services can help you negotiate with lenders. You may also be able to lean on certain social safety nets, which will vary depending on where you live.
Consider getting a balance transfer credit card. These cards will often start you off with a 0% APR for transferred balances, though they’ll often also charge a transfer fee. This transfer fee can be substantially less than the interest you’d otherwise pay, however. 

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