Plastic Problems: Strategies for Paying Off Credit Card Debt
Millions of people battle with debt that they cannot control. Much of that debt is in the form of credit card debt. Fortunately, there are some easy way to battle the beast and keep yourself out of hot water.
Always Pay Off The Balance Every Month
Always pay off the balance each and every month. Credit cards are often used as a loan for things, and this is a huge mistake. The temptation is there, and itâ€™s so easy to just rack up a big bill and worry about it later. Most people rationalize their purchases and this is how they get into trouble.
Credit cards are more like lines of credit or charge cards – credit thatâ€™s extended, but intended to be paid off each month. This is why interest rates for these cards are so high. They represent a huge risk for the issuing card company and so they charge really high rates to compensate for the many defaults they experience.
Get A Consolidation Loan When It Makes Sense
Sometimes, when you just canâ€™t dig yourself out of debt, you need a consolidation loan. Much of the credit card debt in the U.S. can be consolidated because itâ€™s not secured by anything. Getting a consolidation loan, therefore, can lower the interest rate from a variable one to a fixed one, or from a high variable rate to a low variable rate.
Fully amortized loans often have much lower rates than revolving lines of credit, like credit cards. So, if you have the option, consolidate the debt into a fixed, amortized, loan.
Set Firm Limits
Call your credit card company and tell them that you donâ€™t want your credit limit increased beyond a certain limit. Most of the time, the card company will comply with your wishes. However, in the even that they wonâ€™t or donâ€™t, you can always cut up your card and find someone who will.
This is less an act of willpower than it is an act of planning. Changing behaviors is incredibly difficult, and credit limits are instrumental in shaping new spending habits. So, by placing a hard limit on what you can spend, you limit the â€œdamageâ€ you can do to yourself, thus helping you improve spending and (hopefully) savings habits.
Donâ€™t Use Credit Cards To Fund Consumer Goods
Never use credit cards to fund consumer goods. Consumer goods are things like food, furniture, cars, going out to the movies, and other consumable items or services. They have no real economic value once theyâ€™re purchased. Theyâ€™re either impossible or very difficult to resell, and theyâ€™re not used for the operation of a business or to further your education.
Many businesses use debt to expand operations, and this is actually OK, though not always ideal. Why? Itâ€™s ideal because the business is using borrowed funds with the intent of creating more value and income from those funds. Itâ€™s not always ideal because the interest rate can be more than what the business earns with those borrowed funds.
For an individual, thereâ€™s never a return on investment to offset the interest, so itâ€™s nearly always a bad idea to use loans to fund consumer goods.
Some exceptions do exist, however, like buying a home or a large purchase like a vehicle, which donâ€™t always retain value, but usually retain enough that resale is possible.
Use Credit Cards With Rewards Points
If youâ€™re going to use credit cards, use ones that offer rewards points. These cards often offer cash-back incentives for every purchase you make. When you accumulate a minimum number of points, you can call your credit card company and have them send you a check for an amount of money equal to the points youâ€™ve accumulated. Some companies have tiered rates or translations for points.
For example, a company may give you $1 for each point, or they may translate the points so that 1 point equals $0.50. Sometimes 1,000 points will translate into a specific amount of money.
Of course, not all rewards point are cash-based. Sometimes, credit card companies award frequent flier miles for points accumulated. These are useful if you happen to travel a lot. Other times, a company might offer rewards points toward gasoline purchases – handy if you drive a lot.
Regardless, these types of point schemes reward you for using your card, and they provide you with an incentive to pay off the balance each month, since interest charges offset the benefit of accumulating those points.
Lizzy Bale is a happily married mother of three. She prefers to be outdoors and loves hiking and swimming. When she does have to stay indoors, she likes to contribute her experiences with personal finances, paying down debt and managing the household budget. She is currently contributing to DebtConsolidationUSA.com.