Today, almost everyone carries a credit card in their wallets. It is used to pay for almost everything from groceries to flight tickets to gas.
If managed properly, credit cards can be an essential financial tool that allows users to build credible credit, earn money back and gain great perks, like purchase protection and insurance. However, carrying a poor credit balance can plunge you into massive debt.
“Credit card debt is very high-interest debt, typically in the neighbourhood of 20% or more,” said Scott Hannah, president and CEO of Credit Counselling Society in a report.
If you have a balance payment on your credit card, clearing it off can be a difficult task if you’re a low-income earner—or you’ve already incurred too much debt that after using a credit card payment calculator you know you’ll be unable to pay back.
However, no matter how terrible you think your current situation is, there’s always a way out that works best for you. With interest on loans compounding everyday, there’s little wonder why clearing a credit card debt is so difficult. In fact, according to MNP, an accounting firm, nearly half of all Canadians are less than $200 per month away from becoming financially insolvent.
Tackling credit card debt can seem quite tedious, especially with many people choosing to ignore the problem and just keep making the minimum payment. Here are some practical strategies you can take advantage of to effectively tackle credit card debt.
1. Gain a complete understanding of your debt problem
This starting point for anyone trying to get out of debt is to understand why you’re in debt, in the first place.
Critically examine all areas of your finances to determine if your expenses don’t match your finances or if it was due to an unforeseen circumstance such as a medical emergency. Whatever the case may be, it is very important to know the reason why you are in so much debt so you can effectively tackle the root cause.
2. Look into your spending habits
Typically, one quick way to stop yourself from running into credit card debt is to examine your spending habits. What are the things you spend your credit card on? Are they essentials or things that can be easily done away with?
According to Hannah, most people can only account for about 75 to 80 per cent of their monthly expenditures and the remaining gets blurry. It is important to track your expenditure—whether it’s an extra shot of drinks at the bar or a box of cereal from the supermarket. Knowing what you spend money on allows you to build a better financial strategy against debt.
3. Build a budget
Once you have a clear picture of what your monthly expenses are, building a budget becomes the most important step towards managing your income better. Having one central location for tracking both your income and expenses is great in curtailing unnecessary spending and getting you out of debt.
Your budget needs to contain all of your expenses incorporated from essentials like groceries, mortgage, medical care and insurance to others such as utilities. While most people struggle to stick to their budget, you can create some margin for flexibility to make it easier for you.
4. Increase your minimum payment
For most credit cards, the minimum payment is approximately 2 per cent of the last month’s balance. But therein lies the problem because if you consistently pay only the minimum, then the lump of that money goes straight to your interest and not the principal.
Paying some extra money every month would go a long way in helping you clear your credit card debt faster and reduce the compounding interest.
5. Ask for a lower rate
It is very possible to negotiate for a lower rate with your bank; only thing is, most people tend not to do so. If you find yourself struggling with paying back your credit card debt, you can reach out to your lender and ask them to offer you a lower rate.
Long-time customers who have a history of making timely payments have more advantage with getting their request approved.
6. Take advantage of a balance transfer promotion
In a bid to entice new customers, lenders run promotions periodically on balance transfers for their credit cards. Basically, these offers involve having a low-interest rate between 0 to 2 per cent for a limited period—usually between 6 to 10 months.
Always be on the lookout for a lender that offers the lowest rates and longest promotional period, which would give you enough time to clear your debt.
7. Switch to a low-interest credit card
Once you have critically examined your spending habit and created a budget, yet it is obvious that you will always carry over a credit card balance, then it is time to switch to a low-interest credit card.
While these types of credit cards usually have little perks, they are quite useful in wiping a couple of percentage points off your interest. Typically, rates on low-interest credit cards vary but they could be as low as half the interest on a regular card.
8. Begin an avalanche
The avalanche method is great for those who have a lot of debt with several creditors. This method means you’d make the minimum payments on all your existing debts and then add any extra income to the debt that has the highest interest rate.
Using the avalanche method allows you to reduce the interest paid while clearing multiple debts.
9. Use the debt snowball approach
Another debt repayment strategy that you should consider is the debt snowball method. In this strategy, you would focus on paying off your small debt first before moving to the larger ones—all whilst still paying the minimum on all other debt—regardless of interest rate.
10. Get an extra income source
Creating additional streams of income goes a long way in helping you clear your credit card debt. By finding a better paying job or choosing a good side hustle, you can easily put down more money towards your debt repayment.
There’s a lot of gigs you can offer today to raise extra money such as writing, graphic design, proofreading, teaching and programming.
11. Use a personal loan
If your credit card balance is quite high, paying it off using a personal loan may be very advantageous. While the interest rates on credit cards can be as high as 29 per cent, with a good credit score you can qualify for a personal loan at a lower rate.
The main advantage of using this strategy is being able to pay off multiple credit card debts and focus on making single but fixed monthly payments on the remaining loan. Also, you spend lesser money on interest costs and repaying the loan in instalment would boost your credit score.
12. Spend more cash
Despite being very valuable items, credit cards can quickly run you into massive debt when not used properly. If you already have some debt yet to be paid, it is better to spend more cash than accumulate more debt on your credit card.
Get a low-interest credit card but only use it in emergencies once you know there isn’t enough money in your bank account to pay off the accumulated debt.