When we’re kids, we fear ghosts and goblins, but as adults, we know the worst thing to be haunted by is credit card debt. According to a recent GOBankingRates survey, 30% of Americans carry a balance between $1,001 and $5,000 on their credit cards. Hefty balances like that take careful planning to pay back in a timely manner. Often, life’s unexpected trials keep us from making payments. Before we know it, high interest rates cause our balance to snowball into something difficult to pay down.
Debt leads to stress, and stress leads to a variety of health problems. For example, in a recent study by FINRA, 60 percent of respondents indicated feeling anxious about their finances. Meanwhile, a 2008 medical study indicated that while short-term stress boosts the immune system, “chronic stress has a significant effect on the immune system that [can] ultimately manifest an illness.” Worse still, the American Psychological Association reports that many Americans choose to ignore their debt out of fear of facing an insurmountable obstacle.
At Hippo Lending, we’ve helped hundreds of healthcare professionals reduce their financial burden through debt consolidation. We know first-hand the adverse effects financial stress can have on an individual’s life. We also know that lifting that burden is not impossible.
There are several options to eliminate credit card debt quickly so you can move on with life stress-free. This article reviews some of the most popular strategies to do so and outlines the pros and cons for each.
Utilize Repayment Strategy
Creating a strategy for tackling your credit card debt can help you stay organized and stay motivated through the often lengthy process of repayment. There are numerous repayment strategies out there, but two of the most popular are the snowball and avalanche methods.
This method works well if you are paying off multiple credit card balances. Using this method, you focus on paying off small balances first. Once you’ve paid off the smallest, you move up to the next smallest.
Since you’ve paid off one balance already, you now have more to pay toward the next one, meaning you can pay it off faster. Your ability to pay larger amounts toward balances snowballs as you get closer to the top of your list. Because it focuses on balances with smaller interest rates first (i.e. the one balances that grow the slowest) the snowball method requires more time to pay off your total debt, and it’s more costly as well. The true advantage of this method is the feeling of achievement you get by paying small balances off, helping you stay motivated.
The avalanche method moves in the other direction. Using this method, you start with the balance with the highest interest. This method ultimately saves time and money because balances with higher interests tend to grow faster. By paying those off first, you curtail the growth of your balances that earn more interest. The drawback is that it often takes longer to fully pay off individual cards because the high interest accounts are usually the ones you owe the most on. Because it takes time to see results, it’s easier to become discouraged.
In summary, the avalanche method is considered the fastest way to pay off debt and save money; however, it lacks that feeling of achievement that comes with quickly paying off your cards with the smallest balances first.
Negotiate with your Creditors
Though credit card companies are often characterized in pop culture and the media as aloof institutions disinterested in the well-being of their clients, in reality, any successful business keeps its customer’s best interests in mind. At the end of the day, creditors want to get paid, and if you’re having trouble making payments, they may be willing to work with you to make that easier.
Many credit card companies have hardship programs that will waive fees or lower interest rates over a specific time period. These programs are usually not advertised, and not all lenders have them, but it’s worth getting in contact with your lender to see what your option are. Utilizing hardship programs will generally not affect your credit score because you are negotiating new monthly payments rather than simply not making full payments.
Balance Transfer Card
A balance transfer card is a credit card that you get in order or pay down another credit card whose high-interest monthly payments are proving too unwieldy for your pocketbook.
It may sound a bit nonsensical to pay off one card with another. After all, you’re not eliminating the debt; you’re merely moving it to another account. But a good bank transfer card will come with an introductory offer such as 0% APR for the first six months or a $0 annual fee. Such offers will allow you to pay the balance down without having to pay interest, saving you lots of money in the end.
To be clear, balance transfer cards are merely credit cards that you get for the purpose of transferring a balance. They are not a special program offered by lenders. In fact, you will usually have to get a new card from a different creditor than the one you have a balance with, as many creditors do not allow existing customers to transfer their balance to a new card.
Because you have to apply for a new card, you will need to have a good credit score to qualify. Once you have your new card, simply initiate the balance transfer. This process can take a couple of weeks and usually requires a few phone calls. Once the balance is transferred, be sure to pay it down before the end of the introductory offer.
If you’re going with the balance transfer card strategy, make sure you are prepared to pay the balance down during the introductory offer period. Have some money saved up to speed up the process. Otherwise, you may end up in a similar position to where you started.
Debt Management Plan
Non-profit credit counseling agencies help individuals who have trouble making payments on their credit card debts by crafting a debt management plan tailored to the client’s needs. These plans help you address your debt without having your credit score suffer.
Your credit counselor will contact your creditor and arrange to make themselves the payer on the account. They will also notify your creditors that you are pursuing a debt management plan and attempt to negotiate lower fees and interest rates with your creditors. Your counselor will then make payments on your behalf using funds drawn from your account each month.
In truth, everything that a credit counseling agency does you can do on your own, but since credit counseling services have years of experience, they will be more willing to negotiate successfully. And since successful credit counseling agencies have a reputation for success, your creditor will likely be more willing to work with them than they would a typical customer.
Measures taken during your debt management plan generally do not affect your credit score because your credit counselor works with the creditor to come to a mutually beneficial payment plan. Credit counseling services do charge a fee for their services, but this fee is often outweighed by the savings they provide.
Debt settlement is a last resort for individuals who have substantial credit card debt that they are unable to pay. While it’s possible to reap some benefits from this process, there are many risks with the potential to land you out of the frying pan and into the fire.
Debt settlement works like this: Generally, debt settlement companies will ask you to stop making payments for an extended period of time. You need to prove that you are unwilling to make payments. Creditors will not negotiate if they think you will give in.
Instead of making payments to your creditor, you will open a savings account and deposit monthly payments there. This money will go towards your settlement. After a certain period, the debt settlement company will begin negotiating with your creditor to reduce your balance.
Debt settlement is risky for a number of reasons. For one, there is no guarantee that your creditor will be willing to negotiate. In such a case, numerous late fees and penalties may have been added to your account, meaning you owe substantially more than when you started out.
There are also fees charged by debt settlement companies, which can be as high as 10% of the settled debt. Imagine finally being relieved of your financial obligations, only to be slapped with a substantial bill that you are unable to pay. There is the real threat of the debt cycle starting over again.
But by far, the biggest risk is the hit your credit score will take. Debt settlement will always have a negative impact on your credit score because the process necessitates missing multiple payments. It can take quite a while for your score to recover, and even after that, the debt settlement process will be reflected in your credit report for several years to come. Even if your score recovers, creditors will be able to see that you went through the debt settlement process, meaning it will be difficult to get any sort of loan for a long time.
If you have substantial credit card debt that seems to drain both your time and money, debt consolidation might be a good option for you.
Debt consolidation involves taking out a new loan to pay off several existing loans or credit card debts. Similar to balance transfer cards, the goal is to move your balance from one high-interest loan or credit card to a new loan with a lower monthly payment. In the case of balance transfer cards, however, you must qualify for a card with a lower interest rate to get real value out of the process. But with debt consolidation loans, even if you don’t qualify for a substantially lower interest rate, you may still be able to negotiate a lengthier repayment period that will bring down your monthly payment.
Additionally, debt consolidation loans allow you to consolidate not only credit card balances but also a variety of loans, including student or personal loans. This means you can address all of your debt with one solution, saving you time and money.
The Next Step: Avoiding Future Credit Card Debt
The Biggest challenge regarding the elimination of credit card debt is not paying down the balance but keeping that balance down. In today’s world of one-click purchases, it’s all too easy to backslide and find yourself back on the treadmill of debt. If you want to truly nip credit card debt in the bud, then here are a few simple steps that will help you stay aware and stay unburdened by an excessively high balance.
Maintain a low balance
The key to avoiding snowballing credit card debt is to avoid racking up a high balance in the first place. Credit cards are a great resource to get the goods and services you need when you need them without draining your bank account. But often, there’s a difference between what we need and what we want, and it’s up to us to discern between the two.
One way to do this is to avoid saving your credit card information to your accounts with online merchants. When all it takes is one click to purchase, it’s easy to make hasty purchases that we regret later. Adding the extra step of entering your payment information gives you more time to think about the purchase. You will be surprised how much your spending goes down if you try this simple method.
Another tried-and-true method for maintaining a low balance is budgeting. Though this method is about as old as currency itself, it’s persisted for a reason. Planning out where you will spend your money each month helps you keep tabs on your spending.
The more aware you are of where your money is going, the less likely you are to overspend. Try calculating your total monthly expenses – from your house payment down to your Netflix subscription. Subtract that total from your net monthly income. Take what’s left, subtract a predetermined amount for savings, and what’s left is your spending money.
It’s really not very complicated; it just takes a little time. Ideally, your budget should conform to the “50-30-20 rule – 50% of your income should go toward your needs, 30% toward your wants, and 20% to savings.
Make on-time payments
Making timely payments keeps your balance down and helps avoid interest. Since credit cards often have high interest rates – the average interest rate for credit cards in the U.S. is currently 20.99%, according to Investopedia – it’s easy for your credit card debt to snowball if you do not make your payments.
The biggest culprits in this manner are rewards cards, which tend to carry high APRs (the Annual Percentage by which interest is calculated) to balance out the rewards offered. You may think you’re doing yourself a favor racking up travel miles, but in reality, it’s a risky game if not managed properly.
Another thing to avoid is the temptation to make minimum payments. Making a minimum payment on your balance may help you avoid late fees, but usually, interest is still charged, meaning the balance you owe will grow. If you have an interest rate of 25%, for example, a balance of $5,000 will have $250 interest added if you only make a minimum payment. In many cases, interest is far more costly than late fees, so the goal of a successful credit card payment strategy should be to pay the entire balance each month, thus avoiding interest.
The only real advantage to making the minimum payment is maintaining your credit score. Even though you are not paying your full balance, minimum payments are still reflected as on-time payments, so they do not have a negative impact on your score.
So, in a nutshell, though it may be tempting to simply pay the minimum balance, the only way to successfully manage your credit card debt without spending hundreds or even thousands of extra dollars each year in interest is to pay your balance in full each month. Only spend what you know you can repay in a timely manner. In many cases, that means curbing your spending and limiting yourself to only a portion of your total available credit.
Another way to ensure on-time payments is by signing up for autopay. However, not taking measures to ensure you have enough funds in your account to pay your balance can render this solution more harmful than helpful. Autopay should be part of a larger debt management plan.
Don’t Apply for more cards.
Determining how many credit cards you should have can be complicated. After all, there is no universal “correct” number – the ideal number of credit cards varies from person to person. According to CNBC, on average, Americans have four credit cards. Having several credit cards can be good for your credit score because it drives down your credit utilization – the proportion of your available credit that you are using. For creditors, someone who uses less than 30% of their available credit is seen as someone who is more likely to be able to manage loan payments. So having three to five credit cards can be good for you, as long as you don’t drive up your balance on them.
If you’ve had problems keeping your balance down in the past, one measurement you can take to avoid a repeat of the problems is to not apply for more cards. This can be easier said than done, as temptation lurks in every mailbox, but applying for new cards comes with multiple drawbacks. First, the creditor will run a hard credit inquiry before you can be approved. Hard credit inquiries drive down your credit score and affect your ability to get approved for loans for larger purchases such as a new car or a house.
In addition, having multiple credit cards means managing multiple billing cycles. If you have more than five credit cards that you are utilizing on a regular basis, it can be easy to spend more than you can pay back on time or miss a payment simply because you forgot it was due. One option to avoid this is to sign up for autopay, but when you have several cards, even that solution can be risky because if you don’t manage your spending, you can drain your bank account and either incur overdraft fees from your bank or late fees from your creditor. The bottom line is there’s no replacement for good financial management – and good financial is difficult to achieve when you’re balancing more than five billing cycles.
With all that said – although it is generally not advisable to apply for new cards, it is equally unadvisable to close existing accounts. Although closing a credit card account eliminates the temptation to overspend, it also raises your credit utilization. Ideally, you should keep your existing accounts but carefully manage how you use them. Consider setting aside one or two cards for use only in emergencies.
Keep an Emergency Fund
It’s almost inevitable that something will break or fines will be charged. In situations like these, having an emergency savings fund can save the day. This fund can also help with stressors such as job loss or extended illness.
It’s wise to set aside about 15% of your income, or 3 to 6 months of necessary expenses, to help cushion these emergency costs. Start by deciding how much you want to put into this fund, and set up automatic monthly deposits in a high-interest savings account. A 2021 Bankrate Survey showed that 25% of respondents didn’t have any emergency savings, and 51% had less than 3 months’ worth. Having an Emergency Savings Fund will ease the need to use high-interest credit cards or take out a loan.
How Hippo Can Help
Hippo Lending has helped hundreds of healthcare professionals consolidate their debt so they can move forward with a life free from the stress of an overbearing financial burden. Our company was founded on the principle of helping healthcare heroes accomplish their dreams. We only serve healthcare professionals, and that specialization allows us to offer unique funding opportunities that others can’t. And since we’re a commercial lender, our loans are not reported as taxable income, meaning it doesn’t show up on your credit score. Join the thousands of healthcare professionals who have bettered their future with funding provided by Hippo Lending.
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