Owning a credit card and falling into a debt trap is commonplace these days. What is uncommon is the common sense needed to use a credit card judiciously and wisely. But what if you actually happen to fall into the debt trap? You need to use your discretion and caution in the following months in order to free yourself from the vicious circle of credit card debt.
Some people might think of filing bankruptcy as an easy way out. But it is not the case. Your focus should be to eliminate credit card debt without filing bankruptcy; simply because bankruptcy can lead to loss of self-esteem besides spoiling your credit score and making it almost impossible to get a loan for several years.
While looking to eliminate credit card debt without bankruptcy, your efforts need to work in 2 directions – prevent the debt from increasing further and find a way to pay off current debts. Here are some tips that you could follow…
1. Get a grip on your financial situation: If you are looking to eliminate credit card debt, it is very important to first understand your financial situation and start clearing off the pending payments slowly and steadily without falling into a deeper pit. You will need to make a list of monthly income and expenses, list all your debts including your credit card debts and figure out avoidable expenses. Also allocate some percentage of your income towards contingency fund. Then focus on cutting expenses so that the maximum amount goes towards repaying debts.
This link provides a great reference for “how to make a budget”. It will help you get started in getting a grip on your financial situation.
2. Be thrifty and avoid using your credit card: When you use cash for making payments, you end up holding back many certain (avoidable) expenses and this will ensure two things: First, it will help in paying off the towering debt steadily and second, it will help in curtailing frivolous expenses. So, use the credit card only when it is very necessary e.g. use credit cards for things like booking an airline ticket, making hotel reservations and other such stuff for which you don’t really have another way to make payments. If you have bought something on installments, make the monthly payments in time to avoid late charges. If the amount is low, make sure you pay the full amount at the earliest to avoid accumulation of interest.
3. Do your homework: Find out the interest rates on various credit cards that you own and use the card (if you have to) that charges the least interest. This will reduce your debt burden marginally but even a small bit will help for sure. Also, if you are already deep into debt, make sure you pay off the debt on the card that charges the highest interest first. Once the higher interest debt is paid off, you will find that your rate of growth of your debt has come down.
4. Do not apply for more credit cards: Do not apply for more credit cards in order to get more spending power. Using a credit card to consolidate credit card debt is fine, but your aim should be to get out of debt and not plunge deeper into debt by using the increased credit limit. In any case, getting new credit cards will also spoil your credit score; so, you would be better off using unused credit on current credit cards rather than applying for new credit cards.
5. Do not use credit card to withdraw cash: This is a common mistake every shopper with frivolous needs commits. Using the credit card as an ATM card makes you a bigger pauper. Besides consuming your credit limit, you are charged a heavy fee when you withdraw cash using your credit card.
6. Get professional help: Seeking professional help for debt management might be good option if you are not really able to figure out things and your debt situation is getting out of hand. Credit counselors can help you get back on track by offering advice and services to clear off your debt and manage the finances better. There are several non-profit credit card debt counseling agencies that help you with timely advice on managing your debt. They also hold several seminars/conferences and encourage one on one discussions and doubt-solving sessions.
7. Debt consolidation: Debt consolidation involves using another loan (typically a low interest loan) to pay off your current debts (typically running at high interest rates). When it comes to credit card debt, you could either consolidate your current debt through balance transfer to a new credit card or get a personal loan or get a home equity loan (secured loan with your home as collateral). In any case, the interest rates on the new loan should be low enough and payment terms easy in order to make it a feasible option. Your credit counselor can help you make the decision.
8. Debt negotiation: Yes, when your creditors fear that they could lose all their money (if you file bankruptcy), they are ready to negotiate a reduced amount, interest rates and payment terms. Many charges are waived too. Again, you might consider consulting your credit counselor and even avail debt negotiation services to get the best deal. Though debt negotiation too hurts your credit score, it is still better than filing bankruptcy.
Once you are out of the debt trap, plan your finances such that you never get into the trap of credit card debt and live a financially secure, debt free life!