If you pay the minimum, you will stay in debt
Credit card companies make a profit on the interest they charge you. If you carry a balance on your credit card and only pay the minimum paying interest only payments. This means you could be making interest only payments for years and therefore never touching your principal balance. Principal balance is the actual amount that you have borrowed from a creditor without any additional fees. Of all the fees that can be added; interest, balance transfer, late, annual, over-the-limit, and cash advance fees are the most common.
Make an effort to pay double your minimum payment, or more! By doing this, you are subsequently lowering your principal balance and the amount of interest you will be charged per month will decrease.
Learn to negotiate with your creditors
Simply asking for a lower interest rate may allow you to set a payment schedule that fits your lifestyle. If you are paying a high interest rate and notice that your principal balance is never decreasing, you should start making higher payments so that your balance will start to decrease. If you cannot make additional payments, then you should call your creditor, explain your situation, and ask for a lower interest rate. It doesn’t always work, but it’s worth the phone call.
Talk to your creditor before you are sent to collections
If you are having issues making your payments on time due to a medical crisis, change in employment, or marital status, you should contact your creditors immediately. Many times you can avoid negative reporting by simply communicating and creating a payment plan with your lenders. Tell them when you are able to make payments and how much, and plan to stick to it! This can be life changing considering a pattern of delinquent payments show on your credit report for years and can lower your credit score immediately.
Have you been paying the minimum or even extra on all of your credit card bills at the same time? Doing this can make it seem like you will never get out of debt. An effective solution would be to implement either the avalanche or snowball effect. Debt avalanche means that you are paying off your debt starting with the highest interest rate. Debt snowball means that you are paying off your debt starting with the lowest balances.
With both of these strategies, you make a higher payment on either the higher interest rate or lower balance and the minimum payment on all other cards. Then, once you have paid off the first card, you add the amount you were paying, plus the minimum payment, on the next card. Continuing with each card until all of your debt is paid. Neither process is better than the other, so how do you decide which is right for you? Consider your drive to become debt free. If you are easily sidetracked or frustrated, then the snowball effect may give you the encouragement you need to keep going.
Avoid late charges
Late fees are a simple way credit card companies can keep you in debt. If you have a high interest rate, consistently make late payments, and only pay the minimum, you may notice your balance actually going up. Late fees can range from $25-50 depending on the credit card company and late fees on installment loans such as personal, car, mortgage, or student loans can quickly have a negative effect on your credit and will limit the amount that you are paying towards your principal balance.
If your debt is extremely high, try consolidation
Debt consolidation can be helpful in making your financial plan achievable, but be cautious with your consolidation loan. Beware of high charging debt consolidation services and instead meet with your local credit union to discuss your options. Also, try not to put your house on the line. Don’t gamble with your home without speaking to a financial advisor that can provide the best course of action.
Additionally, you would not want to apply for a debt consolidation loan only to max out the credit cards that you now have available to you again. This could cause you to be in a worse financial situation than you began with. Make sure you are disciplined enough to handle the available credit card usage before applying for a consolidation.
The most important thing to remember about debt consolidation is that you should never get into an extended term that results in you paying back more in interest than you would have originally. Ensure that you are getting the shortest term possible or make the additional monthly payments that will offset the interest rate.
Remember: Stay focused and celebrate small victories!