Credit card debt need not be something to fear because you can use it to achieve your lifestyle goals. The key lies in managing credit card debt, using effective strategies even before you experience debt problems.
Financial education: Your first step in managing debt is to educate yourself in budgeting and financial planning. You need to know what your sources of income are and where your money is going. Getting a clear picture of your cash inflow and outflow allows you to plan your expenses—when to incur them, how much to incur and when to pay them, keeping in mind that your total income should be your maximum expenditure limit to avoid being in debt.
You can learn the basics of financial planning through self study, by taking a course or under the guidance of a credit or financial counselor.
Increasing regular payments: Whether you’re dealing with credit card debt (or any loan like a mortgage), you can reduce your debt by increasing the amount of your regular repayments. This will reduce your interest costs as well as the balance on your principal amount. This strategy works best when you have extra savings lying around or experience a sudden cash windfall.
Offer to make a lump sum payment: When you have fallen behind your monthly payments and have accumulated a large balance due to the monthly interest and penalties, you can work out a debt solution where you will make a one-off cash payment in an amount that is much less than the total value of your debt. This strategy often works when your debt has more than 120 days in arrears because the company can write off the unpaid portion of your debt. Be aware that this may drain you temporarily of funds to repay other loans and emergency expenses.
If you have more than one debt, here’s a proven technique for managing several debts which requires discipline, consistency and time but it guarantees results.
Debt Snowball Method: Make a list of all your loans and order them from the highest balance to the lowest. Make minimum payments on all of them except for one, which you will put all your spare cash into. This frees up more cash for your next set of payments. Continue making minimum payments on the rest while you put all your free cash on the same loan you reduced. Once you have paid it off, you move on to the next loan on your list and keep paying extra cash on it until it is gone.
Each time you pay off one loan, you’ll be able to apply more funds to the next one. It’s called the snowball method because the amount of money that you apply to each debt grows like rolling snowball picking up more snow.
The key here is to use the freed up cash to reduce another loan, not to add to your living expenses.
If you’re overwhelmed by debt and don’t know how to resolve it, talk to a financial counselor who can help you plot your payment strategy and negotiate with creditors.