WARNING! Credit Cards Are Ruining Our Finances
Credit cards can be so helpful and yet so detrimental at the same time. Hey everyone, how are you doing?
How much credit card debt do you have? I won’t give a dollar figure, but I can tell you I have an ample amount of it.
For years now I have pretty much only made minimum payments on that debt. Also, I have taken out not one but two debt consolidation loans to pay my credits cards off. But do you know what I did next? I charged them right back up! Have you ever done that? Further, do you only pay minimum payments on your credit card debt because you live paycheck to paycheck or for other reasons?
What are some ways we can climb out of this hole and rid ourselves of this debt? Firstly, let’s talk about a few key ways this affects us. Secondly, what options do we have to pay this debt off?
How Your Credit Card Balance Affects Your Credit Score
We have talked before about how important our credit scores are for our financial success. Credit cards affect that score in negative ways if we don’t manage them correctly.
Our credit card utilization is a significant factor in our credit score. Credit utilization is the amount of the available credit that we use. For example, if you have one credit card with a $10,000 limit, and you owe $5,000 on it, your credit card utilization is 50 percent. Moreover, if you have a short credit history and only that one credit card, your score will be negatively impacted even more.
There are several ways you can lower your credit card utilization as listed below:
- Make multiple payments throughout the month. Most financial institutions report to the credit bureaus once a month. The lower your balance at that time, the higher your credit score will be.
- Another way is to spread your charges against multiple credit cards to keep the balances as low as possible on each card. However, with some credit scoring models, this won’t effectively help your score.
- Lastly, increasing your credit limits can raise your credit score because that will lower your credit card utilization. On the other hand, if you receive a credit limit increase, and then actually use that credit, you now just hurt your finances even more!
Most importantly, most experts say to keep your credit utilization to less than 30 percent. Above all, our goal right now is to get our credit utilization to ZERO and become debt free!! Let’s do this!
Why Making Minimum Payments is Bad
Do you make only minimum payments each month on your credit cards? If so, what is the reason for this? Maybe you live paycheck to paycheck and can’t afford to make more significant payments. Similarly, perhaps you prefer to save what cash you do have for other purposes.
I used to do this up until several months ago. For many years, I lived paycheck to paycheck. After that stage in my life, I just chose to hold onto my money for other uses. But wow, how much money do we give away by doing that?
According to this calculator, for instance, if you owe $5,000 and have the current average 17.67 percent interest rate, it will take over 13 years to pay off that balance! Thirteen years of paying interest! In the end, you will have spent over $4,300 in interest!
Ok, so, that’s all well and good. You pay minimum payments, you do this for 13 years, and bam, its paid off. However, did you not charge a single thing on that card for those 13 years? Keep in mind, every time you use it, you are adding to how long it will take to pay off!
What Can You Do to Make Bigger Payments
I completely understand how hard it can be to pay more than the minimum payments, depending on your situation. Moreover, it can be especially hard if you live paycheck to paycheck.
There are two essential things we can do to allow us to make more significant payments and rid ourselves of this debt. Indeed, this will take time and a lot of dedication! It will not happen overnight.
Firstly, as I have said in other articles, you must have an emergency fund saved up! Without this, you will continue to charge on your credit card when something happens. It could be car repairs, home repairs, veterinary bills, etc. An emergency fund is most certainly step one in my opinion.
Secondly, you need to create a budget, especially if you live paycheck to paycheck. I want to think that we all have some extra money, and we just don’t manage our money correctly. Most of us spend money on things we don’t need and sometimes don’t even realize how much we spend on those things. A budget will pinpoint those areas that we can improve, and free up money to put towards our debt!
Solutions to Pay Off Credit Cards
There are several ways to make this journey easier on us. Two of those tools are debt consolidation loans and balance transfers.
Above all, you cannot utilize your credit cards after you use either of these options!
Remember when I said I have taken out two consolidation loans and then charged my cards back up? Now imagine in your situation, can you afford to pay two loan payments and the credit card payments? Even if you can, it will be so much harder to dig yourself out of that hole.
Likewise, if you get a credit card with a 0% balance transfer option and utilize it, but then charge the original credit card back up, your finances are now even worse. It is imperative that the balance is paid before the initial balance transfer period ends to prevent paying interest! That is the entire point!
However, your credit score plays a huge role in being able to do either of these things! These two options allow for paying less money out in interest in addition to paying off our debt faster!
Remember that minimum payment calculator and the 13 years it will take to pay off $5,000 in credit card debt? Well, a consolidation loan will take much less time, and you will pay out much less interest.
For example, if you take out a consolidation loan for $5,000 with a 4.5 percent interest rate over a five-year term, you will pay only $592 in interest. Did you catch the five year part? The debt will be gone in five years vice 13 years.
Check this out: 7 Hacks to Improve Your Personal Finances
We Need To Plan For Our Debt
I can tell you, I have always taken on more debt than I planned, a substantial amount more. This is one area that I simply must get better at, and I am sure many of you are in the same boat.
However, I do have a plan in place to eliminate my debt. My plan won’t work for everyone, and it may even be a terrible plan, but it is working for me currently. On the other hand, if I don’t do everything almost perfectly, it can potentially backfire on me.
I will be laying out my plan very soon. I hope the way I am going about this can help others as well. If my method works as advertised, I will be down to only two consumer debt loans in approximately six months!
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YOUR TURN – How are you doing with your credit card debt? What tips do you have for paying credit card debt off?