3 Rules for Staying Out of Trouble with Credit Card Debt
Stay out of credit card debt (and boost your FICO score!) with these 3 easy tips. Image from www.investgo24.com
Getting buried under credit card debt can sneak up on a person. According to statistics released by the U.S. Federal Reserve, the average indebted U.S. household owes $15,611 in credit card debt*.
Using a credit card is a good way for someone to build credit and develop a strong credit score, but there are three rules you MUST follow to guarantee you stay out of trouble.
Rule #1—Make your payments either early or on time
As noted in an article on creditcards.com, paying your credit card bill late has unfortunate consequences:
“Not only will you face a late-payment charge, which could be higher than your minimum payment, your tardiness will show up on your credit report, damage your FICO score and make it harder to get better terms for future loans and accounts.”†
When you look over each month’s statement (you do this, right?) make note of the due date. Pay it early if possible, before you allocate your money for other things. When you don’t make a payment before your due date, finance and interest charges from that month’s purchases (they accrue from the date of purchase will start to accumulate). It’s this domino effect that gets credit card holders deeper and deeper into debt.
Did you know…The Credit Card Act of 2009 mandates that due dates fall on the same day every month, and allow payments that arrive on the first business day after a holiday or weekend to count as on-time?
Rule #2—Make more than a minimum payment
The most important goal you could have with a credit card is to pay off all your purchases each month. It boosts your credit score and will lead to your credit card company increasing your credit limit. This is a good thing, in case you face an emergency down the road and need the funds.
If you are unable to pay off the balance monthly, make as high a monthly payment as possible. That minimum payment on your bill might look attractive, but often that is only 1% of the principal plus interest charges. And if you’re ever wondering how long it will take to pay off your credit card balance if you only make minimum payments, credit card companies are now required to show balance payoff as a time range. It’s usually at the top of the front page of your monthly statement.
If there are months where you can’t pay off your monthly statement, don’t panic. According to myfico.com, “owing money on your credit cards doesn’t mean you’re a high-risk borrower”††. If you’re responsibly using and paying down your credit, that’s a good thing—even if it takes a bit longer!
Try out this calculator to see just how much interest you’ll pay if you only make minimum monthly payments. You’ll be shocked!
Rule #3—Read the fine print!
Introductory rates, regular rates, finance charges, fees…all the information is in the disclosure statement provided by your credit card provider. When you’re aware of how your credit card works, you’re less likely to find yourself making costly mistakes in how your manage your credit card debt.
Did you know…According to a Pew Charitable Trust study (May 2011) on average, credit union credit cards had lower annual percentage rates for purchases, and in general offered more consumer-friendly terms.
Tips for when you’re in trouble
Are you in over your head? Here are a few easy steps to dig your way out:
- Know where you’re at—Write down the balance and interest rate of every card you have. You can’t set a true goal without understanding where you’re starting from.
- Put your cards away—Don’t cancel them, but put your cards where you won’t be tempted to use them. Pay by cash whenever you can, and removed stored credit card data from any online stores.
- Analyze your interest rates—When making a plan to pay down your debt, start with the card that has the highest interest rate.
- Consolidate your debt—If you have more than three credit cards and you’re having difficulty paying them off, consider consolidating those balances with a low-interest loan from your financial institution. You’ll pay the debt off faster, and with a lower additional interest charge.
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