5 Fixes for High Credit Card Balances
By Eva Norlyk Smith Ph.D.
February 16, 2012
Millions of consumers turned to credit cards to make the season bright last year, driving Americans' credit card balances up by more than $8.3 billion in the last two months of 2011, according to the most recent numbers from the Federal Reserve.
If you find your credit card debt inching upward, the earlier you tackle the issue, the easier it is to change course. If you wait, the problem compounds — pun intended. Instead of ignoring your credit card debt, try these five debt-fighting tips.
1. Face the facts.
It's fun playing Santa, and getting a little ahead of yourself on holiday spending is common. However, if your credit card balances keep climbing after the holidays instead of being whittled down, it's time to face the facts: Financially speaking, you're not on a sustainable course.
“If you are spending more than you are earning, you will crash, it's just a matter of when,” says Mike Sullivan, director of education for Take Charge America. “You absolutely have to put a plan in place to deal with the issue.”
2. Look for ways to free up money.
There are basically two ways to get rid of debt, says Sullivan — spend less or earn more. If your card debt is a manageable problem, you can usually tackle it by creating a budget. Knowing how much you have coming in and how much you spend is key in deciding which expenditures you can cut to free up money for paying off credit card debt.
Once you have a list of expenses, sort them into categories according to how important they are. Then begin making cuts, starting with the lowest priority costs.
3. Practice sound credit management.
To avoid any fallout on your credit score, be very careful to pay all bills on time, not just credit card bills. In addition, pay more than the minimum on all credit cards, and don't wait until the last minute to pay the bills. As much as possible, keep credit card balances below 30 percent of the limit to avoid carrying too much debt — and the credit score dings that come with doing so.
4. Minimize interest expenses.
The lower the interest on your credit card debt, the lower the financial damage. If your credit score is good, look into getting a 0 percent annual percentage rate (APR) or low-interest balance transfer card. Look for a balance transfer card with a 12- to 18-month no-interest introductory period, no annual fees and a low balance transfer fee. That way, you can consolidate the debt you're carrying on several cards onto a single card — and give yourself some time to pay off the debt without interest.
If you're getting a balance transfer card, keep this in mind: You will want to make sure to pay the balance transfer off in full before the promotional 0 percent APR expires. Most balance transfer credit cards feature higher-than-average APRs at the end of the introductory period.
Another option to keep interest costs low is to ask your credit card issuer for a lower interest rate.
“If your credit score is good, and if you have a lower rate with a different creditor, then call your card issuer and explain that you have a lower rate elsewhere,” says Sandy Shore, a spokeswoman for the New Jersey-based credit counseling association Novadebt. “If you've been a good customer, they will likely want to accommodate you to keep you as a customer.”
5. Look for other options.
With mortgage interest rates for 30-year fixed loans at record lows, refinancing your home might be an appealing move for many homeowners to free up some extra cash from lower mortgage payments. In addition, personal loans (bank loans not secured by assets), are making a comeback, according to The Wall Street Journal. With interest rates running as low as 8.5 percent (depending on the applicant's credit score), personal loans can be a great way to consolidate high-interest credit card debt and create one fixed monthly payment for all your debt.
In either case, however, be sure to bring your expenses into alignment with your income first. Otherwise, refinancing your house or taking out a personal loan could end up getting you even deeper into the hole.