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Dealing with Credit Card Debt

by Bruce Haring

Credit cards are easy to use, and can be helpful financial instruments. Today, many Americans use cards as reserve funds to cover medium to large purchases. However, it is also one of the quickest ways to incur debt. Given its collateral-free nature, credit card debt is often costlier than other mortgages and loans.

The high interest rates are the primary reason why this debt should be paid off as soon as possible. Credit card debt is riskier given the ease with which one can utilize the credit, and the large interest rates involved which can send your bank account balance on a downward spiral.

The average rate of interest on credit card debts in the United States is a whopping 13.70%. Managing your credit card debts can be stressful, especially if you have raked up more bills than you can afford to pay back in just a month or two. To avoid financial as well as psychological stress, you need to be smart about how you deal with credit card debt. Here are some ways:

  • Negotiate Your Rates
  • One of the quickest ways to save significantly on your credit card bills is to negotiate with the lender for a lower interest rate—yes, it’s possible to do that. Your credit score does play a big role in determining whether or not your credit card issuer gives you a rate cut, however, it is not the only deciding factor. Often times, all you need to do is ask to receive a lowered interest rate.
    • Getting a discount of even a percentage point or two can help you reduce hundreds of dollars, for example, that would have to pay while paying off your debt. Call each credit card company to negotiate the interest rates on your outstanding amount, but remember to first work out a payment plan. If the issuer does not receive realistic figures from you, it is unlikely that they will take your request seriously.
  • Balance Transfers
  • This is one of the most common ways of dealing with credit card debt, since this is the preferred approach for most card issuers. Under a balance transfer, a second credit card company takes on your debt from the first one, often with an enticing offer, for example, no interest charges for the first 12 months. Tempting as it may sound, it is important that you approach this method with caution and gather the necessary information beforehand.
    • If you happen to default on a monthly payment or are unable to pay the debt within the stipulated time, the interest rate can rise by a much larger amount. Balance transfers are golden if you are sure you will need just 6–12 months to pay off a debt, and have the discipline to not be tempted by more “easy credit” offers. You are not the government, you cannot spend money you do not have and get away with it. The feasibility of a balance transfer also depends on the amount of credit card debt you have, and your FICO score (a minimum of 700 is deemed necessary in most cases).
  • Personal Loans
  • Several credit card users opt for a personal loan at a lower rate of interest to pay off existing credit card loans. It may seem counter-intuitive as you are ultimately borrowing credit to pay off credit that you have already borrowed. But if you have a moderately high FICO score, such a loan can be a sagacious way to lower your card interest payment burdens.
    • The sparkling news is that the rise of competition in personal loan companies has led to a reduction in borrowing costs, which may be as low as 4.25%! When you compare it to the average 13.7% rate of interest charged by credit card issuers, it seems like the obvious choice. However, calculate your risks and the feasibility of taking on another loan before making this decision.
  • Cut Expenses

If you are drowning in credit card debt, an effective way to deal with it is to track your costs, create a budget, and minimize all the expenses that you can. You will be surprised by how much you can save just by making your own coffee instead of buying it, or by resisting the temptation to eat out as often as some other people. Moreover, stash away your credit cards to avoid risking falling further into debt until you have cleared all your outstanding balances.

In the end, regardless of which approach you choose, the best way to deal with credit card debt is to generate enough money to make this debt a thing of the past and to spend less than you make. Remember, you are not the federal government!

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