Because of the growing trend of purchasing products first and paying later, people's spending power has increased as a result of credit cards. There is a chance that a person will overspend on a card and either skip payments or pay the minimum. Your monthly bill adds up to the prior months' bills, culminating in a big debt that must be paid. If you only have one credit card, this is the case. If you have more than one, and you do not manage your money correctly, you will have many debts, which will affect both your monthly budget and your credit report. As a result, they may become entrapped in debt, as credit cards charge an exorbitant interest rate for late payments.
It may seem impossible to get out of credit card debt, but it is very feasible. It only requires determination, dedication, and a method that works for you.
1. Make a note
Looking at your entire credit card account at once can be overwhelming. It would be best if you divided it into smaller chunks. Because categorizing it would be easier. What determines which bill needs to be paid first depends on two factors the interest rate on the card and the outstanding amount. It would be advisable to pay the one which are is the most interest and has the highest amount
List your bills from highest to lowest interest rate if you want to get out of debt as quickly as feasible.
2. Debt avalanche i.e. Pay the most expensive balance first
It is recommended to pay the credit card bill with the highest interest rate first, rather than the one with the highest balance. This will prevent you from paying a big quantity of money in interest in the future. Pay the bare minimum on each, but focus all of your additional cash on the debt with the highest interest rate.
When you pay off one debt, you free up more money each month to apply to the next debt. Once you've paid off your personal loan with the highest interest rate, move on to the account with the next highest interest rate and pay as much as you can. Continue this approach until you've paid off all of your bills. You'll also pay less overall and get out of debt faster if you tackle your debts in order of interest rate.
To put it simply, imagine you have Rs. 10000/per month to pay off your debts. You would pay the minimum amount of all the cards you hold. Suppose by the end of it you are left with Rs.5000, you'd use these funds to pay more of the highest interest loan.
The debt avalanche will help you pay less interest and get out of debt faster. You'll also enjoy the satisfaction of witnessing the highest interest rates vanish first. It might be a while before you see any changes in your total debt with this method.
3. Debt Snowball
This is a very effective debt relief method. You will feel a sense of accomplishment as you begin to pay off small debts, and you will be left with more money to begin paying off large debts. Your debt payments will "snowball" over time, making it easier to pay off your larger bills.
If you are someone who is motivated by success this is the method for you. You start off by paying the smallest balance to the largest. You essentially do the exact opposite of the debt avalanche.
Ideally, your debt utilization rate should be between 10% and 30% of your total available credit. For example, if you have an Rs. 100000 credit card line, you should only use Rs.10000-Rs. 30000 of the available balance. Your credit score will suffer if you have a high debt utilization rate.
4. Transfer of Funds
A balance transfer is a type of refinance facility that allows the borrower to transfer an outstanding credit card facility to another with a lower interest rate.
You can convert your balance from one card to another or from multiple credit cards to a single card using a balance transfer. This provides you with temporary debt relief. The second bank offers a credit-free period of up to 90 days to make it easier to repay your outstanding balance. When the credit period ends, the cardholder will be charged normal interest.
In India, unlike the United States of America, there are no credit cards with a 0% annual percentage rate. These cards are used to transfer credit card balances. The cardholder can pay off all of his or her unpaid dues within the 0% interest period.
In this instance, you can have two credit cards and transfer the balance from the one with the higher interest rate to the one with the lower interest rate. You will save a significant amount of money on interest this way.
5. Convert payment to EMIs
If you are unable to repay your credit card balance, speak with your bank and request that your outstanding balance is converted into monthly EMIs. Banks, on the other hand, levy a monthly interest rate of 2% to 3% for offering the EMI option. There will additionally be a processing fee of about 1-2 percent of the outstanding balance.
6. Get your finances in order
Unexpected medical or emergency expenses can sometimes lead to credit card debt. In other instances, persistent overspending is the source of debt, which implies you're spending more than you're saving or have in your account. So it's time to take steps to tighten the purse strings.
According to Matt Kelly, owner of Momentum: Personal Finance Coaching in Durango, Colorado, your budget should include the following items:
Rent, utilities, groceries, and petrol are all basic necessities and are part of the monthly payments. The minimum payment on card debt and other debt are obligatory. Restaurants, coffee, and entertainment charges are nice-to-haves. Insurance, auto repairs, haircuts, vitamins, hygiene, vet costs, birthday gifts, vacations, weddings, and festivals are examples of irregular recurring expenses.
Examine each item and look for ways to save enough money each month to pay off your debts in 12 to 18 months.
7. Debt consolidation loan
If your credit card bills are too large to pay off in installments, there is another way to pay them off all at once.
You can apply for a personal loan or consolidation loan to pay off all of your credit card payments at once if you have a strong credit score. You will be debt-free and pay less interest if you do it this way.
The interest rates on personal loans are lower than those on credit cards. Aside from that, your monthly EMI will be a small amount, depending on the term.
8. Pay more than the minimum amount due
Many cardholders adhere to the habit of paying only the minimum amount due. As a result of their rising obligations, many borrowers find themselves trapped in never-ending revolving debt. Also keep in mind that credit cards have very high-interest debt, so paying merely the minimum due amount will only increase your outstanding balance at an exponential rate, depending on how much you owe.
What Effects Debt Has on Your Credit Scores
The first thing you should realize is that debt has repercussions throughout your entire financial life, including your credit scores.
Your credit score is a number between 300 and 900 that enables a lender to understand your debt accumulation and repayment history. It also influences the amount of loan that a lender is willing to offer, as well as the collection of the demand and the interest rate for repayment.
The amount you owe at the time the score is taken accounts for about 30% of your credit score. Large amounts of unpaid debt appear on your credit report and lower your credit score.