How to Avoid Credit Card Debt
Credit cards are the most popular form of payment in the United States, but credit card debt plagues many Americans. According to Debt.org, the average credit card holder has at least 2.7 cards, and the average household has $5,315 in credit card debt.
Facing credit card debt can feel daunting, especially if looking at the balance makes your head spin. Fortunately, getting out of credit card debt is entirely possible, and there are plenty of strategies to help you do it. We'll explain some of them in this guide.
*Disclaimer: Ethos' content is intended to provide general education about credit card debt resolution strategies. You should consult a financial planning professional to manage credit card debt.
How to get out of credit card debt
Getting out of credit card debt is essential for a few reasons. First, a high credit card balance can negatively impact your credit score. It also becomes more expensive to pay off over time because you have to pay interest on the amount you owe.
Managing credit card debt can be challenging, and it often takes patience, depending on how much money you owe. However, resolving your credit card debt should be a priority if you want to improve your overall financial health.
Here are several strategies that can help you get out of debt and remain debt-free for the future.
Identify the root cause of your debt
When you're considering how to manage credit card debt, the first order of business is to figure out what caused your debt in the first place.
Maybe you started spending beyond your means or used a credit card to fund a major purchase, like a used car. If you're part of the 25% of Americans without an emergency fund, perhaps you were forced to use credit cards to cover an unexpected cost, like medical bills.
Identifying the cause of your debt can prevent you from making the same mistakes in the future.
Put yourself on a budget
When you're paying off debt, making a budget is essential. There are many ways to budget, whether you employ a spreadsheet, budgeting software, or an app that works for you.
To put more of your money towards your debt, you probably won't be able to continue spending like you usually do. Unintentional overspending can be a significant cause of credit card debt for many people.
Look at your income, then subtract your monthly expenses. Look for ways to lower your spending or cut back in certain areas. If your monthly expenses are greater than your income, you may need to consider ways to bring in some extra money.
Choose a repayment strategy
When you need help managing credit card debt, it's best to be strategic. There are several popular approaches to debt management, including:
- The avalanche method: Pay off your highest interest credit cards first, then pay the minimum amount on your other cards.
- The snowball method: Pay off your credit card with the smallest amount of debt first, then pay off the highest balance cards last.
- Balance transfer credit cards: Open a new credit card with a 0% APR offer. When you transfer your balance from another card and pay 0% interest for the first 6-12 months, it allows you to pay off your debt without a high-interest rate. However, most balance transfer cards are only available for borrowers with good credit.
- Make extra payments: Consider making a few additional payments over the year. You can also pay more than the minimum amount during the billing cycle to pay down your balance faster.
Work with a debt counselor
If you need the guidance of a professional to get out of debt, working with a debt counselor may be a good option for you.
A debt counselor can help you create a repayment plan that works for your current financial situation and goals. Depending on the amount of debt you have, you may qualify for a Debt Management Plan (DMP), which can lower your interest rate significantly.
However, keep in mind that debt counselors charge a fee, and participating in a DMP also costs money. It could be worth the attempt to pay off your debt by yourself first before you pay for professional financial help.
What happens if I can't afford my credit card debt?
In some instances, you simply can't afford to pay off your credit card debt. If you've reached this point, you have a few options. You can either declare bankruptcy or settle your debt.
Filing for bankruptcy
When you file for bankruptcy, you become absolved of your debt. You're no longer required to pay back what you owe, and debt collectors aren't allowed to contact you to attempt to collect the money.
However, filing for bankruptcy has a significant impact on your creditworthiness. Bankruptcy stays on your credit report for seven to 10 years, and your credit score will drop significantly. When you apply for loans or credit cards in the future, you'll likely pay a much higher interest rate.
Another option is to settle your debt by working with a debt settlement company.
The debt settlement company negotiates with your credit card company and "settles" on an amount of money that gets forgiven. This strategy can potentially lower the amount you owe, but you still need to pay back the remaining amount.
Ultimately, debt settlement isn't a great option for everyone. Firstly, working with a debt settlement company costs money, putting you further into debt. It can also harm your credit score. Not to mention, your credit card company may not be willing to settle your debt, leaving you with fewer options.
Getting life insurance from Ethos
If you're currently getting yourself out of credit card debt, the last thing you're probably thinking about is adding another insurance premium to your monthly expenses. However, having life insurance can be even more beneficial for people in debt. If you were to pass away, your spouse or children would likely inherit your unpaid debt. But with life insurance, the death benefit can be used to cover your debt and financially protect your loved ones.
The information and content provided herein is for informational purposes only, and it is not to be considered legal, tax, investment, or financial advice, recommendation, or endorsement. You should consult with an attorney or other professional to determine what may be best for your individual needs.