These 8 steps to reduce credit card debt revolve around a basic yet powerful concept: A credit card is a two-edged sword. In other words, the fact that you are concerned about its liabilities underlines how financially resourceful a line of credit can be. However, this debt is also a problem that you need to address. Otherwise, your FICO score and personal budget may become even more difficult to manage.
Just as importantly, accumulated credit card debt limits your ability to enjoy its benefits in the future. Tackling these liabilities starts with an organized and well-planned approach. Furthermore, the following 8 steps to reduce credit card debt are designed for long-term successes. That is to say, they enable you to keep your finances intact and continually grow your FICO score.
Start With a Plan
Steps 1 and 2: Add up Your Debts and Expenses
While it seems obvious, the first of the 8 steps to reduce credit card debt is to add it up. Firstly, identify how much you can afford to pay and put together a defined timeline. Secondly, determine the amount of credit that fits your budget and, equally as important, suits your needs. Some people rely on credit cards for quick cash during an urgent time, to give an example. Others, such as consumers who already have enough emergency funds, may use their credit card to go shopping or pay for travel expenses.
Nevertheless, cardholders should add up each of their total debt and combined credit balances. After that, they can put together a realistic and defined timeline for paying it off. The credit card issuer’s billing or collections department will certainly work with you if you’re behind. More details on that are coming. Beforehand, compare your total open credit to what you actually need.
When a cardholder’s balance is over the top, they might consider closing some accounts to lower their monthly payments. Similarly, if credit cards don’t cover all the necessary costs, you could reexamine your budget or find alternatives, such as a medical FSA card.
Step 3: Rank the Accounts by Age
In short, a consumer’s FICO score is about their ability to consistently pay on time and keep their finances intact. Many banks will give you even more money (credit) when you don’t miss any due dates for several months in a row. Moreover, when the issuer doesn’t increase the balance, a three-year-old credit account still demonstrates that you are responsible at budgeting. This is very important to lenders and creditors. Therefore, when you rank the accounts by age, it gives you an initial idea of which credit cards to retain/cancel.
Step 4: Rank the Debts and Balances
Needless to say, consumers should start with credit cards that have the largest monthly payments. This critically helps them reduce their debt, but affordability is also a factor. Since the monthly bill is based on how much credit the issuer gave the cardholder, consumers can make their budget more manageable when they remove expensive items. Moreover, lower credit card payments make it easier to meet other obligations and remember due dates. If you want to decide on which line(s) to close, both of the account history rankings and monthly payment list should guide your choice.
Slash the Burden
Step 5: Keep It at 30%
When it comes to FICO scores, the credit card utilization rate (i.e. how much you actually use) is a critical factor. In general, spending over 30% of the total balance reduces your credit score. For example, to maintain a healthy FICO score, cardholders shouldn’t spend over $300 on a $1,000 line of credit. Just as importantly, when you cap the utilization rate at or below 30%, your credit score starts to gradually climb.
Above all else, this enables you to take your time while navigating through these 8 steps to reduce credit card debt. In fact, even if this takes several months, your FICO score will keep growing as long as you don’t exceed the 30% threshold. It also means that you pay what you can afford without putting your credit at risk.
Step 6: Tackle the Small Ones
Firstly, consider closing out inexpensive balances. To give an example, assume that an individual has five credit cards. Their respective amounts are $200, $300, $600, $900, and $3,000 (or $5,000 in total). The cardholder wants to reduce their overall credit lines to $3,000. If they start with the larger ones, it may take much longer to attain that goal. Subsequently, the consumer gives up before paying off and closing any of the accounts.
They can cover the smaller balances, such as the $200 or $300 credit cards, in one or two payments. The number of monthly payments will advantageously go down, which makes it easier for the cardholder to manage their budget. This difference, in itself, can massively motivate consumers to stick to their plans and further reduce their credit card debt.
Implement and Move Forward
Step 7: Categorize Your Expenses
Credit cards can valuably help you save money and manage cashflow. Yet having too many accounts has the opposite affect. In light of this, an effective debt-reduction strategy requires you to specifically define its purpose. In other words, will you use it to pay for medical bills, gas, leisurely expenses, or a combination of them? Once you categorize the budget items, dedicate a separate credit card for each one. At the end, you narrow down your accounts to two or three lines.
This strategy is advantageous for several reasons. Firstly, the less credit card bills that you have, the more likely it is that you remember them. It also makes it easy to manage your expenses and taxes. For instance, when you want to claim your medical bills as deductions, the related credit card’s statements make the process time-efficient and simple. Secondly, organized finances reduce the likelihood of a missed payment, which only harms your FICO score. Thirdly, when your spending is under control, you can effectively maximize the advantages of a points/rewards credit card.
Step 8: Call the Issuer
Many people are intimidated by the idea of calling their creditor when the payments are past due. However, doing so can go a long way. For a start, when you inform them that you have a plan to take care of your late payments, they will note that on your account. Consequently, the balance is much less likely to go to collections than if you were to ignore their calls or avoid updating them. Needless to say, a collections account can cause your FICO score to dip.
Additionally, when you call the card issuer’s billing department, they will contact you when you’re ready to pay and remind you of the obligation. In a way, they also keep you in check. After all, the only way to stop the calls is by fulfilling the owed amount. Above all else, consumers need to implement these 8 steps to reduce credit card debt from the start.
Final Thoughts: 8 Steps to Reduce Credit Card Debt
A solid and concrete plan will guide you forward. From there, you may lower your credit card utilization ratio and give yourself enough time to implement the strategy.
At the end, a categorized and simplified credit portfolio can serve you for years. In other words, the best way to manage and limit credit card debt is by making it as easy to remember the payments and monitoring your spending.