Getting Out of and Avoiding Credit Card Debt

Credit card debt is something we’re all aware of, and if we’re not careful it can get out of hand. There are many common habits that keep people in debt. Not paying your card off every month and continuing to pay the minimum, impulsive spending, not knowing the terms of your credit card (i.e. APR or penalty rates) and accepting too many credit card offers are just a few.

What most people don’t know is how serious credit card debt can impact our credit scores. So here are some great facts to know…

• Did you know that 30% of your credit score is made up of your credit card balances? This is known as credit utilization. When you start to get above utilizing more than about 30% of your credit balance it begins to hurt your credit score.
• Payment history makes up 35% of your credit score, which is one of the most influential factors. That is why paying your bills on time is so crucial, and it helps to boost your score.
• The length of time that each credit card account has been open makes up roughly 15% of your credit score. Instead of closing accounts, pay the entire balance and don’t make any charges to the account – you can even cut up the card if you feel like it’ll be tempting to use!
• Closing cards can raise your utilization ratio, which you want low, since you have less available credit.
• Opening credit card accounts makes up 10% of your credit score. If you have a lot of inquiries in a short period of time can lower your credit score.

If you feel like some of this information applies to you, then keep reading. We have several practices that can help you eliminate credit card debt.

1. Make sure your monthly charges do not exceed your take home pay and fixed expenses.
2. Don’t only make minimum payments, and don’t max out.
3. Make your credit card payments on time.
4. If you’re looking to pay down debt, pay attention to your interest rate. It might be helpful to look at a consolidation loan to make debt repayment more manageable.

There are a lot of resources and apps available to help anyone who is trying to get out of debt. One resource that our Financial Planning Associate, Melissa Visbal, recommends is the book, Surviving Debt by the National Consumer Law Center. This book provides great advice on how to deal with debt in many areas such as which debt to deal with first, student loans, when and when not to refinance and so much more.

There are also apps, like Mint, that can help tack your spending and setting budgets. Specifically, with Mint, you can see where your money is going and get alerted you when you have overspent on a specific spending category. Of course, there are other apps out there like Unbury.me, Qoins, Debt Eliminator and Financial Goals that are extremely helpful. Do your research and see which fits your needs.

It is so crucial to be knowledgeable about your credit card debt. If you feel like yours is out of control, take steps to help it stop growing. Start with only using your debit card and avoiding your credit card. Then take inventory of your debts. Write it all down. Know what your interest rates are, your balance and the current minimum payment. Even though this is a little frightening, it will help you make informative decisions about your debt.

Getting out of debt and avoiding it, altogether, may be hard but it is possible and worth it in the long run. If there is anything you take away from this, let it be: spend less than you make. Most debt comes from poor financial behavior, so educate yourself. To move on from large debt and the consequences it incurs, is to avoid accumulating that much debt again in the future. Don’t get caught in a debt circle because once you’re in it, it is nearly impossible to escape.