Know When to Rein in Your Spending
No external gauge lets you know when your credit card debt is getting out of control. Your credit card issuers aren’t going to warn you that your balances are more than you can afford to pay. Instead, it’s up to you to watch for these 10 signs that show that your debt is out of control:
Stop Digging
The old adage about the first step toward climbing out of a hole applies here. In order to get your debt under control, the first thing you need to do is change your habits so that you’re not making the problem worse. Quite simply, stop using your credit cards. If you keep using them, your debt will only grow, making it more difficult to pay down. If at all possible, though, avoid closing accounts. Because your debt utilization ratio is an important part of your credit score, you want to grow your available credit as you pay down your debt in order to improve your credit score.
Eliminate Your Debt
Acknowledging the severity of your debt is an important first step, but you have to take action to address the problem. You have to come up with a workable plan and stick to it—and sticking to it might be the most important part. Getting rid of debt can take a long time, and results might not be evident at first. Be patient and persistent, and eventually, your efforts will make a difference. There are multiple ways to tackle your debt, and what’s best for you depends largely on your financial situation and also a little on your own personality. Consider what’s best for you and your situation.
Eliminate high-interest debt first with the avalanche method. This makes sense because high-interest rates can be the biggest obstacle to eliminating debt. If you’re paying a double-digit interest rate—or something even higher than 20%—it can be difficult to pay down balances. The sooner you can lower the balance on those high-interest debts, the more impact your monthly payments can have. If you still have decent enough credit, it’s also worth considering applying for a new credit card with zero percent interest on balance transfers for a period of time. Adding another credit card might seem counterintuitive, but if you can be disciplined and do so only as a means to eliminate some of the interest you’re paying, it’s an effective strategy. Try the snowball method. Author and radio host Dave Ramsey popularized this method. Target the lowest balance first, then move to the next lowest balance, and so forth. While this strategy likely will result in paying more in interest than the previous method, it can be a good approach if you need a boost of confidence when tackling your debt. Because you’re starting with the lowest balances, you’ll eliminate them more quickly, thus giving yourself a sense of accomplishment as you work through your indebtedness.
Seek Help
If the above strategies don’t work, you might consider seeking outside help. Nonprofit credit counselors can help you organize and manage your finances. If the situation is dire, they can also arrange a debt management plan (DMP) with your creditors. The counselor will negotiate with your creditors, often reducing interest rates, and will take care of all payments. You will send one payment to the agency. Your credit score will likely be negatively affected, at least in the short term. Some for profit agencies offer “debt settlement” for a fee. This option should only be considered as a last resort, as debt settlement can have a significant impact on your credit score.
