So, are you heading down this path? If the answer is YES, follow these five tips to effectively resolve and reduce credit card debt. Even if you're doing good financially, it doesn't hurt to know what can be done. Perhaps you could even share these with your family and friends!
1. Consolidate Your Debt
When owing a significant balance on multiple cards, it might be wiser to consolidate (combine) these debts and pay them off with other financings, at lower rates. You can do so either through a balance transfer or a personal loan.
A credit card balance transfer, as its name suggests, is a transfer of the leftover balance from one credit card to another. But does it make sense to move your debt from one lender to another? In many ways, it does. This is because a balance transfer typically offers a lower interest rate (often at 0%) on the balance payable for a specified period.
For example, if you can pay off what you owe within 12 months or however long the agreed repayment period is, you’ll enjoy the balance transfer offer rate, which ranges from 0% p.a. to 9% p.a. Compare this to the usual 15% p.a. to 18% p.a. and you’ll understand why a balance transfer can be a good, cost-friendly way to help you clear off debt.
Similarly, a personal loan can also be used to pay down credit card debt with potential interest savings to be had as well. This is due to the average personal loan rate standing at 7% p.a. to 8% p.a. which is much lower than most credit card rates.
If you think balance transfer credit cards or personal loans would be a great option to help you pay off credit card debt, check out our comparison pages to discover and review the best products for your needs!
2. Put Yourself on a Debt Diet
The first thing to do is to STOP SPENDING so that you won’t create more debt. Some of you may find this very hard to do, but it’s time to get serious about your finances. Avoid buying anything on credit (for the time being), plan your purchases, and use cash/debit cards whenever possible.
Don’t worry, you will not have to part with your card forever; it’s just temporary until you have repaid what you owe.
Consider downgrading cable TV subscriptions, entertainment outlays and other unessential purchases to save money. You can then channel these savings into your credit card debt repayment.
2. Clear off Debt With the Highest Interests First
Go through your credit cards and note which ones are charging the highest level of interest and resolve to settle these first. By working through the most costly balances, you can put a hold on incurring more debt from interests alone. Psychologically though, this method may be tough for some, as it can take a while to clear off a major balance as other debt (i.e. smaller credit card bills) remain or climb.
So if you don’t have the discipline to stick with and reduce high-interest debt, try this: pick the card with the lowest balance and clear it completely.
Next, tackle the second lowest balance and keep repeating the process until all debt is cleared.
This method of debt clearance is known as the ‘debt-snowball method’, an effective repayment style touted by the personal finance expert, Dave Ramsey. And according to him, tackling and paying off the smallest balance will trigger a debt-busting drive that eventually helps you clear off major debt too.
4. Balance Conversion
What is a balance conversion? Well, in a nutshell, it’s a repayment plan that converts any balance owed into a fixed monthly instalment. This is a good option for those who are seeking an affordable, systematic method to repay debts. Moreover, applying for one can keep debt from climbing to an insurmountable level.
If your balance conversion application is approved, the bank will convert the total amount to small repayments over a specified period. Depending on the bank, you may request for a conversion plan on just a single retail purchase or even partial/entire balances owed.
Note that a minimum swipe amount usually applies, and cash advances will not be granted a conversion plan.
5. Negotiate With Your Credit Card Provider
If you find that you can’t fully repay your credit card bills for two months in a row, or even make the minimum payments, it might be time to negotiate. Most don’t realise that banks can be lenient, especially if you aren’t habitually late or defaulting on payments. They may be sympathetic to your money troubles and allow an extension.
However, if your credit card debt gets to be overwhelming, where even an extension won’t help; seek outside assistance i.e. from the likes of the Credit Counselling and Debt Management Agency (AKPK).
If eligible, you can opt to enrol in their debt management program and get help from the agency to deal with the bank on your behalf, to negotiate restructuring debt.
So, What Are You Waiting For?
It's time to stop giving excuses and start gaining control of your debt. It's absolutely possible as long as you monitor your balances and take proactive steps towards reducing them as much as possible. Also, don't forget that your credit score will follow you for life. Being blacklisted by one bank might affect your chances with other banks. Are you willing to ruin your financial ability for future opportunities because of this?