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10 Tips for Managing Credit Card Debt

Originally posted on PenFed Credit Union

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  • Create Better Spending Habits

  • Find Ways to Save Money

  • Create a Plan to Pay Off Your Debt

  • Consider Different Forms of Consolidation

  • Avoid Payday Loans

  • Pay Your Monthly Bill on Time

  • Pay More than the Monthly Minimum

  • Ask for a Lower Interest Rate

  • Build an Emergency Fund

  • Be Aware of Your Credit Utilization and Score

1. Create Better Spending Habits

Having a credit card can feel liberating. After all, credit cards provide instant gratification. But you'll end up paying for it if you can't pay your balance in full every month. For instance, imagine you buy a new TV for $500 using your credit card. You take 12 months to pay it off, and your credit card's interest rate is 18%. By the time your TV is paid off, you'll have spent an extra $50 in interest.

That's why your first line of attack in managing credit card debt more effectively should always be to change your spending habits. Simple things like saving for that new TV and using your debit card instead of charging it can save a lot in interest. Creating and following a personal budget can also keep you from overspending and relying on your credit card between paychecks.

2. Find Ways to Save Money

Saving money is another way to manage credit card debt more wisely. If saving sounds hard, consider starting with some proven strategies for saving money quickly, such as:

  • Setting up a budget

  • Examining your spending habits

  • Negotiating better deals for ongoing services and subscriptions

  • Creating a side hustle

  • Automating your savings with direct deposit and automatic transfers

Once you free up some cash, you can put that extra money toward paying down your credit card balance.

3. Create a Plan to Pay Off Your Debt

Over time, carrying a large credit card balance can be costly. There are also times when having too much debt can be an obstacle to life goals, such as buying a new car or home. Lenders look at factors such as your credit score and debt-to-income ratio to determine whether it's safe to lend you money.

Regularly paying down your debt shows lenders you are a responsible borrower. Depending on your unique situation, there are different strategies you can consider for paying off your credit card debt. For example:

  • Avalanche Method: Pay off the card with the highest interest rate first.

  • Snowball Method: Pay off your card with the smallest amount of debt, then the next smallest, and so on.

  • Debt Consolidation: Use a balance transfer card or personal loan to try to lower your interest rate.

It doesn't matter which strategy you use to manage credit card debt. The important thing is to be consistent with your plan, day in and day out, so your credit card debt continually shrinks instead of growing.

"It doesn't matter which strategy you use to manage credit card debt. The important thing is to be consistent with your plan, day in and day out."

4. Consider Different Forms of Consolidation

Debt consolidation can be a very effective way to take control of your debt. The process involves combining debt from multiple credit cards into a single new loan with a lower interest rate.

A lower interest rate means you can pay more on the principle of your loan, paying it off faster and saving money. And — drumroll, please — you'll end up with only one convenient monthly payment.

There are several ways to consolidate credit card debt, each with its own strength. Choosing the best way to consolidate your credit card debt depends on your individual situation. If you think debt consolidation is for you, consider factors like your credit score, total amount owed, and current interest rates. Then research your consolidation options carefully.

5. Avoid Payday Loans

Payday loans sound good in theory. The approval process is simple, only requiring an ID, proof of income, and a checking account. Most payday lenders don't check credit scores, making it quick and easy to get money for emergencies, and borrowing this way won't affect your credit score (as long as you repay the loan in full). Then when you receive your next paycheck, you simply pay off the loan.

But there are several reasons why you should avoid payday loans. Interest rates are high on this type of loan, with annual percentage rates (APRs) usually around 400% or higher. Yes, you read that right. (For comparison, credit cards usually carry APRs of 12-30%.) In addition, payday loans have finance charges of around $15 for every $100 you borrow. All of this multiplies your debt substantially in a short amount of time.

For example, imagine you borrow $450 for 30 days at an APR of 400%. With fees and interest, that $450 loan could end up costing $597 or more!

6. Pay Your Monthly Bill on Time

When you first get a new credit card, it's important to understand your billing cycle. A billing cycle is the number of days between two credit card statements. Typically, billing cycles run from 28 to 31 days depending on the card issuer, but this may vary from month to month since the number of days in a month can vary. At the end of a cycle, your credit card issuer will calculate your minimum monthly payment based on charges and fees from that billing cycle.

Missing credit card payments is expensive. The average late payment fee for credit cards is $36, although some companies charge more. Many credit card companies also increase their late payment fee for customers who miss multiple payments.

In addition to late payment fees, credit card companies can also increase your interest rate if you continually miss payments. All these penalties add up to greatly increase the total amount you owe. But you can avoid all of this by making payments regularly. If your credit card issuer supports it, you might even set up automatic payments to ensure you always pay on time.

"In addition to late payment fees, credit card companies can also increase your interest rate if you continually miss payments."

7. Pay More than the Monthly Minimum

One of the best ways to manage credit card debt smartly is to pay more than the minimum monthly payments. Making higher payments helps reduce your credit utilization, which is a major factor in your credit score. More importantly, if you only make minimum payments, interest charges will build up, increasing the total amount of debt you owe.

8. Ask for a Lower Interest Rate

Did you know you might get a lower interest rate on credit cards just by asking for one? Many credit card companies are willing to work with cardholders if the cardholders ask. A lower interest rate will save you money and make it easier to pay down your balance.

Before you call your credit card company, make sure you understand the current terms of your card so you can better evaluate any offers they make. You should also check your credit score because a good one can help you justify a better interest rate. Card issuers are also more likely to consider lowering your interest rate if you've been making regular, on-time payments and if you've had your card for several years.

Another tip is to check competing credit cards for deals or special offers. (Make sure you're comparing your credit card to cards that are similar to yours.) Sometimes your credit card provider will be willing to match the offers you find.

"One of the best ways to manage credit card debt smartly is to pay more than the minimum monthly payments."

9. Build an Emergency Fund

An emergency fund is different from a regular savings account. It is money set aside for serious situations like unemployment, unforeseen medical expenses, or sudden, necessary home or car repairs. And whether it's a flat tire or an emergency trip to the vet when Spot eats your sock (again), emergency expenses will crop up.

Emergency funds help you manage your credit card debt by covering surprise expenses you would otherwise put on a credit card. This way you can use your credit card mindfully instead of relying on it as a safety net. This helps you stay in control of your credit utilization and keeps your credit score healthy.

10. Be Aware of Your Credit Utilization and Score

Credit utilization is the percentage of total available credit that you are using. It compares the amount of credit card debt you carry to your overall credit limit. This credit utilization ratio is an important part of your credit score. High credit utilization suggests a borrower is overspending, making creditors less likely to extend you more credit. In contrast, lower credit utilization looks more responsible and can help a borrower qualify for increased credit limits or new lines of credit.

Your credit score is a number between 300 and 850 that is used to evaluate your creditworthiness. The higher a person's credit score, the more likely that person will be able to pay off any debts they accrue — including credit card debts. For this reason, high credit scores often help borrowers get lower interest rates.

The Takeaway

Credit cards are useful tools, and when used carefully, they can benefit your finances substantially. But it's important that you know how to manage credit card debt so you can make your cards work for you. Even if you haven't managed your credit cards well in the past, you can start now with these easy tips and take control of your debt for good.

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