Credit Strategies

This week I wanted to discuss credit card debt and some of the ways you can pay it down and build your credit back up in order to get out from under the credit card companies. Unfortunately, credit card debt has become increasingly commonplace, and while credit cards can be very useful the debt that comes with it can be devastating. Most credit card interest rates come out around 15% but can certainly go higher to 20%.  

Anyone who has dealt with credit card debt knows that it’s not a pleasant experience and something that is both financially detrimental but also incredibly emotionally taxing. While paying off your credit cards every month is ideal, not everyone is able to so I wanted to discuss a few strategies as well as highlight the importance of managing your credit.  

1. Focus on High Interest Cards First. This one is known to most people, and is the most common way to tackle credit card debt.  Because of how important getting out of this type of debt is to your financial plan, I’m going to make sure you as a reader know about this option. Take a look at the interest rates of the cards you have, find the highest interest rate, and work to pay that one off before moving down the ladder, rung by rung. This allows you to eliminate the highest interest debt first and makes it easier to tackle the lower interest cards and climb out of the grasp of the credit card companies.

2. Focus on Lowest Balance First. This strategy is less efficient, but perhaps more effective for certain people.  Those who have developed bad spending habits and use excessive retail therapy may not be able to successfully tackle the highest interest cards without falling back into old habits.  In that situation, it could be more useful to work on building better spending habits and being able to pay off cards quickly gives a satisfaction that you’re on the right path and taking positive steps.  By paying off the credit cards with the lowest balance you can see real progress towards your goal of erasing your credit card debt. While this approach is less efficient, it could potentially be more effective for some people.  

3. Balance Transfer. For those of you who have the means to aggressively pay off credit card debt, doing a balance transfer can be a great choice. This means finding another credit card to transfer your existing credit balance to in order to take advantage of shorter term advantages of the new card.  For example, if you have $10,000 of credit card debt we can find you a card that allows for balance transfer and will give you a certain stretch of time with 0% APR.  That means that you can transfer your balance to a new card for free, and then aggressively pay it off within the 0% APR window effectively allowing you to pay off your credit card debt interest free.  However, this strategy requires you to find the right account to open, the ability to pay off the balance within the stated time frame, and have good enough credit to qualify for the new card. Let me know if you’re interested in this option and we can walk through it together.  

Now that we’ve discussed methods of repayment, let’s take a look at a few ways to rebuild your credit score.  There are a number of ways to go about rebuilding your credit score, so I wanted to look at a few methods to give you a sense of what kind of strategy may work for you.  One of the most important aspects of this process however is to find a strategy that you understand and can stick with instead of just randomly trying different strategies for small bits of time.  Let’s look at a few actions you should take when rebuilding your credit score.

1. Pay Existing Debt on Time. Nothing positively affects your credit score more than making on-time payments. Pay off any bills and lines of credit on time, every time. If you have had some organizational issues in the past that led to missing payments, look at automating payments as missing a payment can be a big setback on the path to rebuilding your credit.

2. Use a Secured Credit Card. If your accounts were closed, it may be necessary to start with a secured credit card.  A secured credit card requires an upfront deposit as collateral, but then acts just like any other credit card.  Shop around to find a card that reports to the three major credit-reporting bureaus (Experian, Equifax, and Transunion) and make sure the details of the card fit your strategy.  Use this card sparingly to make purchases that can easily be repaid every month.

3. Credit Builder Loan. Another option is to get a credit builder loan, which is designed to help you rebuild your credit.  These loans are generally not advertised and usually offered by smaller community banks and credit unions.  To avoid getting burned on these types of loans, many of the banks or credit unions will set strict limitations for the loan so make sure you completely understand the terms of the loan before signing.  These loans can provide a boost when trying to restore your credit, but you are taking on a loan, so make sure that it’s a payment level you can comfortably afford. Like everything else, make on time payments, every time.  

Obviously these are just a few strategies that can be employed, but it’s important to figure out an overarching strategy that will help get you out of credit card debt and back on the road to rebuilding your credit score as soon as you can.  These strategies may not be applicable to each individual, but the important thing is that you work to get out of credit card debt as a first step to taking control of your finances. An important fact to remember when rebuilding your credit is that it’s a marathon, not a sprint.  Missed payments, collections, and judgements can stay on your credit report for up to 7 years, while bankruptcies can last for 10 years. Credit card companies try to make this process as complicated and opaque as possible so as to keep people in debt and make more and more money off them.