Grasping Each Detail of Your Credit Card Debt: An In-Depth Guide
Credit card debt signifies the outstanding amount you owe for transactions conducted via your credit card. The issuer of your credit card provides you with a specified credit limit, which you can use freely. It is crucial, however, to make a minimum monthly payment to evade interest charges. Failure to clear your balance at your monthly due date once you reach your limit results in the accumulation of debt. Lower balances make your credit card debt easier to manage.
Most cards offer you an interest-free period, typically 20 to 30 days, to clear payments for purchases before interest is charged to your account. Interest rates outside this period fluctuate based on the issuing bank, usually falling within the 19 to 30 percent range.
Besides making purchases, credit cards also enable you to draw a cash advance. Usually, there’s no grace period for the interest accumulated on your cash advance, and the rate may differ from that charged on purchases. Some credit card companies even levy a service charge for your advance, making cash advances a costly affair.
Understanding Credit Card Debt and Your Credit Score
Your credit score is a three-digit figure that represents your creditworthiness. Every creditor provides a rating to the credit bureau, which is based on the account’s history. Your credit score is then determined using these ratings.
The following factors are taken into account when calculating your credit score:
Payment history: Your ability to make timely payments contributes to 35 percent of your credit score. It involves questions like ‘Do you clear your dues each month?’, ‘Do you skip payments?’ and ‘For how long were your bills unpaid?’.
Debt amount: This is a consideration of how much you owe on your account types and the amount of credit still available to you.
Credit history: The age of your credit accounts can determine your credit behavior. The older your history, the more responsible and less risky you are considered. Having and maintaining older accounts in good standing will positively affect your credit score.
Variety of credit: A mix of credit cards, retail accounts, mortgages, and car loans influences your credit score. Having too many credit accounts or lacking a mix of different types can impact your score.
New credit: How many new accounts have you opened recently? Numerous credit accounts with different lenders give the impression that you’re incurring new debt, which may negatively impact your credit score.
Credit card balance: Be wary of the amount of credit you use in comparison to your total limit. Maintaining balances close to your credit limit will negatively affect your credit score.
Strategies to Pay Off Credit Card Debt
Eliminating your credit card debt is far from impossible. With a realistic plan and determination, you can reduce or completely clear your debt. This can be achieved in two primary ways:
Self-Managed Repayment Plans
These require you to devise a plan and commit to fulfilling your repayment, all by yourself. They are hands-on approaches to successfully clearing your credit card debt.
Adopt debt consolidation: This solution might seem unfeasible as you will have to avail a new loan or credit card to clear all your existing credit. You pay your outstanding debt with a zero percent balance transfer credit card or personal loans which have low-interest rates. This leaves you with only one monthly payment which will be easier to manage.
Apply the debt snowball method: Select your credit card with the smallest balance and prioritize clearing this as quickly as possible. Once it’s paid off, you roll that payment into the amount you’re contributing to paying your next smallest balance, and so on. Continue this way until you’ve cleared all your debts.
Try the avalanche method: Here, you prioritize the account with the highest interest rate and clear that first. Once it’s paid off, select the account with the next highest interest rate, and so on. This method is usually faster and cheaper.
Professional Debt Relief Options
With these, you’d have to engage the services of professionals who would work with you develop a more serious plan to repay your debt.
Adopt a Debt Management Plan (DMP): This involves hiring a debt management company to evaluate your debt situation and find the right solution for you. If necessary, they negotiate with your creditors and arrange a single payment through the debt management company to your creditors. Generally, DMPs do not reduce the principal amount owed and there are no formal processes to stop collections or creditor actions.
File a Consumer Proposal: This involves finding a Licensed Insolvency Trustee, such as MNP Ltd., who are licensed by the federal government. The Trustee will help determine how much of your debt you can afford to pay. A Consumer Proposal is usually less costly than a DMP and creditors cannot opt out of it.
Declare bankruptcy: This also involves finding a Licensed Insolvency Trustee. A personal bankruptcy
will impact you more negatively than a Consumer Proposal but may be suitable if you can’t afford to pay a portion of your debt.
Preventing credit card debt is feasible and it begins with wise spending and smart saving.
