A credit card debt can become inevitable when the going gets tough, especially if you’re just learning how to manage your credit or if you’re facing hardships that may force you to make risky financial decisions.
This was the reality Lydia Senn and her husband, who live in Alabama, were faced with during the Great Recession in 2008 after Lydia was laid off from her job and her husband had to take a pay cut due to economic conditions. Due to their dependence on credit cards to keep up with their expenses, they acquired a debt of around $14,000 as a result.
Senn, who chronicles her financial journey on her YouTube channel, says that after she got her debt paid off in 2014, the couple decided to give up credit cards for a while and live a no-credit card lifestyle until 2019. In order not to accumulate high interest debt, we are very strategic and intentional about how we use our credit cards so that we do not rack up debt with high interest rates.”
An effective plan may help you stay out of debt and keep it manageable when times are tight and you are running low on money. Take into consideration alternatives before making credit card mistakes that will make it very difficult for you to bounce back from if you do not consider them before making mistakes.
1. Don’t keep spending as usual
In the event that inflation or other factors are threatening your budget at this time, you should change it immediately. As a result of the current inflation, Senn had to adjust her budget as a result of the increasing bills she was facing for gas, internet, and cell phone bills on her credit card.
“It is critical to take a look at the budget and decide which is the most important item – needs or wants,” says Katie Bossler, a quality assurance specialist at GreenPath, a nonprofit credit counseling agency that provides services to low income families.
As a family of six, Senn’s grocery bill increased from $125 per week to $225 per week for a household of six. Considering her husband has lupus and requires an autoimmune protocol diet on a daily basis, cutting this bill isn’t a viable option for her. There has been a significant difference between him thriving and being in daily pain because of that,” says Senn.
Rather than cutting back on other areas of spending, in order to keep costs in check, she opted to choose alternatives instead. The family dates that they used to have at the local coffee shop have now moved to her patio. In the past two years, the family has dined out less, travelled less, and attended less expensive arts camps for the children.
Taking a closer look at your credit card statement, it is important to eliminate purchases that are unnecessary or subscriptions that are unused. Rent, utilities, food, and any expenses that you have that bring in income should be prioritized over other expenses. The advice of Bossler is to consider other options in case you are still struggling financially after making changes, such as working part-time or gigs, or finding roommates.
2. Avoid relying on your credit limit
It is possible to save money by trimming your budget which may prevent you from having to use your credit cards too much. Try to save as much as you can every week – even if it’s just $5. It is true that an emergency fund provides foolproof protection, but a credit limit can certainly be slashed or even maxed out at the issuer’s discretion.
It is recommended that after your accounts have been in good standing for a while, you request a higher credit limit from your issuers. Alternatively, you could keep some credit available as a last resort option in order to supplement your emergency fund in case you need it. Upon making this request, an issuer might run a “hard inquiry” on your credit report, which can temporarily drop the score of your credit report for some consumers.
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3. Don’t carry a balance on a high-interest credit card
If you do not keep track of the balance on your credit card, it will cost you more money to make purchases at the store. In 2016, there was an average interest rate of 16.45% on credit card accounts assessed interest according to data released by the Federal Reserve. Several credit card companies offer higher interest rates than 29.99% on their credit cards.
There are some cards and institutions that offer lower interest rates for long-term balances, which may save you money on an ongoing basis regardless of your income level and credit score. A recent report from the National Credit Union Administration shows that according to its data, in March 2022, the average interest rate on credit cards at credit unions was 11.21%, which is higher than the national average.
You may be able to get a balance transfer credit card if you have a good credit score (at least 690 on a FICO scale) that allows you to move a substantial balance from one card to another at a lower rate if you need a debt payoff strategy. It is important to weigh the cost of the balance transfer fee and the ongoing interest charges when trying to determine the best option. If you want to make progress on your debt, the ideal balance transfer credit card should not charge an annual fee, have a low balance transfer fee of 3% or less, and have a long enough 0% introductory APR period to help you out.
4. Stop racking up late fees
You should notify your credit card issuer as soon as possible if you are foreseeing a late payment. In a 2022 news release, the Consumer Financial Protection Bureau stated that the fees associated with late payments can cost as much as $30 the first time and as much as $41 each subsequent time.
In addition, some issuers may be able to adjust your due date for you or offer you a short-term financial hardship program, or they might refer you to a nonprofit organization that can assist you in establishing a debt management plan. For a certain period of time, some of these programs may waive the application fee or reduce the interest rate.
5. Think twice about cash advances
If you have a credit card and want to use it for a cash advance at the bank or ATM, this is a convenient way of getting funding, although it is costly. Interest begins compounding on the amount of cash borrowed immediately and fees may be charged in addition to the interest.
Rather than turning your credit card available credit into a high-priced installment loan that is less expensive than a personal loan, you should instead consider getting a personal loan or a targeted offer from an issuer that will put money in your bank account. A credit check is not necessary when applying for the latter option, nor is there a need to submit a loan application.