Before actually diving into How to clear credit card debt, it is good to know some important aspects related to it.
Odds are high if your above 25 then you will know most of this technalities but if you are not familiar with it.
Don’t worry it’s my responsibility to make familiar with it as the FinanceBread tagline says “ making finance more understandable “.
So in case you want to jump to certain topic, for your convenience a table of content is given.
If you really want to get good at credit card its my humble request to you to go through complete post.
Now you know
Credit Card is no evil
You may want a credit card and think it will open the doors of shopping and you can make purchases, which sometimes cash is not able to suffice.
But wait it’s no free, after a certain time you have to give the money.
So am I discouraging you not to use credit cards?
In fact, you have to get your belief about Credit Cards right.
Ironically, credit is one of the most vital factors in getting rich, but because it’s hard to wrap our minds around it, we often overlook it entirely.
It’s time to wake up and pay attention to it (and not just because of the credit crisis), because establishing good credit is the first step in building an infrastructure for getting rich.
Think about it: Our largest purchases are almost always made on credit, and people with good credit save tens of thousands of dollars on these purchases.
Credit has a far greater impact on your finances than saving a few dollars a day on a cup of coffee.
Lets get more clear about how to clear credit debt by reading further.
Credit Score Vs Credit Report
So understanding your credit is more important than ever.
There are two main components to credit (also known as your credit history): the credit report and the credit score.
These boring terms can actually save you tens of thousands of dollars over your lifetime, so listen up.
This is what will enable you to justify your next plane ticket and hotel stay.
Your credit report gives potential lenders—the people who are considering lending you money for a car or home—basic information about you, your accounts, and your payment history.
In general, it tracks all credit-related activities, although recentactivities are given higher weight.
Your credit score, on the other hand ( Credit score is a 3-digit numeric summary of your credit history between 300 and 900 )
it is generated by any of the 4 credit bureaus operating in India.
A credit score generated specifically by TransUnion CIBIL is known as a CIBIL score ) is a single, easy-to-read number that represents your credit risk to lenders.
It’s like Cliff’s Notes for the credit industry.
The lenders take this number (higher is better) and, with a few other pieces of information, such as your salary and age, decide if they’ll lend you money for credit like a credit card, mortgage, or car loan.
They’ll charge you more or less for the loan, depending on the score, which signifies how risky you are.
How credit cards affect your spending
Before going further in case you are wandering.
How can you check your credit score?
Then you can visit Paytm.com as I totally like Paytm.
And I wrote a guide on Mutual Funds around 4 months ago and I also explained there how you can invest through
Paytm mutual funds, if you want to know more then this would be a good read.
( If you are reading this from outside India, then following are some good platforms to check your credit score :-
Most of you might say but Rishabh kashyap ” I don’t care about credit ” and I never faced debt in my life and I have good saving habits and I live a low profile “.
YES, you are right and I wish that any of my readers don’t face debt but hear me out on this.
As I am a BBA student right now and do not make useless expense, I totally agree with you.
But What will do when you have to support others, not just you?
To be precise things like career, marriage, family and other.
That time you will need to make expense out of your capacity.
So please don’t panic and neglect this and understand How to clear credit card debt.
One of the key differences between rich people and everyone else is that rich people plan before they need to plan.
If you doubt that a loan’s interest rate really makes that much of a difference, check out the following table. Assuming you borrowed $200,000 for a 30-year mortgage, look at the differences in what you’d pay based on your credit score.
As you can see, a high credit score can save you hundreds of thousands of dollars over your lifetime—and that’s just on a mortgage.
While other people spend many hours cutting coupons, growing food in their gardens to save on grocery bills, or being frugal with lattes, they’re failing to see the bigger picture.
It’s fine to be frugal, but you should focus on spending time on the things that matter, the big wins.
So, let’s dig into tactics for improving your credit, which is quantifiably worth much more than any advice about frugality.
6 important lesson for using credit cards
Now it’s time to take full advantage of your cards as a means to improving your credit.
Mastering credit card game is not matter of one time play its practice and you are going to make mistakes but its acceptable.
I am sure after reading following 6 lessons you will make very few.
One of the most important factors is getting out of debt, which we’ll discusee in future.
But first, we’ll set up automatic credit card payments so you never miss a payment again and you will be on your way to clear credit card debt.
Lesson 1 – Pay off your credit cards regulary
Yeah, we’ve all heard it, but what you may not know is that your debt payment history represents 35 percent of your credit score—the largest chunk.
In fact, the single most important thing you can do to improve your Awful Consequences If you miss even one payment on your credit is to pay your bills on time.
Here are four terrible, horrible, no good, very bad results you may face:
1. Your credit score can drop more than 100 points, which would add $240/month to an average thirty-year fixed-mortgage loan.
2. Your APR can go up to 30 percent.
3. You’ll be charged a late fee, usually around $35.
4. Your late payment can trigger rate increases on your other credit cards as well, even if you’ve never been late on them. (I find this fact amazing.)
Don’t get too freaked out: You can recover from the hit to your credit score, usually within a few months.
In fact, if you’re just a few days late with your payment, you may incur a fee, but it generally won’t be reported to the credit bureaus.
Lesson 2 – Get your fees waived on credit cards
This is a great, easy way to use your credit cards because your credit card company will do all the work for you. Call them using the phone and politely ask them to waive the fees on credit cards.
It’s obvious they are going to be rigid and not make any changes but if you insist that you pay the bill on time and your credit history is good.
The vast majority of people don’t need to pay any annual fees on their credit cards, and because free credit cards are so competitive now, you rarely need to pay for the privilege of using your card.
The only exception is if you spend enough to justify the extra rewards a fee-charging account offers.
If you do pay an annual fee.
Most people should switch from a for-fee card to a free card, so ask your credit card company what they’ll do for you.
If they waive your fees, great!
If not, switch to a no-fee credit card.
I suggest you do this at the same credit card company to simplify your life—and so you don’t have to close one account and open another, which will affect your credit score.
Lesson 3 – Keep your cards for long time and keep them active
Lenders like to see a long history of credit, which means that the longer you hold an account, the more valuable it is for your credit score.
Don’t get suckered by
introductory offers and low APRs.
If you’re happy with your card, keep it. And if you’re getting a new credit card, don’t close the account on your old one.
That can negatively affect your credit score.
As long as there are no fees, keep it open and use it occasionally, because some credit card companies will cancel your account after a certain period of inactivity.
To avoid having your account shut down, set up an automatic payment on any card that is not your primary card.
For example, I set it up so that one of my debit cards pays Rs200 monthly subscription for Netflix through my Kotak savings account each month, which requires zero intervention on my part.
( Did I say, Debit Card? Yes, because I am a student and I hardly earn enough money through this blog that can give me Credit Card)
Above statement, I wrote because I cannot lie to you and I see a lot of people including my family members making mistakes and tool heavy reference from Ramit Sethi’s book, so I decided to write a post on this.
Play it safe: If you have a credit card, keep it active using an automatic payment at least once every three months.
Lesson 4 – Ask for lower APR ( Annual Percentage Rate)
Your APR, or annual percentage rate, is the interest rate your credit card company charges you.
The average APR is 14 percent, which makes it extremely expensive if you carry a balance on your card.
Put another way, since you can make an average of about 8 percent in the stock market, your credit card is getting a great deal by lending you money.
If you could get a 14 percent return, you’d be thrilled—you want to avoid the black hole of credit card interest payments so you can earn money, not give it to the credit card companies.
So, call your credit card company and ask them to lower your APR. If they ask why, tell them you’ve been paying the full amount of your bill on time for the last few months, and you know there are a number of credit cards offering better rates than you’re currently getting.
It’s important to note that your APR doesn’t technically matter if you’re paying your bills in full every month—you could have a 2 percent APR or 80 percent APR and it would be irrelevant, since you don’t pay interest if you pay your total bill in each month.
But this is a quick and easy way to pick the low-hanging fruit with one phone call.
Lesson 5 – Use more credit if you have no debt
This one is counterintuitive, and to explain it, I had to reach into personal-finance lessons of yore.
I’m serious about this warning: This tip is only for people who have no credit card debt and pay their bills in full each month.
It’s not for anyone else.
It involves getting more credit to improve something called your credit utilization rate, which is simply how much you owe divided by your available credit.
This makes up 30 percent of your credit score and you will be good for How to clear credit card debt.
For example, if you owe $4,000 and have $4,000 in total available credit, your ratio is 100 percent (4,000 ÷ 4,000 × 100), which is bad. If, however, you owe only $1,000 but have $4,000 in available credit, your credit utilization rate is a much better 25 percent ($1,000 ÷ $4,000 × 100).
Lower is preferred because lenders don’t want you regularly spending all the money you have available through credit—it’s too likely that you’ll default and not pay them anything.
To improve your credit utilization rate, you have two choices: Stop carrying so much debt on your credit cards (even if you pay it off each month) or increase your total available credit.
Because we’ve already established that if you’re doing this, you’re debt-free, all that remains for you to do is to increase your available credit.
Lesson 6 – Use your Rewards
Before I get into rewards programs, let me say this: Just like with car insurance, you can get great deals on your credit when you’re a responsible customer.
In fact, there are lots of tips for people who have very good credit.
If you fall in this category, you should call your credit cards and lenders once per year to ask them what advantages you’re eligible for.
Often, they can waive fees, extend credit, and give you private promotions that others don’t have access to.
Rewards are worhty if you are going to use them and they can make your life easy.
Here are a few examples you might not know about:
(a) Automatic warranty doubling: Most cards extend the warranty on your purchases. So if you buy an iPod and it breaks after Apple’s warranty expires, your credit card will still cover it up to an additional year.
This is true for nearly every credit card for nearly every purchase, automatically.
(b) Car rental insurance: If you rent a car, don’t let them bully you into getting the extra collision insurance.
It’s completely worthless! You already have coverage through your car insurance, plus your credit card will usually back you up to $50,000.
(c) Trip-cancellation insurance: If you book tickets for a vacation and then get sick and can’t travel, your airline will charge you hefty fees to re-book your ticket.
Just call your credit card and ask for the trip-cancellation insurance to kick in, and they’ll cover those change fees—usually up to $1,000 per year.
(d) Concierge services: A concierge is an individual or a company which is specialised in personal assistance or any other assistance services like household.
Most important, your credit card makes it easy for you to track your spending.
For these reasons I put almost all my purchases on a credit card—especially the large ones.
Call your credit card company and ask them to send you a full list of all their rewards. Then use them!
Dumb Daniel and Smart Senorita
5 Ways to Clear Credit Card Debt
Now that you see the benefits of climbing out of debt as quickly as possible, let’s look at some concrete steps you can take to get started.
Just keep in mind that you won’t be able to invest as aggressively as I recommend until you pay off your debt.
(1) Figure out how much debt you have
You wouldn’t believe how many people don’t do this and continue blindly paying off any bills that come in with no strategic plan.
This is exactly what the credit card companies want, because you’re essentially just dumping money into their mouths.
You can’t make a plan to pay off your debt until you know exactly how much you owe.
It might be painful to learn the truth, but you have to bite the bullet. Then you’ll see that it’s not hard to end this bad habit.
In fact, you can get the credit card companies to help you: Look at the back of your credit cards for their numbers, call them, and let them tell you the answers to fill in this spreadsheet.
Refer to below graphic to understand better.
Congratulations! You have done something most people aren’t even aware of.
Now proceed to second section to know how to clear credit card debt?
(2) Decide what to pay off first
Not all debts are created equal.
Different cards charge you different interest rates, which can affect what you decide to pay off first.
There are two schools of thought on how to go about this.
In the standard method, you pay the minimums on all cards, but pay more money to the card with the highest APR, because it’s costing you the most.
In the Dave Ramsey Snowball method, you pay the minimums on all cards, but pay more money to the card with the lowest balance first—the one that will allow you to pay it off first.
This is a source of fierce debate in credit card circles.
Technically, the Snowball method isn’t necessarily the most efficient approach, because the card with the lowest balance doesn’t necessarily have the highest APR.
But on a psychological level, it’s enormously rewarding to see one credit card paid off, which in turn can motivate you to pay off others more quickly.
Bottom line: Don’t spend more than five minutes deciding.
Just pick one method and do it.
The goal is not to optimize your payoff method, but to get started paying off your debt.
(c) Negotiate lower APR
We have already talked about this but this can make your game easier so its worth mentioning it again.
However, the following statements from Chris Mancini might help you understand better.
I fell behind in my payments to my Sears Gold MasterCard. I racked up $3,400 in debt, so I called and told them I was having difficulties paying my bill. They offered me 0 percent financing on my balance for twelve months to help me get back on track.
(d) Decide from where you will arrange money to pay off debt
One common barrier to paying off debt is wondering where the money should come from.
- Balance transfers?
- Should you use your 401(k) money or your savings account?
- How much should you be paying off every month?
These questions can be daunting, but don’t let them stop you.
To eradicate debt, you need to have enough income every month to meet your regular obligations like groceries, utilities, your mortgage, and the minimum payments on your credit cards, plus enough to throw toward putting that debt away for good.
If you do not have enough income to cover more than your minimum payments, you have to clear that hurdle by earning more money, negotiating with your credit card issuers to lower your minimum payments, or working with a legitimate, nonprofit debt consolidation organization that negotiates with creditors on your behalf, not one that provides you with a loan.
Following are a few strategies to get you started on this very path:-
(1) PRIORITIZE YOUR CREDIT CARDS.
(2) PAY THE MINIMUM ON EVERYTHING EXCEPT THE TOP CARD.
(3) STOP USING YOUR CARDS.
(4) REDUCING SPENDING AND PRIORITIZING DEBT
(e) Get started
Within the foreseaable future, you should start paying more money toward your debt.
If you find yourself taking more time than that to get started, you’re overthinking it.
Remember the philosophy behind the 85 Percent Solution:
The goal is not to research every last corner to decide where the money will come from, it’s action.
Figure out how much debt you have, decide how you want to pay it down, negotiate your rates,
and get started.
You can always fine-tune your plan and amount later.
Clearing credit debt takes time but persistence and good spending habits, it can be done.
In fact, I was once listening to Kevin Hart interview on Valuetainment and he discussed some very interesting topics like:-
importance of financial freedom.
managing your expenses yourself etc.
I am sure that you will get lot of value through above interview.
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