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Tips to reduce your debt and save your credit
Debt reduction can be one of the most rewarding elements of a good
savings plan. Fewer debts can mean less stress
and fewer headaches if you lose a job. Reducing your total debt can also mean
better credit for those instances when loans are really essential. Fewer debts can
also give people more freedom to take time off work, continue an education, or even to
change careers.
Many people don’t think that debt is a very big problem. However—when we consider
the costs of high credit balances, unfair interest rates, or the difficulty of setting
money aside—debt is a very real problem for a growing number of Americans.
Still not convinced? Let’s use just one credit card as an example. Suppose
you have a typical credit card with a $2,000 balance and a 19% interest rate. Even if
you racked up no new charges, it would take up to 12 years to pay
off the card by paying the minimum payments. The total cost would be $4,000. To
compound this problem, most people will open additional cards or continue to make charges
when credit limits become available. Check out this article for
more risks of being in debt.
The steps to debt reduction
The results may not be immediate, but don’t get discouraged. Set goals and follow
your plan—the results will start to appear. Try these steps:
- Record your credit card and loan information.
Start a list of all the companies and institutions with which you have outstanding
debts (from car loans and student loans to store credit cards). After the
creditor’s name, record the following:
• balance
• minimum monthly payment
• interest rate
• mailing address
• phone number
• contact name(s)
(Don’t include such items as electricity, rent, or cable bills—these all appear under
the on-going expenses of your budget plan.) Add up your total credit debt and
your total cost of minimum monthly payments. Surprise! Most people owe far more
than they realize.
- Keep the most useful card (but perhaps not in your wallet).
After you review your cards, determine the card which has the best rate and the lowest
annual fee. Ignore introductory rates—they don’t last very long and they often
have unexpected surprises. Consider a Northwest
Community Credit Union VISA card—we watch average rates and fees to keep ourselves
well below other national lenders. The idea is that you should carry only one card
to use for emergencies or when traveling—it’s too hard to keep track of charges or reduce
your debts when you have a variety of cards. If you have trouble not using your
card, you might want to keep it someplace other than your wallet.
- Destroy your remaining cards.
Make it easy on yourself. If you don’t have the card, there is less temptation to
use it. It is perfectly normal to cut up a card when there is still a balance
owing. After you destroy the card, call the issuer and let them know. That
way, there is no chance of credit card fraud or additional charges for that account.
You’ll continue to get regular billing statements, but the account number will no longer
be useable. Many people say this is one of the easiest (and most fun) ways to
control debts.
- Call the issuing companies and change your limit.
If you keep only one card, you may want to increase the limit in order to transfer
balances from other, higher rate cards. If you keep multiple cards, you can also
request a balance reduction. Balance reductions help many people to avoid
uncontrollable debts. While you’re doing this, see what else you can ask for.
It never hurts to try, so ask for a better rate. Perhaps, if you’re canceling a
card you’ve cut up, you can waive the annual fee. Some companies will more readily
agree to this if you’ve maintained a good credit history.
- Carefully consider a balance transfer.
If you have the available credit, transfer balances from higher rate cards to lower
rate cards. Reducing your interest rates—even by a fraction—can save you a great
deal of money. However, make sure you don’t make new charges once you’ve
transferred a balance. This happens all too often in debt consolidation—people
refinance debt in order to get smaller payments, but then go on to add new charges to
their old, high rate cards. Only make a balance transfer if it will work for you
(that is, if you are certain not to add up new charges).
- Increase your payments.
Minimum payments are just that: recommended minimums. It is better to double or
triple up on your payments. If that isn’t possible, at least round up the amount
you send in. Due to the way interest works, you can more than half the time it
takes to pay off a card by making double payments. Some finance plans apply
payments first toward interest, so make sure to specify "apply to principal balance"
when you send in extra amounts. Some loans and finance plans will charge a fee if
you make extra payments—without paying off the total balance. If this is the case,
transfer that balance to another card or line
of credit, like those available at NWCU, where there are no early-payment penalties.
If you can’t afford to do this with all of your debts, at least focus on one creditor.
When that is paid off, you’ll be able to tackle even more payments.
- Don’t open new cards.
This is worth repeating: don’t open new cards. When people have a lot of debt, it
may seem that new credit cards are the only way they can buy the things they "need."
Some people open new cards so they can get cash advances to pay other cards. Never
do this—cash advances almost always have much higher interest rates in addition to fees.
Northwest Community Credit Union has one of the very few
VISA cards in the world that has no fee or
increased rate for cash advances. We do this specifically to help members get ahead
and pay off higher interest balances. Otherwise, new credit cards are the surest
way for people to bury themselves even deeper under mountains of debt.
- Work on goals-oriented saving.
If you apply the other steps, you will soon find that it is easier to save up for
various purchases. Not only this, but you will actually own your purchases,
instead of making payments on them. Goals-oriented saving can seem impossible
if you live paycheck to paycheck, but consider the alternative. When people
continue to put more and more on their credit cards, it can quickly build to something
out of control.
If you're living paycheck to paycheck, take a look at our
budgeting pages. They can help you get on track and
reach your financial goals.
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