By Sarah Pacheco
When you carry a revolving credit card balance, you’re living with one foot in the past. Think about it – you’re paying for something you bought months ago that you may not even use or own because it broke, fell out of fashion or was replaced by a newer version. You may have signed up for a credit card for all the right reasons – Cash back, airline miles, to take advantage of a sale at your favorite store. And at first the bills were manageable. You paid the balance in full each month before the due date. But then you started using your card more and more, to the extent that the balance due was a little more than you could afford that month.
So, you paid the minimum due. Then the next month you forgot to send your payment on time. Then the next month you had to make an extra payment for your son’s braces, forcing you to pay the minimum balance on your credit card statement again.
We’ve all been there.
Life happens – kids get sick, work gets hectic, last-minute trips come up – and when these unplanned events eventually occur (but really, we should expect the unexpected, because something urgent will inevitably surface at the most inopportune time) the last thing on our minds is a bill payment. But when you pay the minimum balance on a bill, what you’re really paying is the interest rate for the following month. (And sometimes, what you pay amounts to less than the interest charge that shows up in next month’s statement!)
A cost-of-debt calculator from Credit.com assessed that an average individual will pay just over $279,000 of interest on credit purchases over the course of a lifetime – and that’s assuming a fair credit score of 620-679. Those with a lower (i.e., less favorable) credit score means they’ll likely pay more. According to the Federal Reserve Consumer Credit Report, as of May 2018 the average APR on a credit card that still carried a balance was 15.54 percent. If you carry $5,700 in credit card debt (which is average amount for a U.S. household, per recent data from the Survey of Consumer Finances by the U.S. Federal Reserve), and continue to pay the minimum balance due, it will take nearly seven years to pay off that debt, plus an additional $3,538.33 in interest.
The best way to avoid going ‘round and ‘round this carousel of debt is to pay bills in full each month to avoid racking up interest to what you owe. If circumstances prevent this, automate payments for at least three times the minimum monthly balance that is due. If you’re tired of paying for your past, here are some tips to paying your credit card bills now, so you can plan for a brighter, debt-free future.
Budget for a Credit Budget
A well-thought-out budget is the key to paying credit cards off in full. Include a line for credit card bills in your monthly budget along with other necessary expenses like rent, groceries and gas to better understand where your well-earned money goes when you make charges for extraneous, spontaneous purchases. Don’t bury the credit card debt to the bottom of your budget – make this line item your main priority and contribute as much of your budget as you can toward paying it off.
As discussed earlier, paying the minimum due does nothing to improve your financial situation. You are digging a hole in quicksand. Even when you pay off your credit cards in full, stick to your practice of budgeting. Adhering to a budget helps prioritize purchases and expenditures so that you’ll have a little extra left over each month in savings that can go toward a major life goal.
Start a List
Speaking of goals, what are yours? What do you hope to achieve? How can living debt-free help you reach those goals? List-making is a skill we’re taught early on but rarely keep up. However, the practice of parsing out things you need to accomplish (a to-do list of tasks you need to complete for work) or purchase (a grocery list) is proven to help you turn plans into action. In addition to a budgetary list of monthly expenses, keep other lists that will help you set and stick to spending goals. Having physical reminders in place work as reinforcement you may need when faced with temptation to pull out your credit card for an unplanned purchase.
Avoid Late Fees
Not only will a late fee put a ding on your credit score, it also can cost you additional money in the form of late fees. While federal regulation limits the maximum late fee that can be charged on a first-time delinquency at $27, subsequent delinquencies can result in a maximum late penalty of $38. The same report found that late fees amounted to nearly one-fifth of consumer costs, making it the second-largest cost to consumers from credit cards, after interest. Take advantage of online billing and schedule to have payments made at the same time every month. Some people like to schedule payments to be made on payday – that way they know there will be money available, and the money is taken out of their account before they can spend it on other, unnecessary purchases.
Build a Sound Credit Score
The amount of money you owe, the type of credit you have and whether you pay bills on time – this all adds up to your credit score. Also known as FICO, a credit score ranges from 300 to 800, depending on the scoring model. A higher credit score shows better financial health, which can help you secure better rates when it comes time to apply for things like a mortgage, loan or even auto insurance. While not perfect, credit scores are an indicator of an individual’s ability to access low-cost credit and their propensity to pay it back.
However, having a low FICO doesn’t necessarily mean poor spending habits. It could be due to thin files, or not much credit history. If you fall into this category, you can work with providers from HawaiiUSA FCU to obtain products like credit-building loans and secured credit cards designed to give people with poor credit scores an opportunity to build and repair their credit.
Learn to Live Within Your Means
When you rack up credit card debt, it’s most likely because you don’t see credit as real money. Or, you think you’ll pay it off eventually, just not today. If you are constantly swiping your card for pay for spur-of-the-moment splurges, freeze your account until you can get the balance down to $0. Carry cash to avoid overspending. Physically parting with money is harder than punching in a few numbers on a keypad. While you’re whittling away at your debt, reassess your spending habits and put yourself on a financial diet to get your finances back to good health.
