It is entirely possible to use credit cards regularly and stay out of debt forever.
How? By paying the amount you can only pay when the bill arrives. Use credit cards as a means of payment, not as a means of revolving debt.
To run this method, you must monitor costs and cash flow.
2nd ed. Know when short-term loans are meaningful.
Sometimes financing a purchase with a credit card is prudent – as long as the repayment period is short.
Let’s say, for example, that you want $ 1,500 worth of living room furniture, but you don’t have the money to pay for it right away. If you borrow items from a credit card with an 18 per cent interest rate and cover the balance within four months, the financing fees total only $ 57. Not a bad deal.
However, if you extended it for two years, you’d pay an extra $ 300 – quite a mark-up.
- it’s easy because it’s owed, it’s hard to repay.
Without caution, it’s fairly easy to sink into overwhelming debt.
When cardholders start, credit card limits are typically low, but typically rise over time, which makes overcharging attractive. Paying down debt is difficult because interest compounds and payments increase as the balance rises.
With funds promised past spending, there is less money for current and future expenses.
- Debt affects your credit score.
Not only is it wise to keep debt free for your own balance, but keeping high balances negatively affects your credit score.
Lucy Duni, a consultant who works with TransUnion, says that to maintain a high score, your account balance must be below 30 per cent of your current credit limit. And many personal finance experts recommend keeping your loan usage as close to zero as possible.
Timely payments are also vital. If you fall behind and skip a billing cycle, the creditor will report the payment to the three major credit reporting bureaus (TransUnion, Equifax and Experian) after 60 days, and your score will drop markedly.
When you miss paying more, you’ll see a dramatic drop in your credit score.
And those negative signs don’t fall off your credit reports for a full seven years!
Related: Fico’s 5 factors: components of the FICO credit rating
- Develop a repayment plan.
Even if you’re deep down, you can probably get out of debt with a commitment and a plan.
Norman Perlmutter, author of “how to settle your debts,” recommends going into “crisis money management mode” :
Limit spending to basic needs to free up money to pay for it.
Ask creditors if they will lower the interest rates on your cards.
Prioritise payments based on interest rates (pay the high interest balance first).
Suspend the charge while in refund mode.
- you can’t pay? Ask for help.
While your credit card company has no obligation to accept less than the minimum payment requested, don’t be afraid.
” Work with your credit card company to make payment agreements, “says Lita Epstein, author of” The Complete Idiot’s Guide To Improving Your Credit Score.”
” If this fails, work with a credit adviser from the National Credit Counseling Foundation to create a repayment plan, ” he says.
7th ed. Sit carefully.
Do you want to settle your credit card debt to a lower amount than the actual balance ? This is possible, but you need to offer a lump sum payment, and most creditors require borrowers to stay at least a few months behind.
It’s best to arrange such a deal on its own, because the companies that facilitate it often charge a substantial fee, and some are not very respectable. Still, payments should be tried after less radical steps to eliminate debt failure, as they can lead to significant credit harm and tax problems.
” Forgiven debt is often reported as taxable income, ” says Perlmutter.
- You can’t go to jail for not being paid, but…
If you’re worried about spending time behind bars to avoid paying off your credit card debt, know there’s no debtor prison in the US. But there are other legal repercussions you should be aware of.
A creditor can sue you in a court of law and if they win a judgment , they can keep your salaries or take goods and assets that are not exempt. Free of living debt is within the capacity of each cardholder.
The key is to be aware of charges and balances at all times and to address credit issues immediately.