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Personal Finance: How to Dig Yourself Out Of Debt

So, you’ve run up a hefty balance on your credit card and you have no clue how you’re going to pay it back. Maybe it doesn’t seem like a big deal to miss just one payment. After all, how much could one delinquency hurt? Ummmmm…..

It turns out even one late payment is a big deal: It sets into motion a chain of events that can negatively impact your financial situation — and your life — for years to come. For example, not only can too much credit card debt cause a negative drop in your credit score, it may result in emotional stress that can take a toll on your physical health. A low credit score can hinder your ability to buy a home, purchase a car, or save for retirement.

Additionally, in the event of a job loss, having an expensive monthly credit card bill to pay can be disastrous — you might find yourself forced to choose between paying your credit card or paying your rent, and no one wants to be trapped in a never-ending cycle of debt.

Call Your Credit Card Company

If you’re generally good about making your payments but have recently fallen on hard times, call your credit card company to see if they can offer support. And if any extenuating circumstances are impacting your finances (a layoff, an illness, etc.), be sure to mention it. That’s the advice shared on the HerMoney Podcast by Jennifer Streaks, senior personal finance reporter at Insider.

“Hopefully, if you have, up until that point, a great history with this creditor, they will be happy to work with you,” says Streaks. “They want you to keep your account on track with them, and they want to get paid, so it’s in their interest to work with you.”

You can ask them to waive the late fee, give you a lower interest rate, or even work with you on an individual payment plan. During negotiations, emphasize your history of making on-time payments or carrying a low balance, along with your desire to continue using their card as a financial tool.

Tackle Your Highest-Interest-Rate Debt First

Once you’re in a position to throw some money at your debt, look at the interest rates for each credit card you hold. “I would definitely go with getting rid of the highest-interest debt first,” says Streaks. “That’s what’s costing you the most money, so get rid of that first.”

This method of debt repayment is commonly known as the “avalanche” method, wherein you focus on the card with the highest interest rate first. This ensures that more of your money is going toward paying down the principal (rather than going toward interest) as quickly as you can. Once you’re done paying down the credit card with the highest interest rate, you’ll move onto the debt you have with the second highest interest rate, and focus your extra cash there until it’s paid off. Just don’t forget to still make (at least!) the minimum payments on all your other cards, so you can keep your other debt in check, and continue your history of on-time payments.

Weigh The Pros And Cons Of A Balance Transfer

A balance transfer card can be a solid option for paying off debt — as long as you know what you’re signing up for. The process involves moving your debt from your regular high-interest-rate credit card onto a card that has a much lower “teaser” rate. For example, you may find a 0% temporary rate that’s good only for a certain period of time — typically a promotional period of around a year. Most card issuers charge a fee of around 3% of your balance to complete the transfer. Your goal would be to pay off the entire balance before the end of the promotional period. Once your low rate expires, the interest rate will rise — and might be even higher than the one on your original card. Then you’ll be charged that higher interest rate on whatever balance remains.

“You have really got to read that paperwork,” says Streaks. “A balance transfer card works only if you can afford to pay that off, and you can be really diligent about it.”

Before you sign up for one, do some self-reflection on your spending style. Can you commit to paying off your balance during the promotional period? Is there any danger that a 0% interest rate might tempt you to get even further into debt? Compare different offers for balance transfers, and run some calculations on whether the fees (and potentially higher interest rate if your plan doesn’t work out) will be worth it.

The Bottom Line

Neglecting your credit card payments can have severe consequences that extend far beyond financial stress. Thankfully, we can all avoid getting trapped in a downward spiral of debt by paying our bills on-time every month, and getting on a strategic repayment plan whenever we do fall behind. Remember that careful budgeting and proactive communication with your credit card company is key to regaining financial stability and breaking free from the kind of debt that can negatively impact your credit score and your life in the long-term.