Reduce Credit Card Debt on a Budget
What if it was possible to reduce credit card debt on your own and it was as simple as budgeting and sticking to your plan?
If you are struggling with credit card debt, you already know about the tremendous strain that carrying big credit card balances can put on your finances, your family, and your health. Letting your credit accumulate is overwhelming and can make you feel helpless. Simply deciding to act can give you the strength you need to tackle your debt and change your life for the better.
So what do you have to do to get rid of that troublesome debt? Read on.
What can you expect when you reduce credit card debt?
Not only will reducing or removing your debt load improve your financial health, you will improve your physical and mental health. Working towards reducing your debt will also help to improve your credit score. You may already be aware of the fact that your credit score is boosted by you paying your debts on time. But did you know that reducing the amount of debt that you have will improve your credit score too? “Amounts owed” accounts for nearly one-third of your score.
You can pay your debt and stick to your budget
If you’ve been wanting to pay your debt down, but feel like you don’t have any extra cash on hand to achieve your goal, it’s time to sit down and set a budget that helps with your cash flow to reduce debt. You’d be surprised at how effectively you can tackle debt just by restructuring your spending.
Not having a budget is one of the most common reasons that people end up in debt, because in many cases they have no idea where their money is going, or how much they are truly spending. Sit down and lay out a detailed budget that includes all of your expenses in detail. Are there areas that you can cut back?
Zero in on things like energy bills, groceries and transportation, where planning ahead can save you a lot. Also determine if there are areas of spending you can cut out entirely in the short term, at least until you’ve put a dent in your debt and have enough cash on hand to cover these “extras”, like eating out, vacations and big ticket items like electronics. Assign any extra cash that you’ve located towards debt repayment.
Make sure that you track all of your spending. That’s the best way to ensure that your budgeting is accurate. It can also help you most quickly identify areas for improvement.
You don’t need to completely overhaul your lifestyle to reduce your credit card debt, but you will have to become more disciplined with your money each month. It can be helpful to keep focused on your goal and take it one day at a time. Recognize that debts won’t be paid overnight; it’s going to take hard work and commitment over a period of time to get there, but you can do it if you stick to your plan.
Recognize that some debts, despite your best efforts, may be simply too large to handle on your own; you may wish to speak with a trained credit counsellor by calling 1-844-402-3073 or by taking our Free Debt Analysis. We’re here to help.
The Problem with the Minimums
If you are able to make the minimums on your credit card payments, what’s the big deal? You’re getting by right? Not so. Making minimum payments is like treading water- you can only do it for so long until you get into trouble.
When you make a minimum payment, you aren’t doing much to attack the principal of your debt. That means that every month, you will accrue more interest. As that debt grows over time, the interest will continue to grow and grow until it becomes unaffordable. And if you are doing this with multiple cards, there is a good chance that you’ll be in financial trouble sooner rather than later, missing payments or turning to credit just to pay credit minimums, which will keep the debt cycle churning.
The only way to reduce your credit card debt is to aggressively pay down the entire debt, with as much money as you can afford every month.
Why Reduce Credit Card Debt?
If you’ve got a lot of debt, why should you start with your credit cards? In most cases, credit card debt is unsecured revolving debt. Unlike secured debts like mortgages and car payments that have fixed payments, unsecured debts carry higher interest rates; you can save a lot of money in interest in the long run if you focus on repaying them today. There’s a cumulative benefit to paying down your credit card debt too. As you lower your balance, your monthly payments will start going down. This will free up extra money to accelerate your debt payments, increase your savings, or build an emergency fund. In short, tackling this type of debt is the fastest route to your goal.
Change Your Attitude Towards Spending
If you’ve been used to retail therapy or regularly using the “buy-now, pay-later” option, it is time to change your attitude towards how you spend your money. To start, adopt a cash only lifestyle. If you are faced with the opportunity to make a purchase, consult with your budget first. If it’s not in the budget in cash, ultimately you’ve got to defer it until you have the cash on hand.
This can be a hard habit to break. Try some tricks like walking away from a purchase and evaluating later on if you “really” need it. Avoid malls or friends that might influence you to spend beyond your means. Equate the purchase price to your hourly wage. Is it worth that many hours of work, just to buy it?
Reduce Debt Strategically
Strategic thinking will get the most out of your money and help you pay down debt quicker. You’ll have to do some preliminary work and scrutinize your monthly budget. See if you can cut back on some of your discretionary payments, such as entertainment or restaurant spending, or even look for alternative ways to get the same products and services you use on a regular basis at a lower cost. This will allow you to free up some extra money for debt repayment.
You should also examine your individual debts and take stock of balances and interest charges. Determine how long it will take to pay off each debt if you only pay the monthly minimums; our debt calculator can do the math for you.
Once you have the numbers in front of you, you’ll be able to single out the biggest debt-offender and focus your energy toward it. Try using one of these common repayment methods:
Pay off the highest interest rate account first.
This method focuses on paying high interest accounts first so that you can eliminate them and save yourself from their additional interest charges. Identify your card with the highest interest rate. Continue to make the minimum monthly payments on your other cards.
Rework your budget and pay as much as you can above the monthly minimum towards repaying this debt. Once paid off, take the money that would normally go toward that account and choose the credit card with the second highest interest rate. Continue this until you are completely debt free.
Pay off your smallest balance first
You can always try working from the bottom up. Your high interest cards may be too daunting because they often carry the biggest balances. While this is not as efficient as paying off the card with the highest interest rate, knocking off some of the smaller debts will free up money and help you build the momentum that you need in order to tackle your bigger debts. Don’t underestimate the value of a psychological boost when you are trying to pay down debt to help stay committed to your goal. Use the same strategy as above, but start with the smallest credit card balance first.
Identify your credit card with the lowest balance. Make the minimum payments on all of your other credit cards. Rework your budget and pay as much as you can above the monthly minimum towards repaying this debt. Once you pay it off, use the extra money and put it towards paying off the next-smallest balance debt. Continue until you have paid off your credit cards.
The Importance of Savings
If you are focused on paying down debt, every extra dollar you have should go to debt payments, right? Actually, setting aside at least a small amount of money every month for savings is an important part of your debt repayment plan.
This is because you’ll need a cushion to absorb any emergency expenses that may arise as you try to pay down your debt. How discouraging would it be to make so much progress in paying down your debt, only to ramp it back up to cover costs in an emergency?
Having cash savings on hand, along with a solid budget, commitment and a debt repayment plan is your best bet for a debt-free future.
It’s possible that these DIY strategies may not be enough to reduce credit card debt. Maybe you have too many cards, or maybe you can’t afford all of your monthly payments. If it seems like you can’t tackle your debt on your own, let us guide you through the process. Don’t be afraid to reach out to our trained credit counsellors by calling 1-844-402-3073. They’ll assess your situation and tell you the best way to conquer your debt, and their expert advice is free.