If you have a maxed-out credit card, you basically have two problems right now. First, you have credit card debt, and I know that’s stressful. Second, your credit score has likely been damaged by having a high credit card balance.
Now is the time to be proactive so you can limit further damage. You can get control of your situation if you take these next steps. I know you can do it, so start today!
Stop Using Your Credit Cards
No one likes this first step, and I understand that. It’s a major change in your lifestyle. But you can’t get out of credit card debt if you’re still busy increasing your burden. And besides, your maxed-out card will likely be denied if you use it anyway.
Even if you have low balances on other credit cards, don’t use any of your cards again until you’re out of debt.
Oddly, you might have the urge to get a new credit card during the early stages of paying off the balance. Resist the impulse to get a new credit card with a shiny new credit limit. (But consider a balance transfer card. See below.) The hard inquiry on your credit report will take even more points off your credit score. And seriously, right now your focus has to be on getting out of debt.
If you’re having problems paying your credit card bill, contact your issuer and ask to speak with the hardship department. These departments are set up to offer temporary relief to those who can’t pay their bills. The remedies offered vary by issuer and by your specific circumstances. Just honestly explain your situation and ask for help.
[Read: Best Secured Credit Cards.]
Set Yourself Up for Success
There are some basics when it comes to managing your money, and I call this your “Financial Foundation.”
I call it this because, to me, it feels like the foundation of a house. You can’t build a house on a shaky foundation. In personal finance, a shaky foundation leads to all kinds of problems, including debt. A solid foundation involves having a budget, tracking your spending and paying all of your bills on time.
This isn’t as daunting as you might think. There are lots of free apps and personal finance websites to choose from. Pick one you feel comfortable with. Then, enter your budget numbers, and start monitoring where your money goes.
Slash Your Budget
Now you’re on the move. Whether you have maxed out only one card or five, you have to pay more than the minimum payment on your credit card balance to make progress.
Decide what expenses in your life are needs versus wants. Needs include items such as rent payments and cellphone service. You probably have other expenses that are more of a want than a need, such as a weekly pedicure.
The money you save can be used to pay down your credit card debt. If it helps, remember that this is a temporary situation. You’ll have the freedom to choose how you spend your money when you’re out of debt. When I cut expenses to pay off my debt, I gave up a ridiculously expensive health club membership and started working out at a local gym.
After I got out of debt, I actually stuck with the cheaper option. So your budget cuts can be temporary, or you might learn that your priorities have changed when it comes to really living within your means.
And don’t take away everything you love. If you look forward to your latte, keep your latte. But you’re going to have to cut something else in the budget to pay for it.
[Read: Best Low-Interest Credit Cards.]
Choose a Debt-Reduction Strategy
There are many different strategies for getting rid of your debt. There really isn’t one method that everyone should use. You need to pick the option that’s best for your situation and that works with your credit score.
Balance Transfer Credit Card
It’s possible to have a mountain of credit card debt and still have a good credit score. If you still have an excellent credit score, consider a balance transfer credit card. You’ll get a 0% annual percentage rate for a period of time, usually about 12 to 21 months.
This gives you a chance to pay off the balance during the interest-free introductory period. Figure out what your monthly payment has to be so you have a zero balance before your new APR kicks in. Just so you know, most of these cards have a balance transfer fee between 3% and 5%.
For instance, let’s say your credit card debt is $5,000, the fee is 3% and the 0% rate on your balance transfer card is for 18 months. You must pay back $5,000 plus the transfer fee, which is $150.
Monthly payment: $5,150 / 18 = $268.11.
If you consistently make this payment each month, you’ll pay off your debt during the intro period. If your credit score isn’t high enough for a balance transfer credit card, then consider getting a debt consolidation loan.
Debt Consolidation Loan
If you still have a fairly good score and debt on many cards, a debt consolidation loan is an option. You won’t get a 0% interest rate, but there’s a good chance your loan’s rate will be lower than the APRs on your credit cards.
The good thing about these loans is that it simplifies your life. Your balances are now on one loan at a fixed monthly payment, which can lower your stress level. The best part? You end up paying less interest on your debt.
Do-It-Yourself Debt Reduction Options
If it looks like you’re on your own to pay off debt, then consider one of these:
— Debt avalanche method. Make a list of your credit cards starting with the highest APR down to the lowest APR. Your first target card is the one at the top of your list. Then you work your way down the list until you pay off the card with the lowest APR. With this strategy, you save money because you pay less interest.
— Debt snowball method. Make a list of your credit cards starting with the smallest balance down to the highest balance. Your first target card is the one at the top of your list. Then you work your way down the list until you pay off the card with the largest balance. With this strategy, you get a quick win by paying off a small balance. Many love this method for that reason, but keep in mind that this strategy ignores interest rates, so you could end up paying more interest.
— Debt blizzard method. When I got out of credit card debt, I combined the methods to create my own strategy: the debt blizzard. I paid off my smallest balance first (snowball) and then switched to paying off the card with the highest APR (avalanche). This strategy gives you an adrenaline boost quickly, but then you focus on paying less interest.
The right strategy is the one that you’ll stick to. So give it some thought and decide what works for you. Be persistent and have a little patience, and you’ll reclaim your financial freedom.
[Read: Best Credit Cards for Bad Credit.]
Get Credit Counseling
If you’re using your credit cards to survive month to month, then consider talking to a credit counselor. Start your search with the National Foundation for Credit Counseling. Act now before it gets worse.
Living paycheck to paycheck is stressful. Talking to a credit counselor can help you figure out how to break the cycle you’re in. And to ease your mind, just talking to a counselor won’t lower your credit score. If it appears that a debt management plan or bankruptcy is the right move for you, then it will impact your score. But even then, stay focused on the solution, and your score will bounce back in time.
More from U.S. News
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How to Pay Off Credit Card Debt
What Happens When You Have a Maxed-Out Credit Card?
Maxed-Out Credit Card? Next Steps to Take originally appeared on usnews.com
