What to do when you first dip into debt
If you鈥檝e always paid your credit card balance in full every month, it can be disconcerting to find yourself carrying a balance for the first time. The balance might be the result of having聽a little more聽fun than your cash flow can accommodate, or it might be a consequence of something serious,聽such as a job loss or聽medical emergency. Either way, it鈥檚 a sign that you might need to re-evaluate your use of credit cards, and think about how to manage your new balance responsibly.
Here鈥檚 how to manage the debt and prepare for the next financial challenge.
Examining the cause of the debt
Before you聽look to the future, it鈥檚聽useful to look at how you got here. If your credit card debt was the result of a one-time event, consider what you聽can do to be more prepared next time. If you have an聽,聽you鈥檙e less likely to need to lean on credit cards when聽disaster strikes.
But if your credit card balances have been steadily growing, to the point where you can鈥檛 cover them with your disposable income, it鈥檚 likely the result of overspending. Your expenses may have simply grown faster than your income, or perhaps you鈥檝e developed some new聽habits that have pushed your lifestyle over the line into being unsustainable. Try tracking your spending for a few months.聽You may be able to free up cash by cutting back on restaurant meals, turning your thermostat down (or up, depending on the season) by a couple of degrees or choosing more modest entertainment options.
An even bigger source of savings may be recurring expenses,聽says Sean McQuay, NerdWallet鈥檚 resident credit card expert. 鈥淒o you still need cable?鈥� he says. 鈥淒o you use your gym membership? Can you sell the spare car you never use? Can you downsize? Because those expenses are recurring, any cost savings will compound over time.鈥�
You don鈥檛 have to reduce your fixed expenses or stop spending money on fun stuff forever. Temporarily spending less will give you more cash to put toward eliminating your credit card debt, and will buy you some time to think about how you can avoid getting into debt in the future.
Strategies for paying off credit card debt
We鈥檝e talked about reducing your spending, but there are some strategies for managing the debt itself that could help you pay it off faster.
Credit cards often have very聽high interest rates. When you pay your balance in full each month, however, you never actually pay any interest. Once you start carrying a balance, that changes. Interest begins to accrue, and a portion of your payment will go toward paying off the interest, rather than paying down聽your debt. If you make only the minimum payment, your payment might even be all interest, which won鈥檛 reduce your debt at all.
If you have good credit, you can often get a break from paying interest by applying for a balance transfer credit card. These credit cards give you a 0% annual percentage rate聽period for a specified length of time 鈥� often a year or longer.
Sounds dreamy, right? The catch is that most of these cards (but not all of them) charge a balance transfer fee of 3% to 5% of the amount you鈥檙e transferring. They might still be a good deal, but you need to calculate how much you鈥檇 save in interest and make sure it鈥檚 worth it.
McQuay has used a great trick for making sure he pays off a balance before the 0% APR period ends. He calculates how much he owes, and divides it by the number of months before the 0% period ends. Then he schedules automatic monthly payments to come out of his checking account, timing things so the balance will be completely paid off before the introductory APR period is over.
Of course, this works only if your balance is small enough to be paid off within the allotted time. But if your balance isn鈥檛 gargantuan,聽automating payments may help you wipe it out.
Next steps
鈥淥ne of my favorite things about credit cards is the financial freedom they provide, including the ability to carry debt on a card when needed,鈥� McQuay says. And credit cards can help you out of some tight spots.
Despite this flexibility, it鈥檚 a bad聽idea to get in the habit of carrying significant balances on credit cards. Carrying a balance can lower your credit score, and you may not be able to get聽听蹿辞谤别惫别谤.
So it鈥檚 best to eliminate your balance and get back to a paid-in-full lifestyle as soon as you can.
Virginia C. McGuire is a staff writer at聽, a personal finance website. Email:virginia@. Twitter:聽.
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