How to Tackle Debt but Still Maintain Credit

January 30, 2020 By , ,

Is your credit score suffering due to too much debt compared to your available credit limits? We’ve come up with three tips for how you can manage your debt load while maintaining a credit profile.

Stop Accumulating Debt

If you have several credit cards with high-interest rates and your debt is snowballing out of control, you need to take action now before it gets even further out of hand. A few ideas for how you can do this include cutting incidental expenses, increasing your income with the addition of a part-time or freelance job (if that’s a skill set you’re able to accommodate), or applying for a balance transfer credit card with a lower APR.

Cutting incidental expenses

Cutting “incidentals” is a fairly simple and painless way to whittle down your debt slowly. It takes dedication and self-control but can be very effective over time.

If you aren’t convinced, do the math yourself! Let’s say you stop by Starbucks for a coffee a few times a week. The price of an average grande drink is about $4.50. If you drink four cups of coffee a week, you’ll end up spending almost $1,000 per year on coffee alone!

How often do you eat out instead of bringing your lunch to work? That can add up even faster than the daily coffee costs. With some simple lifestyle changes, you can easily apply those funds directly toward paying down the balances on your debts.

Increase Income

During specific seasons, it is fairly easy to find part-time supplemental income. Especially October through December, most retail outlets hire additional staff to handle the increased holiday business. The holidays also tend to be when most people’s debt load increases. Imagine if you were able to pay for all the presents and incidentals with cash instead of breaking out your credit card every time.

Outside of the holiday season, there are other ways to pick up some extra income. Do you drive? Have you considered signing up with a driver service such as Lyft or Uber? Those allow you to set your hours of availability, 24 hours a day. Do you have any hobbies or pastimes that you could turn into an income source? Maybe you play an instrument and could offer lessons. Maybe you’re crafty, and you could turn that into an online income source via Etsy or similar sites. These are all options that allow you to choose your hours to fit in with your existing lifestyle.

Balance Transfer Your Credit Cards

Balance transfers are more of a quick fix if your cards all have high-interest rates, and you should not use that as a long-term solution for controlling your debts. A balance transfer is a fairly simple concept: You apply for a new credit card with a lower interest rate—preferably one with a 0% rate for a year or more. Then you move your balance(s) to that card from your existing card(s).

To set up the balance transfer, you usually sign in online to the new card or call the number on the back of the card. You’ll provide the information for the account(s) you want to transfer from, and the amount(s) you want to transfer. The new card issuer may approve the full amount or only a portion of your request. The amount you get approved for depends on your credit limit, as well as potential other limiting factors or rules, such as a dollar limit for transfers. You’ll typically have to pay a fee of 3% to 5% of the amount you want to transfer.

Keep in mind that most cards with 0% introductory rates have a specific promotional period, after which the rate will increase—usually to the same rate the card charges for purchases. You’ll want to have your balance paid down before the rate increase happens, so make sure you choose a card with a long 0% introductory period.

Start an Emergency Fund

Instead of relying on high-interest credit cards to help carry you through emergencies such as car repairs, unexpected home maintenance, medical emergencies, etc., you should make every effort to establish an emergency savings fund to cover those unanticipated expenses.

There’s a common suggestion that you should have three to six months’ living expenses saved up as your emergency fund. Don’t let that discourage you—even a small amount to start with can help. For example, if you can accumulate $500 or so in an emergency fund, that can cover a car repair or some medical expenses. If you don’t start saving, you’ll have nothing to work with when an expense arises, so even a small amount will be better than nothing at all.

You should create a separate savings account specifically allocated to your emergency funds, so it’s less tempting to tap into those funds for other expenditures. If possible, use an account that doesn’t charge a monthly fee. To ensure you’re making regular contributions to the account, you should work with your employer to get direct deposit set up and allocate a preset amount to deposit with each paycheck automatically. In addition to the regular deposits, you should also consider depositing unexpected windfalls—bonuses, birthday money, tax refunds, etc.

Maintain Good Credit

Occasionally an emergency fund won’t be sufficient to cover expenses. Sometimes life requires a backup plan besides your backup plan. For those instances, you could consider alternative sources of funds besides high-interest credit cards. You could look into a personal loan from your financial institution. If you already own a home, you could also consider getting a Home Equity Line of Credit (HELOC), which would allow you to withdraw funds from the available equity in your home. These options will often provide larger amounts of available funds as well as potentially a fixed repayment term instead of a revolving balance like a credit card. You should compare the costs of interest and fees among all your options before you make a decision.

Ideally, you won’t even need to borrow or finance your costs. For instance, medical debt servicers will often allow you to set up a payment plan. Some sources of debt also have options for applying for financial aid to lessen your debt burden.

It’s important to consider all your options rather than simply becoming overwhelmed at your debt burden and hoping it goes away. If you have multiple creditors, and none of these options appears to be a realistic solution to your debt load, you should talk to a credit counselor to see if they can help you establish a budget and get set up with a debt management plan.

Did you know you can get a home loan, even with debt?

Contact us today to learn more!

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