This story originally appeared on The Penny Hoarder.
There’s really only one way to get out of credit card debt: by paying off the balance. But there are plenty of pitfalls along the way to make the payoff more costly than it needs to be.
If you’re among the consumers who paid off $108 billion in credit card debt in 2020, good on you! However, that still leaves $820 billion left to go, so it’s in your best interest to do everything you can to put a dent in debt that costs you double-digit interest rates every month.
Picking a method for paying down the balance should be your first step — there are plenty of options, including avalanche, snowball and lasso — but there are mistakes you should avoid to ensure you get the maximum value out of whatever method you choose.
We’re here to help you avoid the most common — and costly — errors people make when getting out of debt. Let it help you make the best money decisions during your climb.
1. Forgoing a Budget
You know how if you don’t make plans for a day off, you end up wasting it on a Netflix binge instead of doing something productive?
Well, the same goes for paying off debt. If you’re simply going about it without a plan, there’s a good chance all your good intentions — and extra payments — will end up getting spent elsewhere.
How do you prevent the money from disappearing? By creating a budget.
Stop whining — it’s no different than planning a vacation itinerary. Instead of blowing your money on new shoes, you’ll create an attack plan and pay off debt faster with a clear direction.
By reviewing a monthly budget, you can see where you might be overspending in certain areas and commit to applying that money to your credit card debt instead.
Even if you’ve never lived with one before, we can help you create a budget that fits your lifestyle and your money goals.
2. Never Applying for a Personal Loan With a Lower Interest Rate
Don’t make the mistake of assuming that replacing credit card debt with a personal loan is just trading one debt for another. Interest rates can make a big difference.
How much of a difference? Let’s say you have $5,000 in credit card debt and you commit to paying $400 every month.
If your credit card interest rate is 17%, it will take you 14 months to pay off the debt, and you’ll pay $542 in interest.
Alternatively, if you take out a low-interest loan at 4%, it will take you one less month to pay off the loan, and you’ll pay $116 in interest — a savings of $426.
3. Ignoring Balance Transfer Offers
If you’re paying off credit cards and you know you’re within striking distance of wiping them out, you could be throwing away money on interest by not researching short-term options.
By opening a balance transfer credit card, you could save yourself a bundle on interest. Balance transfer credit cards generally come with lower introductory interest rates for a set amount of time (plus any transfer fees).
The rates then rise to a higher annual percentage rate after the promotional period ends.
If you’re prepared to pay off your credit cards within the promotional period, it would be a big financial faux pas not to put in the extra effort to research balance transfer offers.
And consolidating your credit card balances could not only save you money with a lower interest rate but also keep you on a more livable payment schedule, thus avoiding those pesky late payment fees.
4. Focusing Only on Saving Instead of Making Money
If you’ve reduced your expenses, but you’re still coming up short on extra credit card payments, remember the other half of the financial equation: money coming in.
Getting a side hustle to bank extra money for payments can accelerate your payoff schedule in a meaningful way. Consider this: If you make $50 extra each week, you could pay an extra $600 toward the credit card balance after just three months.
One of the keys to making the side gig work for you is to create a specific goal for the money you want to earn or the time you want to spend working. By developing an exit plan for your side gig, you won’t end up burning out and spending all the extra cash on ways to make up for being overworked.
5. Refusing to Ask for Help
If you feel like you’ve tried everything — or nothing, because you’re too overwhelmed — it’s time to swallow your pride and ask a professional for help.
A credit counselor can review your financial situation and make recommendations to improve it. Depending on your situation, they might help you organize your credit accounts, obtain a credit report, develop a budget or even help you set up a plan to pay off your debt.
If your credit card debt is more temporary but urgent — think: you got laid off and your water heater just died — you can also ask your credit card issuer for a break via a credit card hardship program.
The little-advertised assistance option could suspend your minimum payments or reduce your interest rate temporarily. But you won’t get the help unless you ask for it.
6. Forgetting the Residual Interest
Let’s say you’ve been paying down your credit card balance for a few months (or years). You get the statement in the mail that says your current balance is $1,000 and you’re ready to pay it off.
You go online to make the payment in full, but you schedule it for 10 days later because you’re waiting for payday.
When you get next month’s statement, you’ll see that you were charged interest on that $1,000 for the 10 days between the account closing date and your payment (and probably a couple extra days for the time it took for the statement to arrive in the mail). That’s called residual interest (or trailing interest).
It might only be a few dollars, but if you don’t pay the residual interest — which could easily happen if you think that the balance is paid in full so you ignore the next statement — that amount will continue to accrue interest.
And not paying it will result in late fees and a hit to your credit score.
Instead, call your credit card company for the full payoff amount as of the date the issuer will receive the payment, then monitor your credit card statement for at least a couple of months after to make sure the residual interest has been paid off, too.
7. Losing Sight of Your Future
Paying off your credit card bill is important. But so is your future.
If you’re putting every last dime toward credit card payments, you could be setting yourself up for a big financial hardship down the road.
In the short term, that could be due to an unexpected expense and no emergency fund to cover the cost.
In the long term, you could be losing out on retirement savings by not investing early and letting compound interest do its thing to grow your nest egg.
And once you make that last payment — oh, joy! — you’ll understandably want to celebrate.
But you’ll also want to think about life after debt, including sticking with the good strategies you used to get out of debt rather than falling back into bad habits that got you into debt in the first place.
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