Does this sound familiar? You make credit card payments every month, yet you don’t see a dent in your debt. If you think you’re alone, think again.
Credit cards have become a way of life; they can even build and improve credit, when used properly. The key is to have a payment strategy to avoid excessive interest, fees, and other penalties, because these all equate to one thing: more debt.
If you are not paying your credit card balance off in full each month, that puts you in a category with many other Americans. A common question these people ask is, “why is my balance still so high?” Here are five common reasons and tips to fix them.
1. The Interesting Thing About Interest
If you don’t pay off your balance in full each month, interest continues to accrue, adding to your debt. Depending on your balance, interest rate, and payment, you may only pay down your balance by a few dollars each month. One option, depending on your credit and financial situation, is a 0% APR credit card. This rate is typically available for between three and 12 months from the date the credit card account is opened. Do your research and consult with your financial advisor or the credit card company to make sure you understand the fine print before signing up.
2. Minimum Payments = Maximum Debt
A common debt management mistake is one of the most innocent: only making the minimum payment. Short term, you have a more flexible spending budget. Unfortunately, it also makes paying off debt a longer-term endeavour. In many cases—especially with a high balance—the minimum payment may only cover that dreaded interest, leaving your principal balance unaffected. If you are financially able, paying even a little more than the minimum can make a big difference.
Bonus tip: look for a comparative chart on your statements illustrating how long it will take to get a zero balance paying only the minimum versus adding a few dollars more each month.
3. Budget for Emergencies
Many people only use credit cards for emergencies, but even that can become costly. A smart way to avoid adding the insult of financial hardship to the injury of an emergency is to plan for it. When figuring out your monthly budget, include an amount for emergency savings that serves as a safety net, rather than using a credit card. You may want to save this money in a separate account, like NVE Bank’s Statement Savings Account.
4. Don’t Fall Behind With a Cash Advance
A cash advance from one debt source to make payments toward another is a common mistake. Cash advances typically come with fees and interest rates that can cause you to accrue even more debt. This is like digging one hole to fill another. Many card issuers offer 0% interest for the first year when you move your balance to their card. Consult with a financial adviser to determine if this is right for you and develop a plan to pay the full balance before the promotional period expires.
5. Pay It Down, Then Move On Up
It would seem to make sense that if you have a significant amount of money saved, applying most or all of it toward your debt solves your problem. But that’s only a cosmetic fix for a deeper issue – spending habits. Making small changes, like bringing lunch to work or making coffee at home, are manageable steps in the right direction. Once you’ve paid off your credit cards, use them to maintain your credit rating but make sure to pay the balance in full each month.
Bonus tip: once you’re out of debt, reward yourself. Just make sure not to lose sight of other financial goals and responsibilities, such as emergency savings, retirement, home projects, education savings, etc.
There are many approaches to paying off debt. A financial advisor can help determine one that works for you. It may not be an easy road to travel, but the satisfaction and peace of mind you’ll get once you’ve arrived at your “debt-stination,” is priceless.
Learn how NVE’s products and services can help you with your financial needs by visiting nvebanking.com. You can also visit one of our 12 branches, conveniently located throughout Northern New Jersey, or call 1-866-NVE BANK (683-2265).