Martin finds out he could have avoided a sky-high interest rate in our latest video collaboration with Matthew Giuffrida.
For many, getting a new credit card is a rite of passage into adulthood. Having the ability to buy whatever you want or need and pay for it later is exciting and empowering. But it’s very easy to fall into the trap of spending money that you don’t have. Before you know it, your credit card is maxed out, so you apply for another one. The next thing you know, that one is maxed out too, and you find yourself in a financial hole.
Getting out of credit card debt will take some planning, dedication, and a little sacrifice, but you can do it. And when you do, you will have established great habits that will carry you into a solid financial future.
Consequences of Maxing Out Your Credit Card
Maxing out your credit card doesn’t just increase your debt level, it also affects your credit score, your minimum payment, and even your future transactions.
- Future Transactions – When you max out your credit card, it means you’ve reached your credit limit. While some credit card issuers allow some leeway to go over the limit, others do not. As such, any potential purchase on your credit card may be declined until you pay down your debt.
- Minimum Payment – Depending on how your credit card issuer calculates your minimum payment, it may increase with a higher balance. For example, if your credit card issuers calculate your minimum payment by taking a percentage of your balance, the minimum payment will increase as your balance does.
- Credit Score – Your credit utilization ratio refers to your credit usage. In general, a credit utilization ratio of 30% or lower is recommended. With maxed out credit cards, your credit score is likely to take a hit.
How to Manage Your Maxed Out Credit Cards?
There are a number of actions you can take to help manage your maxed-out credit cards. Here are some strategies that will get you on the right path.
Put a Freeze on Charging
You cannot borrow your way out of a debt problem. Do not apply for any additional credit cards. You also need to stop using the cards you have, even when the balances start to go down. Some people literally put a freeze on their charging by putting the cards into a container of water and putting it in the freezer. That way, the cards can’t be used on a whim. By the time they thaw out, you will have hopefully decided the purchase is unnecessary.
Figure Out a Budget
If your cards are maxed out, then you have been living beyond your means and buying things you cannot afford. In order to get back on track, you need to have a budget. Write down all of your necessary expenses: shelter, utilities, food, insurance, transportation, and other needs. Cut out the extras, like entertainment and eating out. Your baseline budget should only include your basic needs and debt payments.
Once you have your baseline budget, add a small amount for fun. If you try to drastically change your lifestyle all at once and completely deprive yourself of all fun, you will have a hard time sticking to it. By giving yourself a small budget for extras, you will be more likely to stay on track.
Supplement Your Income
If you are overspending, the problem may be that you need more money coming in. Consider getting a part-time job to bring in some extra cash. Go through your belongings and find items that you can sell in a yard sale or online auction. Maybe you could babysit for a neighbour or friend. Get creative with ways to earn a little extra money.
In addition to earning more, you should also find ways to save money. Try renegotiating some of your monthly expenses, such as your insurance or cell phone plan. Reduce your grocery spending by clipping coupons and shopping for sale items. Do a little research to find other ways to live frugally, and you may find you don’t even need to supplement your income because you can get by on less.
Start a Savings Account
If you’re trying to pay off your credit cards, the suggestion to put away some savings may seem counterintuitive. But you are trying to get away from using your credit cards and life happens. When those unexpected emergencies pop up, you will need a little money set aside to deal with them, so you don’t have to break out the plastic again.
Communication with Your Creditors Is Key
Let your creditors know your situation. If your payments are too high and you are in danger of not being able to pay them, it is important that you give the card issuer a call and try to negotiate the terms of repayment. Sometimes you can get a better interest rate or work out a more manageable payment plan.
Creditors are used to dealing with situations like yours, and they are there to help you. They want to get their money, and they know that the best way to do that is to make repayment possible for you. They do not want you to default any more than you do because then they won’t get paid.
Plan Your Escape From Debt
Now it’s time to come up with a strategy for paying off your cards. There are many ways to go about doing it. Some people like to pay off the smallest balance first, in order to see results sooner. Others prefer consolidating their credit card and high-interest debt to make payments more affordable and manageable. In more extreme cases, consumers may file for a consumer proposal or even bankruptcy.
- Consolidating Credit – You can pay down your credit card debt by consolidating your credit card debt as well as any other high-interest debts. You can do so using a personal loan, a HELOC or any other loan that has an interest rate lower than your credit card. By compiling all your debts into one loan with a lower interest rate, you’ll only have one payment to manage and you’ll be able to save money on interest. Moreover, by consolidating your debts, you’ll be able to spread your payments over a longer period making payments affordable.
- Credit Card Balance Transfer – Another way you can pay down your credit card is by using a credit card balance transfer. These often have much lower rates, sometimes offering rates at 0%, for a period of time. This is a good way to avoid piling interest on your balance.
- Consumer Proposal – A consumer proposal is a debt relief program that is administered by a Licensed Insolvency Trustee. The process involves your LIT reducing your debt owed and creating a new payment plan (usually up to 5 years) that works within your budget.
- Bankruptcy – This is a more extreme debt relief option. While it can help clear you off all your unsecured debts, it has a huge negative impact on your credit. Bankruptcy should only be considered as a last resort.
How to Avoid Maxing Out Your Credit Cards
Monitor Your Usage – Monitoring your credit card usage is one of the best ways to avoid maxing on your credit card. You can use budgeting apps available through your bank or third-party provider to do so. These apps often provide you with the ability to link your accounts and cards so you know exactly how much you’ve spent and on what. Moreover, you’ll be better able to budget and set limits on your spending.
Reduce Your Credit Limit – Another way to limit your spending is by reducing your credit card limit, while it may increase your credit utilization ratio, it will prevent you from spending more than you can afford. As such, even if you max out your credit card, it will be at an amount you can afford to pay back.
Have an Emergency Savings Fund – In general, it is recommended that you save up 3 – 6 months of your income for emergencies. This emergency savings fund will help cushion unexpected expenses and life events such as job loss. Instead of relying on your credit card, you can dip into these savings and avoid maxing out your credit card.
Can I pay off my maxed-out credit card by making the minimum payments?
Will maxing out my credit card affect my credit score?
Should I consolidate my maxed-out credit card?
Being in debt is stressful, but following these suggestions will get you on your way to paying off those credit cards. Once you reach your goal, you will be in the habit of staying within your budget, and you can put the extra money into savings or investments.
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