New Mexicans carry the highest level of credit card debt relative to their income, according to a 2019 article in the Albuquerque Journal. After a year like 2020, many in New Mexico are struggling with challenges like loss of income and growing debt. In this article, we’ll cover tactics and strategies you can use to manage revolving debt such as credit cards.
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What Is Debt?
The concept of debt is as old as the concept of money. A debt is any sum of money you owe to a person or institution. So, you may be in debt to a friend or family member who lent you money and/or to a bank, school, retail brand, etc. For the purposes of this article, we’ll focus on debts to an institution. The two most common types are Installment and Revolving Debt.
This type of debt comes with a predetermined loan term and monthly payments that are either fixed or variable depending on the type of interest rate. For example, conventional mortgages and auto loans have a fixed interest rate that results in predictable monthly payments. On the other hand, an adjustable rate mortgage (ARM) loan can vary the monthly payment amount over the life of the loan, but you will be notified in advance. Overall, installment debts are typically easier to manage because the payment amount is set, making it easier to budget and plan for. Examples of installment debt include:
- Auto loans
- Student loans
- Home equity loans
- Debt consolidation loans
Revolving Loans or Lines of Credit
This type of debt includes anything without a fixed monthly payment, such as a credit card account. With revolving debt, the monthly payment varies depending on your current balance. Generally, the more you owe, the more you’re expected to pay (through a minimum payment, for example). Revolving accounts are fine if you can pay off the balance every month. However, they become harder to manage if you don’t track your spending and pay it off each month. The balance can grow quickly and you may have trouble paying it back down or making the minimum payment. Examples of revolving debt include:
- All credit card accounts
- Home Equity Line of Credits (HELOC)
- Overdraft line of credit
Best Strategies for Paying Off Revolving Debt
Is your revolving debt balance getting out of control? Many people start the new year with a resolution to reduce their debt. If you have the same goal, we can help. Here are the best strategies for getting out of revolving debt once and for all.
Credit Card Balance Transfer
If you can qualify for a special/introductory offer credit card with a low interest rate on balance transfers, you could take advantage of the opportunity to pay off a credit card balance faster. Keep an eye out for fees associated with the transfer. Also, this strategy works best if you have a clear plan for paying off your balance within the low interest rate window and don’t use the new card for additional purchases, which will usually accrue interest at the usual rate. Otherwise, you could end up still in debt at the end of the introductory period.
Similar to a balance transfer card, using a personal loan to consolidate credit card debt with a personal loan means replacing one debt with another one. The advantage to a personal loan is that it may offer a lower interest rate than your credit card. Personal loans are also installment loans, meaning you’ll have a fixed monthly payment to budget for and you’ll know exactly when you’ll be done paying off this debt. You may save money on your monthly debt payments overall, as well as see additional potential benefits such as a rise in your credit score. Just make sure you can afford the monthly personal loan payments, as they may be higher than the minimum payment on a credit card.
Snowball (Lowest Balance Amount) Method vs. Avalanche (Highest Interest Rate) Method
If you can’t or don’t want to take out a new debt to pay off an existing balance, your best best is the snowball or avalanche methods. These two approaches pick a different starting point, but they are both about tackling your debt one account at a time. Here’s how it works:
- Snowball: Make a list of your debt accounts and start with the smallest balance. Make minimum payments on all other debts while you throw as much as you can at the smallest one. Can you take on a side gig to bring in extra money? Cut other spending to allocate more toward your debt payment? Whatever works for you, pay off this first, smallest debt as soon as you can. The idea with starting small is that you reach a feeling of accomplishment sooner, which can provide the momentum (aka the snowball effect) you need to keep going. Once you finish the first debt, move on to the next smallest balance and so on until you’re debt-free.
- Avalanche: Some people don’t like the Snowball method because it doesn’t take into account the extra interest you may pay on higher balances. If you feel the same, this approach (aka debt stacking) also takes a debt-by-debt approach to paying it all off, but you start with your highest interest account instead of the lowest balance. This approach would work well for those who don’t need a quick win to stay motivated.
5 Tips to Stay in Control of Revolving Debt
Once you achieve your goals of paying off revolving debt, develop these habits to stay in control of your debt in the future.
- Keep balances as low as possible. As mentioned earlier, it’s best to avoid spending more on a revolving debt account than you can pay off at the end of the month. However, things happen, and if you find yourself with a balance you can’t pay off immediately, try to keep it as low as possible. Interest accrued on your revolving debt account is added to the balance, making it harder to keep your balance in check. Pay as much as you can to keep your balance under control. Otherwise, your monthly minimum payment will increase as your balance increases. Check your credit contract to learn how minimum payments are calculated for your account.
- Be aware of high interest rates. Many revolving debt accounts, such as credit cards, come with interest rates as high as 15% or more. Interest may be calculated daily or after a grace period (check your account terms to find out). The higher your rate and the higher your balance, the more interest that will be charged to your account and added to your current balance. This is why revolving debt is great if you can pay it off right away, and it can be useful in an emergency, but should not be used for discretionary spending.
- Pay on time, every time. If you don’t pay your revolving debt accounts on time, you’re likely to accrue a late payment charge and may see your interest rate raised, too. Late payments may also show up on your credit report, making it hard to qualify for new credit accounts and loans in the future.
- Credit Utilization is important. Credit utilization is the percentage of your total available debt that you happen to be using at a given moment. Your credit score can be negatively affected when you go over the 30% utilization mark, so aim to cap your credit utilization at 10% or less.
- Don’t open too many accounts. Applying for a new credit card or other revolving debt account shows up on your credit report. Too many new applications can hurt your score. So as tempting as that new credit card offer may be, try to avoid opening more than you need. This is especially true for “store cards.” Usually they are not offering any better rates or terms than what you already have with a non-retail branded credit card.
Get help with your revolving debt!
At Del Norte Credit Union, we are committed to helping you realize a better future. If you’re struggling with revolving debt, we have several options to help you improve your life by gaining control over your finances.