7 steps for New Year’s Resolution to escape credit card crunches

To get started with budgeting and debt reduction, check out this Budget Calculator from Clearpoint Credit Counseling Solutions. For more tips you can trust, visit bbb.org.
By Robb Hicken/ BBB’s chief storyteller

Traditionally, Americans set goals at the first of the year to make their lives better.  If your New Year’s Resolutions include getting out of debt, Better Business Bureau has advice to help you meet that goal.credit cards

The Federal Reserve reports that almost 75 percent of Americans have at least one credit card, 58 percent of which are carrying a balance. According to the Experian,  the average credit card balance per consumer was recently reported to be $3,779. Altogether, consumer credit card debt is estimated at over $900 billion.

The consumer credit crunch, when coupled with the fallout from the mortgage crisis, is impacting businesses small and large across the broader economy. Despite economic turnaround, many consumers are forced into a win/lose choice of prioritizing among their bills, and having to create “delinquency budgets” to decide which bills get paid on time and which don’t.

Government, lenders and businesses can and should play a role in addressing the current culture of debt by acting on the lessons learned from the home mortgage sector. But consumers must take responsibility for their actions and hold themselves accountable for spending behaviors that leave them trying to choose between paying their mortgage or credit card, phone, healthcare, or utility bills.

Here are 7 steps to put you in the black in 2014:

Step 1. Set up a household budget to guide your spending patterns. Setting up a budget seems mundane, but as the adage says, “failing to plan is planning to fail.” Look at the bottom-line totals for your monthly income and expenses. If your expenses exceed your income, you’ll have to either boost your income and/or cut expenses in order bring the totals in line. Not all expenses are necessities and cutting discretionary spending is the first place to start – make reductions in items such as restaurants, entertainment and vacation/travel. For more information on constructing a household budget, see How to Develop a Working Budget at www.bbb.org.

Step 2. Don’t go any deeper in debt! This point seems self-evident, but it requires consumers to use restraint and act responsibly. Put your credit cards away and make a concerted effort to refrain from accumulating any more debt in the coming months. Pay cash or use a debit card. If you must charge something in an emergency, use the card with the lowest interest rate.

Step 3. Use daily money-saving strategies to free up more money. Adopt the mindset that you will save a bit of money each day. The possibilities are endless: forgo the daily coffee; take public transportation; use money-saving coupons; eat more home-cooked meals; seek out lower-priced auto insurance; cancel your cable TV; or switch your cell phone provider. Challenge family members to come up with other ways to save money.

Step 4. Correctly prioritize debt repayments. Not all of your debt obligations carry equal weight. Start with the most expensive revolving types of credit.

  • Pay off high-interest rate balances first. Pull out your credit statements and review the interest rates and terms of payment. Which one carries the highest APR? Pay double or triple the minimum monthly payment each month on that credit card until its balance is paid off; then start directing that freed-up money toward the next highest rate balance. In the meantime, make sure to make the minimum due payments on your remaining cards.
  • Consider transferring balances to the lowest-rate card. You may qualify to transfer debt on one card with a high APR to another card that has a lower APR, and make sure you read the fine print on any transfer offers.
  • If you have no other option than to miss a payment, carefully consider which debt is the most important. For instance, if you ignore your mortgage or rent obligation, you may eventually lose your home. As well, your car loan may be critical if you are dependent on transportation for your job.

Step 5. Ask your creditors to reduce interest rates. It doesn’t hurt to contact your creditors to ask an interest rate reduction or a new payment schedule. Be honest about the challenges you are facing trying to cut your debts and assure them that you’d like to stay a loyal customer. Sometimes a creditor will decide to cut the rate and not risk your defaulting on the loan or switching to a lower-rate option with another creditor.

Step 6. Make extra payments when possible. Put money you saved in Step 3 toward making extra or larger payments on your high interest loans. Do the same when you find yourself with unexpected cash (from a gift, a raise at work, an income tax refund). Extra payments can dramatically shorten the amount of time it takes to pay down a balance and you’ll save on interest fees.

Step 7. Contact a credit counseling agency, if your efforts are not successful. If you can’t seem to make progress adhering to a workable budget or paying down your debt, you may want to consider seeking professional guidance from a non-profit credit counseling agency. Certified credit counselors are trained to offer objective advice and can offer a no-obligation evaluation of your financial situation. Be sure to check out any debt consolidation or credit counseling firm’s reliability and complaint record with BBB – offering free BBB Reliability Reports on more than three million local and national businesses (www.bbb.org).

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2 Comments

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2 responses to “7 steps for New Year’s Resolution to escape credit card crunches

  1. Pingback: 7 steps for New Year's Resolution to escape credit card crunches … | Consumer Debt

  2. This is a very helpful set of steps that should help many people with credit card debt. Thanks for sharing.

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