Paying off Credit Card Debt
At Firefighters Credit Union we want to help you live comfortably while making smart financial decisions about your future, and understanding debt has a lot to do with that. Here is what you should consider when faced with the decisions to pay off your credit card debt or save.
1. What is Credit Card Debt?
Credit card debt is the amount of money owed to credit card issuers by individuals that made purchases. It is essentially “borrowed” money that has connected interest rates, fees, and penalties if the money isn’t returned within the agreed upon time window.
Here are some key words that are essential to understanding credit card debt:
Revolving Credit – A predetermined credit limit that they can be borrowed. As long as you make at least the minimum payment required each month, you can continue using the card and accruing debt up to the credit limit.
Interest Rates – If the balance is not paid in full by the due date, interest is charged on the remaining amount. Credit cards often carry very high interest rates usually expressed in an annual percentage rate (APR).
Minimum Payments – Each month, you’re required to make a minimum payment towards your outstanding balance. The minimum payment is typically a small percentage of the total balance (usually around 2-3%). However, paying only the minimum amount can lead to significant interest charges and prolong the time it takes to pay off the debt.
Fees and Penalties – Credit cards can also include additional fees and penalties for late payments or other violations. This makes the debt even harder to pay off.
Credit Score – Your credit score is a prediction that typically ranges from 300 to 850 on how likely you are to pay back a loan on time based on payments from your credit history. High credit card debt negatively impacts your credit score and makes it challenging to obtain future loans and credit.
2. How Do I Assess My Credit Card Debt?
Although it can be scary and confusing, assessing your credit card debt situation at any level is important. Specifically, you should take note of your total debt, interest rates, and minimum monthly payments. Seek out information regarding any hidden fees or penalty charges that you might’ve missed initially.
3. What’s the Cost of Carrying Credit Card Debt?
Carrying credit card debt is like a snow ball that is rolling down a mountain and getting bigger and bigger every time it makes a full rotation. Every month, interest rates accumulate on the outstanding balance making it more difficult to pay off in full. Tackling debt is still important because if left alone, it can have negative effects on your long-term financial goals.
4. What’s the Importance of Prioritizing Credit Card Debt Repayment?
Prioritizing credit debt repayment results in many benefits for you and your future. The primary benefit is reducing the amount of interest you pay. The longer that you carry a debt balance, the longer that your interest accumulates. By paying off your debt sooner you will save yourself loads of money in the long-run. Your credit score will also positively be impacted by prioritizing credit card repayment. Your credit utilization ratio, which compares your credit balance to your credit limit, is directly tied to your credit score and will overtime increase your credit score making it easier to get loans and credit in the future.
5. How Do I Balance Debt Repayment and Savings?
Although its essential to prioritize credit card debt, financial emergencies still happen. Having an emergency financial fund helps you avoid entering further debt from unforeseen expenses. Simultaneously saving while paying off debt ensures progress for your financial future.
Here are some tips for allocating funds for emergencies:
– Create a budget
– Set realistic goals
– Automate payments
– Gradually increase contributions
– Seek professional advice
Focusing on repaying credit card debit is extremely important to long-term financial freedom.
Contact us for help with making a credit repayment plan to best support your future.