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Finance tips: How to build credit without a credit card
Improve your credit score with these alternative methods, which don’t require using credit cards.
Credit card debt is a major albatross that can eat into your hard-earned money. If you carry a balance, the high interest rates you’ll likely pay will dwarf any credit card rewards you may have earned. The danger of only making minimum payments is that you’ll stay in debt for a long time and pay a fortune in interest.
The good news is, you can pay more than the minimum. In fact, you can make a plan that will help you pay off your credit cards in 2021. That way, you’ll end the new year in a much better position.
Not sure where to begin with your planning process? Just follow these six steps if you’re serious about tackling your credit card debt in 2021.
1. Take stock of your situation
Before you can make serious progress on paying off your credit card debt, you need to understand just how deep a hole you’re in. The first step is to figure out how much you owe.
Assemble your credit card statements, or sign in to your online accounts. Make a list of the balance due and the interest rate on each credit card you owe money on. You can also note the minimum payment on each card.
2. Determine if you can reduce your interest rate
Credit cards tend to have high interest rates. As a result, a larger percentage of your monthly payment will go toward interest – which can make it more difficult to become debt free. If you can reduce the rate you’re paying, you’ll pay off your debt faster.
You can try to reduce your rate by calling your credit card company and asking if they’ll lower your APR. Sometimes this works, but you’re unlikely to be able to reduce your rate by much. You can also consider using either a personal loan or balance transfer credit card.
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If you qualify for a balance transfer card with a promotional introductory rate, you could cut your rate down to 0%. You may owe a balance transfer fee, which is usually around 3% to 4% – assuming you can’t avoid it altogether. That’s generally well below the annual interest you’d pay on your current card. If you opt for a balance transfer card, you’ll want to make sure you can pay it off before the promotional rate expires. Otherwise, your rate could jump up substantially.
If you think it’ll take you longer to become debt free, consider a personal loan. If you qualify for a fixed-rate loan at a lower rate than your cards, you can use the loan to pay off your credit cards. You’ll reduce the amount of interest owed and have a definite debt-free date since your personal loan will have a set repayment term.
3. Choose a debt payoff approach
If you used a balance transfer or personal loan to pay off your existing credit card debt, you’ll only have one debt to pay back – your new card or loan. Calculate how much you need to pay on your balance transfer card each month to pay off your debt before the promotional rate ends. Or simply make the required loan payments.
If you owe money on multiple credit cards, things are a little different. In this case, you’ll have to prioritize one debt to pay off first. Generally, it’s a good idea to focus on one particular card until it’s paid off in full. You’d still have to pay the minimums on all your cards, but you’d put extra toward one debt. Once that debt’s paid, you can redirect the extra money toward the next card.
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There are two popular approaches to figuring out which credit card you should focus on first. One is the “debt snowball,” where you’d start with the debt with the smallest balance. Alternatively, the “debt avalanche” involves starting with the debt that has the highest interest rate. The latter will save you the most money in interest. The theory behind the first approach is that you’ll be more motivated by your quick wins. You’ll have to decide which of these options make the most sense for you.
4. Make a budget that allows you to pay more than the minimums
Next, you’ll want to work on a budget that makes paying off credit cards a top priority. Look for spending cuts and ways to increase your income so you can allocate as much money as possible to credit card payoff.
If you’re serious about becoming debt free by the end of 2021, this could involve major short-term sacrifices. But remember it’s worth cutting back for a limited period. You’ll save thousands in interest and have more financial freedom when you no longer have to worry about credit card debt.
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At a minimum, try to budget a little more than the required minimum payments. The more you set aside every month toward debt, the more likely you’ll be able to accomplish your card payoff goal in 2021.
5. Put found money toward your cards
Just because you’ve budgeted a fixed amount toward credit card payoff every month, it doesn’t mean you can’t send more to your creditors. Any spare money, from your tax refund to work bonuses to cash gifts, should be put toward repaying debt.
Those random extra payments when you get unexpected cash will reduce the principal balance quickly and speed your progress toward that $0 balance.
6. Track your progress
Finally, you’ll want to monitor how your efforts are going by tracking your card balances. As you see the amount you owe fall, you’ll be inspired to keep working on debt paydown. And if you see you aren’t making as much progress as you wish, you can make changes to your budget to increase your paydown efforts.
Hopefully, you’ll see your balances get closer to $0 throughout 2021 and you’ll be able to reach that target by the time New Years rolls around again.
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