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Now that the holiday season is behind you, what you're left with are the beautiful memories and of course, the huge holiday debt you accumulated.
As the new year begins, two factors can have a big impact on your credit: how you pay (or don't pay) your debt and how much of your available credit you use. That said, late or missed payments on your credit cards can hurt your credit, as can using most of your available credit.
To help you stay on track, here are tips for paying off vacation debt before it hurts your credit.
1. Reduce your expenses
One of the smartest steps to paying off debt is to avoid adding more debt. By reducing your expenses, you control your expenses and reduce your dependence on credit. Additionally, you could free up money that could be used to pay off your debts.
Reducing spending can take many forms depending on your spending habits. This may involve:
- Create a budget and stick to it
- Use cash instead of credit cards to pay for products or services
- Cook your own meals instead of eating out
- Use public transportation instead of driving
- Reevaluate and cancel subscriptions you can live without
- Reduce your use of utilities such as electricity and water
- Shop around for better deals and lower prices on your purchases
2. Start paying off your credit card debt
Your credit card debt is likely to harm your credit more than any other debt. The reason is that credit cards not only carry high interest rates, but their usage accounts for 30% of your FICO credit scores.
Credit utilization rate (CUR) is the percentage of the credit you are using compared to the total credit available.
For example, if the total available credit on all your credit cards is $8,000 and your available balance is $4,000, then your credit utilization ratio is 50% ($4,000/$8,000 x 100).
Increased use of credit gives the appearance of poor debt management. Prioritizing your credit card payments lowers your utilization rate, thereby improving your credit score and saving you money on interest payments.
Tip: Always try to keep your CUR below 30%, and when looking to build credit, a ratio of 10% and below would be ideal.
3. Take a personal loan
A personal loan is a loan that you take out to use at your discretion and habitually. It comes with a lower interest rate: While credit card rates can average between 14 and 15 percent, you can get a personal loan with interest as low as 6 percent.
However, you will need a good credit score (690 and above) and a stable income to negotiate a good deal. That said, lower scores will attract more interest, but you can still get better rates than with credit cards.
So, if used diligently, as clear your credit card debt, you can use the loan to save your credit in the long term. Additionally, the number of personal lenders is increasing day by day, opening up more opportunities to shop around.
4. Get a Balance Transfer Card
If you're faced with multiple high-interest credit cards, one balance transfer card can help you save on interest and pay off your debts faster.
Typically, a balance transfer credit card charges no or low interest for a promotional period of 12 to 18 months. This allows you to repay only the principal of your debt or, where applicable, the interest, at a lower rate.
On the other hand, this type of credit card can also temporarily harm your credit in two ways:
- Moving Your Credit to the New Card May Increase Your Credit Utilization Rate
- Opening a new credit card account can result in a hard inquiry that can lower your score by a few points.
- A new account will affect the average length of your credit history
However, the effects of the above factors on your credit are less severe than the effects of not eliminating your credit card debt in the long term.
Better yet, you can still complete a balance transfer without hurting your credit by using the tips below:
- Make sure you can settle the debt without fail and within the promotional period
- Make sure the balance you transfer doesn't max out your transfer card or result in a higher credit utilization rate.
- Avoid adding more debt to both the original card and the balance transfer card until you have settled your debt.
- Find out if there are balance transfer fees and assess the financial impact beforehand
It's possible to pay off your vacation debt before it hurts your credit. However, this requires drastic measures such as changes in spending habits, consistency, discipline and sacrifice. Meanwhile, you may want to start saving for the next vacation to avoid finding yourself in the same situation next year.
For more financial advice, credit repair and consultation, contact Credit Absolute.