The usual advice about carrying a credit card balance (including on this site) is as follows: Don’t do it.
But what if you find yourself with a balance you can’t pay off at the end of the month – or the next? It happens, and often, it isn’t due to reckless shopping.
“For most people, it’s unexpected expenses, whether it’s home repairs, car repairs or a property tax bill they knew was coming but weren’t planning for,” says John Szalicki, credit counseling manager at Cambridge Credit Counseling. An unexpected loss of income is another common culprit, he says.
The good news is that carrying a balance won’t necessarily cause credit damage or permanent financial ruin — as long as you handle it responsibly. To do so, follow these six rules:
1. Prevent credit damage
Stretching a balance over several payment cycles won’t tank your credit score as long as you:
- Pay on time: Pay at least the minimum (although preferably more) by the due date each month. Late payments will lower your score and stay on your credit reports for seven years.
- Keep balances low (compared to your credit limit): Credit utilization has a major influence on your FICO score, as “Amounts Owed” makes up 30 percent of your score. To minimize credit damage, keep your balances below 30 percent of your credit limits (on each card and across all cards).
2. Avoid new purchases
When carrying a balance, consider yourself in pay-off mode.
“You want to avoid using the card unless it’s an emergency,” Szalicki says.
If you’ll be tempted to pull out your card, keep it out of your wallet.
Cherie Lowe, author of “Slaying the Debt Dragon,” says she and her husband kept their cards in a desk drawer (before ultimately canceling them) while they worked through their total balance of $16,500.
“If you truly have the card just for emergencies, it doesn’t need to be in your wallet,” Lowe says. “You’re not going to encounter an emergency at Target.”
If you do use your card to make new purchases, make sure those new purchases get paid off in full immediately.
Kayla, who blogs semi-anonymously about her $8,000 credit card debt (and other debts) at Shoeaholic No More, still has her cards open but uses then more strategically – for online shopping and travel expenses.
“Then I pay off the new purchases as soon as I get home,” she says. “I don’t want to carry a ton of cash, and I can easily track my travel expenses if they are all on the same card.”
Some cards even have built-in features for those carrying balances temporarily. If you’re carrying a balance on a Chase card, for example, consider using the Blueprint feature. It lets you select spending categories (gas and groceries, for example) to be automatically paid off in full every month before the due date. That way, those purchases don’t get rolled into your existing balance and cost you more in interest.
3. Pay more than the minimum
Paying the minimum required by your bank will keep your balance alive longer, meaning more interest payments. So track your spending to find regular expenses you can cut, and reroute that money toward monthly payments.
“We find that people always find ways they can cut back, Szalicki says. “That $3 or $4 coffee every morning is $100 a month. A $10 lunch every day is $300 a month. It just adds up like crazy.”
Lowe and her husband made many lifestyle changes to speed up the demise of their balances. When the microwave broke, they didn’t buy a new one. Lowe’s husband went more than two years without eating at a restaurant. Lowe took on freelancing work while her husband took on consulting jobs in addition to his 9-to-5 job.
Even if your balance is much lower than the Lowes’, money paid in interest is money thrown away.
“The biggest mistake you can make is just paying those minimums without realizing in the long run that you’re going to end up buying that shirt, that pair of shoes, that vacation three to four times,” Lowe says. “Wouldn’t you rather have three or four shirts? Or three to four vacations?”
4. Plot a pay-off time line
Once you’ve determined how much extra money you can put toward your debt each month, you need a goal – the day you’ll finally be debt free. Use a debt pay-off calculator to get the exact numbers. Just make sure the monthly payment amount is practical for you. While bigger monthly payments could shave months off your debt-repayment slog and save you money in interest, they could sap your endurance early on.
“Maybe it will take you six months, maybe 12,” Szalicki says. “Don’t set an unrealistic goal. Don’t try to make it three months if you can’t do that.”
When Lowe and her husband first did the math, they found themselves staring down a projected 15-year time line for $100,000 in credit card, student loan and other debt. They ended up paying it all off in just four years, though, accelerating their lifestyle sacrifices (and payments) as they went.
While a long time line may seem discouraging, it may be the most effective in the long run, Lowe says, as it gives you plenty of time to absorb the lessons you need to learn.
“You realize, ‘I never want to live this way again, so I’m never going to get back into debt,'” Lowe says.
5. Try to get a lower interest rate
With interest inflating your balance each month, it can feel like you’re making no progress. So slash it if you can. Utilizing a balance transfer offer with a 0 percent period is one option, but make sure you’ve committed to a time line (see Step 4) – and to paying more than the minimum (see Step 3).
“We have clients who transfer balances for years and years,” Szalicki says. “They just continue to pay the minimum. … If you don’t have a plan, a balance transfer will buy you time, but you’re going to be faced with the same dilemma in another year.”
If you go the balance transfer route, you’ll likely have to pay a balance transfer fee, generally a certain percentage of your balance. A fee-free option: negotiating a lower interest rate with your issuer. If your balance was due to a hardship, you might be able to work out a hardship plan to pay a lower interest rate for an agreed-upon number of months. Ideally, the length of the plan will closely match the length of time you calculated in Step 4 above.
Some banks will work with you, while others won’t, Szalicki says. Just don’t lead with demands for a lower interest rate.
“You want to tell them you’re in financial hardship and having difficulties and you don’t want to default or file bankruptcy,” Szalicki says. “You want to make good on the debt, but you need a little help.”
6. Don’t neglect your emergency savings
While it might be tempting to throw every spare dollar at your balance, you’ll sabotage your progress if car repairs or medical bills force you to use your card. So contribute some money each month to an emergency fund. That way, you can pay for unexpected expenses without adding them to your interest-bearing mix.
Kayla of Shoeaholic No More, for example, says she’s contributed more than $800 toward her emergency fund.
“I think having an emergency fund is important so I don’t have to turn back to my credit cards when unexpected expenses arise, she says. “And they will happen from time to time.”