credit card debt advice

For just about anything you want to get off your chest about credit cards.
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Jdown1
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credit card debt advice

Postby Jdown1 » Mon Oct 12, 2015 9:17 am

Hello everyone, I am new to this forum and am looking to you guys for a helpful advice. Here is my situation... I have three credit cards, two of which have very small limits(under $1000) and my other card has a much larger limit(less then $6000). At this point in time, I'm using at least 80% (or more) of my available limits on all my cards. I have been trying for several months to get a handle on the situation but I cant seem to get out from under the one card and its literally killing my credit score. Other then using a high percentage of my card, I have never missed a payment and usually pay much much more then the min due. I was hoping you could all help me develop a reasonable plan to get control on this situation.


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Vattené
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Re: credit card debt advice

Postby Vattené » Mon Oct 12, 2015 11:38 am

Welcome to the forum!

The good news is you don't have crazy high limits. You might be able to get into more debt than you're comfortable with, but you can't run up a huge debt that will get you in serious trouble. This is all very manageable.

It seems to me that your biggest priority should be getting in the habit of paying in full every month. This just means paying the statement balance of every account by its due date. Paying in full on a regular basis makes you spend within your means and will also let you incur no interest expense from using credit cards.

It may take some discipline and work to get into this habit. If you need to use only cash and/or debit to pay for things, do it. Your credit profile and individual accounts will age and you won’t be able to run up balances you carry from month to month. You also won’t have high utilizations reporting, which is another concern you mention. Put two of the cards away completely, and only run one charge through each every few months to keep the accounts active. You may want to use the $6,000-limit card more regularly – even if it is just a single charge a month – to build up a history of more on-time payments. You don’t need to put a lot of spending through credit cards to build up a strong credit profile. Never being late with a payment over a long period of time does most of the work.

Once you’re in the habit of paying in full you can start using credit cards for your everyday expenses (if you wish, that is; not everyone does and the main benefit in doing this is just the rewards you get from your cards). You shouldn’t have trouble getting higher credit limits, which will let you use your cards as you wish without having to worry too much about utilization. As long as you’re not tempted to spend more and you still keep paying in full every month a high priority, high credit limits shouldn’t be an issue. Before you get higher limits, though, you can also manipulate the utilization that is reported to credit bureaus, which will help with your score. The outstanding balance reported to bureaus for utilization purposes is frequently (but not necessarily) the statement balance. Before that balance is reported, you can pay into the current month’s charges (so, above and beyond the “pay in full” amount that is the previous statement’s balance) and leave whatever balance you want to report. Utilization under 10% is generally considered “good,” so you can make sure around $600 or less is reported on your highest limit card.

Paying down your credit cards as fast as you can to get rid of any balances you’re carrying is most important in the short term. Budget whatever you can to get that high balance down as quickly as you can manage. You can also manipulate the utilization that’s reported on you by letting the outstanding balance you want report to the bureaus. Getting into the habit of paying everything in full is what will take the most work, but it will do the most to get you in control of your finances and get you building up a strong credit profile.
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Vermonster
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Re: credit card debt advice

Postby Vermonster » Mon Oct 12, 2015 11:49 am

The first thing is managing spending. After that you start managing debt. There is no point in making a payment plan if you are spending more than you can pay. We can't help too much with that without knowing more personal information like income and fixed expenses. But you can probably see a few areas in your spending that you can curb. Cut eating out down to once a week or month. Make coffee at home instead of buying it. Bring a lunch to work/school instead of buying one. Little things here and there can add up quickly. You not only reduce your spending, but you can also allocate more money towards paying down debt.
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Jdown1
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Re: credit card debt advice

Postby Jdown1 » Mon Oct 12, 2015 12:53 pm

Thanks for your responses. So My plan was to save up $600 or so and pay get the balances on the first two cards down to 30% utilization each and then just use them once a month maybe for gas. I'm sadly not i a position right now where I can just spend $4000 to pay my one card off, so I was thinking of paying 150 to 160 a month on that card and i figured id be able to put a decent dent in it over a year or two. Thoughts?

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Re: credit card debt advice

Postby Jdown1 » Mon Oct 12, 2015 12:56 pm

And are you saying that as long as I keep making the payments on time I don't necessarily have to pay the cards off to where they are below 30 %? I have had credit my first credit card for almost two years now.

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Re: credit card debt advice

Postby Vermonster » Mon Oct 12, 2015 1:22 pm

Pick the card with the highest APR and pay it off first. You will be able to put more money towards balances of the other cards now that you don't have to pay any interest on that one card.
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Vattené
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Re: credit card debt advice

Postby Vattené » Mon Oct 12, 2015 1:47 pm

30% is the generally recommended maximum utilization you should have for credit scoring purposes. Your credit score and what's personally best for you financially are related but separate issues. Banks would love for you to carry some balance regularly because it provides them with a lot of easy income. Of course it's not the best thing for you because it's costing you money you don't need to be spending. Credit scores exist for banks to predict the likelihood you'll default on debt from any credit they may be willing to extend to you. Carrying some balance won't hurt your credit, but carrying too much will. If you're cards are consistently nearly maxed out, you will look risky to banks, which might think you're near the point of not being able to manage your debt and therefore not being able to pay them back. All this is just to say you could keep your utilization around 30% and carry balances from month to month and banks would love you, but you would be wasting a lot of money.

It's understandable if you're not able to pay that off right away; what's important is you budget a reasonable amount and stick to your plan. As Vermonster said more succinctly than I, the spending is the root cause of the problem. Once spending is in check, the debt can follow. Paying with cash or debit will force you not to outspend your income, and finding areas where you can cut down on spending will let you put more of the money you make to your debt. Since it will take a while to get your outstanding balances down, I'd recommend "sockdrawering" all of your cards (putting them away and not carrying them with you so as to not put any new charges on them) and focus on just paying them off.
-Vattené
FICO-8:
EX - 827 (4/17) | TU - 812 (4/17)
Primary Cards:
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Discover it - $23,000 (2/14)
AU on Barclay Sallie Mae - $10,000 (8/15)
plus several store accounts of varying usefulness now

Kevin86475391
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Re: credit card debt advice

Postby Kevin86475391 » Mon Oct 12, 2015 10:17 pm

Welcome to the forum, Jdown!!

Don't worry, as Vattené said, this is very manageable.

My first piece of advice is to get a firm handle on your spending and budget. I recommend doing two separate things to do this.

First, calculate your monthly take-home income. Then calculate all of your fixed monthly expenses: mortgage/rent, utilities, insurance, any monthly memberships you have, minimums on your credit cards, just anything that you absolutely have to spend every single month without fail unless you make lifestyle changes (for example obviously a hypothetical gym membership or Netflix subscription aren't vital life expenses, but include them for now if you're already signed up). Next, calculate a realistic estimate of variable expenses like groceries, entertainment, gas, etc. Now total up all your expenses, fixed and variable and compare that to your income. Does it look okay, or does it fill you with a cold terror? (J/K....I hope). Whatever you have left is your preliminary estimate of how much extra you can throw at your credit cards. I very much agree with Vermonster that you should focus on paying down your highest interest card first. That definitely makes the most financial sense and will save you the most money in interest. However, don't dismiss psychological factors if you're pretty sure for example that starting with your lowest balance card and paying it off first will help keep you motivated - or alternatively if staring with your highest balance card and making a dent in it first will keep you motivated. Pay toward the highest APR first if you feel like you don't need extra motivation, but do what's going to keep you trucking along.

Second, as a completely separate exercise go through all of your credit card and bank statements (I recommend going back at least 3 months or more) with a fine tooth comb. Categorize all of your spending, especially compared to the list you created above. Did you maybe forget about a fixed expense? Did you estimate $300 a month for groceries only to realize you've actually been spending about $600 a month? This information can help you see areas for improvement and potentially allow you to shrink or expand your budget as needed. So for example if you have been spending $600 a month in groceries and only budgeted $300, maybe you can actually slash your grocery bill in half, but maybe you need to adjust your budget to $400 a month. Personally I'd rather give myself some wiggle room and have a realistic figure than miss it and feel terrible (and demotivated). If anything you might consider setting a FINAL goal of $300 a month, but giving yourself 2 or 3 months to gradually get there. Like $450 the first month, $375 the second month, then aim for $300 in the third month after you've had a chance to adjust and look for ways to save. Now is also the time to eliminate any fixed but discretionary expenses, especially if you don't have nearly as much money left over as you'd like to apply to your credit cards. Do you really need those hypothetical gym and Netflix memberships (or whatever fixed expenses apply to you)? Can you get by without cable TV? Is your car insurance bill too high and maybe you could get by with more basic coverage? Is your house or apartment a money pit and maybe you'd be better off long-term downsizing?

In the short term don't worry too much about your credit score. Make sure you always pay at least the minimum, on time, every month on all your cards and bills, but don't worry about utilization right now. You don't need to worry about getting approved for additional credit cards, a car loan, or mortgage, etc., because right now you need to focus on paying down your debt and the last thing you need is more debt/a new debt instrument.

The only exception to this advice is if you think you might need to open a 0% balance transfer card, like the Chase Slate for example, or perhaps do a low-interest, peer-lending loan like through Lending Club (or a conventional debt consolidation loan through a bank or credit union). In that case, of course you need the best score possible to get the best terms possible, and indeed that could potentially save you a lot of money, but regardless you definitely need to start by creating a budget, and analyzing your recent spending.

A very simple thing you can do in the meantime: resolve to never go in the wrong direction again on your accounts. The last thing you want to do is pay $150 to one credit card only to charge $90 on each of the other two. Resolve that your balances, on ALL cards, is only going to gradually get smaller.

Anyway, best of luck and keep us posted if you can! :D

ingramjuan
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Re: credit card debt advice

Postby ingramjuan » Mon Oct 12, 2015 11:15 pm

Jdown1 wrote: I'm using at least 80% (or more) of my available limits on all my cards. I have been trying for several months to get a handle on the situation but I cant seem to get out from under the one card and its literally killing my credit score. Other then using a high percentage of my card, I have never missed a payment and usually pay much much more then the min due. I was hoping you could all help me develop a reasonable plan to get control on this situation.



I don't think I can add anything else based on several great replies to your post. As far as your credit score, have you consider in asking for a credit line increase?
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takeshi
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Re: credit card debt advice

Postby takeshi » Tue Oct 13, 2015 8:47 am

Jdown1 wrote:I have never missed a payment and usually pay much much more then the min due.

Unfortunately the minimum doesn't mean anything with regard to scoring and risk assessment. It's your revolving utilization that matters. The minimum is only what's required to keep your account current.

Jdown1 wrote:So My plan was to save up $600 or so and pay get the balances on the first two cards down to 30% utilization each and then just use them once a month maybe for gas.

+1 to putting the cards away. You have no grace period when you're carrying a balance and you immediately start to accrue interest on new purchases.

Jdown1 wrote:And are you saying that as long as I keep making the payments on time I don't necessarily have to pay the cards off to where they are below 30 %? I have had credit my first credit card for almost two years now.

Revolving utilization always matters and "do not exceed 30%" always applies. 30% isn't your goal. That's a starting point. Your goal is to have it as low as possible without having all 0 balances report.

Vermonster wrote:Pick the card with the highest APR and pay it off first.

Highest APR is handy for reducing interest paid but for minimizing risk of adverse action I'd recommend paying down the card with the highest utilization -- especially considering that the OP is expecting that it will take some time to pay down these cards.

However, I'd +1 the comments that one has to budget and stick to a budget first before debts can be paid down. Once paid down the OP then needs to work on always paying each statement in full. At this stage, score is the least of the OP's concerns.

Vattené wrote:If you're cards are consistently nearly maxed out, you will look risky to banks

One does not need to max or be near maxed to look risky. That's just an extreme case.

ingramjuan wrote:As far as your credit score, have you consider in asking for a credit line increase?

I wouldn't expect anything with 80% or higher utilization. One's credit and income determine the limits and CLI's that one will qualify for. Revolving utilization is a significant factor and high utilization can severely constrict the limits and CLI's that one will qualify for as well as other things such as APR's and even just approvals to begin with. If SP CLI requests are possible they certainly don't hurt but, again, I wouldn't expect anything.



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