How can credit card debts affect your credit score if you are paying your debts on time, how can it financially drain you if you are managing your expenses well?
There is a common belief that credit cards are those extra funds that we can instantly use without having to worry about paying at the very moment and payments can be made later to the credit card company. Well, there is no myth here; this is true but thinking that owning multiple credit cards gives you the freedom to spend. It does not just affect your Credit score alone but also the Credit Utilization Score.
What is a Credit score?
A credit score is based on credit histories like several open accounts, total levels of debt, and repayment history of loans, any default in repayment, or delays in previous payments. The higher the score, the better a borrower looks to potential lenders. A good credit score ranges around 700.
What is the Credit Utilization Score or Rate?
It is the ratio of the amount Spend from the credit card to the Credit Card Limits. The Credit Utilization rate comprises 30% of your Credit score, which is 255 points and can make a huge difference in your credit score. You can calculate your Credit Utilization Rate by-
For instance, the amount spend via the credit card is $8,000 and the credit limit is $20,000. So the CUR becomes 40% which too much. The CUR should be below 15% to keep a good credit score. The best CUR ranges from 1% to 5%.
How to get rid of multiple Credit Card Debts?
-
Debt Consolidation
Debt consolidation is the act of taking a new loan by combining multiple debts into a single, larger debt to pay off other liabilities and consumer debts with more favorable terms. Favorable term structure includes the lower interest rate, tenure, lower monthly payments, etc. to ease the burden of multiple loans. These are best suitable for credit card debts because this way you can pay off the debt at a lower interest rate and save a lot of money and saves you from being filed for bankruptcy. It doesn’t affect your credit score.
-
Debt Settlement
Debt Settlement is a process wherein consumers pay less than what they owe after a mutual agreement with creditors. It saves the time of creditors since they do not have to get into the complex legal process of bankruptcy. On the other hand, consumers also save around 40% to 60% of debt money because they do not have to pay the whole amount. This is the best option if you are short of money or are most likely to be filed for bankruptcy. Initially, this might affect your credit score but gradually your credit score will improve.
-
Zero Percent Balance Transfer
In this consumers can apply for a new credit card which offers a zero percent balance transfer. This way all the debt can be moved into a new card and you pay zero interest on it. They usually give you about 12 months with zero interest to tackle all pay off all your debts.
The only cons of this are that you are more likely to pay upfront a 3% balance transfer fee. It does not help in improving your Credit Utilization Rate because only the debt is moved not reduced.
This is only suitable if you have the confidence that you can pay off your debts in those 12 months provided.
-
Traditional Methods
The option to repay debts traditionally using the Snowball method (small amounts of debts are paid off first) and Avalanche method (debts with the greater interest rate is paid off first) are the most popular ways of paying off debts. These do not save a lot of money compared to the methods stated above.
Debt negotiation, consolidation, and settlement can be tiresome so it is advisable that you seek professional help. If you feel trapped in the vicious cycle of debt and can’t figure out which of these options will be best suitable for your financial situation then you can book a free virtual appointment for your credit card debt settlement with us and start living debt free in New York.