Want to Conquer your Debt? Arro Can Help.

Today, American consumers hold an average of more than $5,000 per person. At this level, debt cuts into monthly budgets – often costing more than $100 just to make a minimum payment – and makes it difficult for people to build emergency or retirement savings.

Credit card debt can be a burden on your wallet

It’s easy for credit card debt to snowball because interest charges and minimum payments get larger the higher a credit card balance gets. Paying your entire balance off every month will allow you to completely avoid interest and get the best value out of using a credit card. If you can't pay off the entire balance, interest charges are typically a small percentage of your balance every month. This is not too problematic if your balance is less than $500 and you are able to pay it off quickly, but interest charges are often over $100 if your balance is $5,000 or more. This makes larger balances grow quickly and become increasingly difficult to pay off.

A higher balance will also lead to a higher minimum payment, which makes it harder to stay current on your debt. Missing payments can lead to late fees and will often decrease your credit score as well since payment history is the most important factor affecting your credit score.

The pitfalls of credit card debt

There are three key dangers to letting credit card debt accumulate:

1. It cuts into your budget. Minimum payments are typically set as a percentage of your balance, meaning that you will have to spend more money each month just to stay current.

2. It makes it difficult to build savings. Paying down debt often requires you to use money  that could go toward savings or to take money out of your existing savings.

3. It hurts your credit score. Accumulating debt both increases your risk of missing payments and increases your credit utilization. These can both decrease your credit score, which makes it harder to qualify for future loans like auto loans or mortgages and can even make it more difficult to get approved for an apartment or find a new job.

How to get out of debt

If you already have some debt, the best strategy for paying it off is called the Avalanche Method. This involves paying the minimum payment on all of your loans and then using all of your remaining budget on the highest interest loan until it is completely paid off. Then you move to the next highest interest loan. This allows you to prioritize paying off the loans that accumulate the most interest, like payday loans and credits, while still staying current on your other loans.

Consolidate your debt with another form of financing Consolidating debt is a great option to combine your credit cards into a single loan with a lower interest rate. Often you can combine all of your open credit cards with one loan at an interest rate 10-20% lower than the cards. This helps you save on interest and lets you focus on making a single monthly payment against that loan instead of focusing on multiple cards. Just be careful not to accumulate more debt using the extra space you open up on your credit card.

Transfer your credit card balance to a zero-interest new credit card Making a balance transfer to a credit card with a zero-interest promotional offer can be a great way to save money on interest while you pay off a large balance. Some cards will give you up to 21 months without interest to pay off your balance transfer. There are a few important things to keep in mind before using this option:

• These credit cards often require Good or Excellent credit to qualify. It is likely the longer the zero-interest period is, the better your credit needs to be.

• Most cards charge a fee about as large as 1-2 months of interest to transfer a balance. This means that this is only a good option if you don't think you can pay your balance off within 2 months.

• Make sure to continue to make your minimum payments on the new card and pay off your entire balance before the zero-interest period ends. You can sometimes lose the zero-interest period if you miss a payment and you will start paying interest on any remaining balance once the period ends.

Set a goal

Regardless of which strategy you use, it is important to set a goal for how you will get out of debt. This will help you plan for how much money you need to put towards your balances every month to get out of debt by the end of your timeline and account for it in your budget. You can use an online calculator to figure out a monthly payment that accounts for additional interest.

Now you’re debt-free! How do you stay that way?

The most important things to remember if you don’t have any debt or you just got out of debt are to set a budget and plan for the future. Setting a budget is the number one, most important step you can take to stay out of credit card debt. Making a budget is the best way to ensure that you are spending less than you are earning which is crucial to avoiding debt and putting aside extra money for savings. These savings will be there for you when you need them most and act as extra security to prevent you from falling into debt if you have an emergency or need to make a large purchase.

Another great way to protect yourself from getting into debt is to make sure you have insurance. There are many different types of insurance you can get, but the most important types are health, auto, and renters/homeowners insurance. While premiums may feel expensive when things are fine, insurance can help protect you from large costs when unforeseen events happen. Research has shown that more than half of bankruptcies are at least partially caused by medical debt and an unexpected car accident or damage to your property can also be costly. Insurance can give you peace of mind and make sure you can stick with your financial plan when unexpected things happen.

Finally, prioritize making large payments against your credit cards. Setting a budget will help you make sure you have enough money to pay off your full bill every month, but make sure you follow through and pay off your full balance at the end of every month. It may be tempting to make a minimum payment or pay off part of your balance, but this will cost you a lot more in the long run. 

Credit cards can be great tools to manage your spending and earn rewards, but they are an expensive way to borrow money if you can't pay your full balance off every month. It’s important to budget effectively to make sure you have enough money to pay off your full balance every month – not just the minimum payment. If you need to borrow money because of an emergency, make sure you shop around for the loan or credit card with the lowest interest rate and make a plan to pay down the balance as quickly as possible.