Is getting rid of credit card debt on your resolution list for the New Year? Whether you are an individual or business owner, here are a few best practices to keep your credit card debt under control in 2016.
- Negotiate a lower interest rate
It never hurts to ask, by shaving off a percentage or two on your credit card’s interest rate, you can save hundreds as you pay off your debt. Improving your rate is one of the best ways to reduce your credit card bill. If you have overall good credit, you may have a higher chance of getting your interest rate lowered. Before you reach out to the credit card company be sure to know your terms; having an idea of the current prime rate is also a plus. A simple phone call may be all it takes to start you on the path to debt relief. Whether you receive a lower rate or not, call back in 6 months or a year to ask again.
- Track your spending
Keep a record of all your fixed monthly expenses (e.g. mortgage, utilities, insurance, car payments, etc.). Also, track your variable expenses such as meals, entertainment, and other miscellaneous expenses. By keeping an eye on your variable expenses for a few months, you will get an accurate sense of your spending habits. If you are a business owner, carefully manage and monitor the employee use of the business credit card – if they have access and approval to use the card. Using a financial software to track your expenses makes this process easy. If you are unsure of which financial software will best suit your business’s needs, consult with your accountant.
- Create a Budget
Cutting back can sometimes be more effective than cutting out. Create a reasonable budget based on your or your business’s current financial situation. After covering fixed monthly costs, devote the remainder of your cash or revenue to paying down your debt. Practice paying more than the minimum; otherwise, the debt will keep building, and it can take years to pay off. If you are a business owner, dig out of your debt hole by cutting down on unnecessary costs and free up your cash flow. Invest the funds in more lucrative efforts and get rid of expenses such as costly phone systems or weekly “team lunches” that can add up pretty quickly. Start small and work your way up. Tackle three ways that you can make an immediate cutback. Or divide your monthly discretionary budget into weekly allotments so you can have a better handle on staying on track.
- Prioritize your debt payments and choose a payoff strategy
Here are two popular strategies to consider when seeking to reduce your credit card debt:
Option 1: Put extra cash into highest interest credit card while paying the minimums on the others. Once the first card is paid off, apply the extra cash to the card with the next highest interest rate and so on.
Option 2: Pay your card with the lowest balance first while continuing to pay the minimums on the others. Once that card is paid off, tackle the card with the next lowest balance.
Choose a strategy that will work best for your financial situation and then rank your cards in the order you want to pay them off. Also, if you have personally guaranteed any of your business’s debt, make sure paying off those debts are at the top of your priority list.
- Create goals & track your progress
Write down your goals and when you have those moments of temptation, take a look at them to remind yourself of the bigger picture. You should also consider setting specific income goals dedicated to paying off debt or devote a percentage of your profit to debt repayment. Monitor your spending and revisit your progress every few months. If it helps, put reminders on your calendar so you won’t forget. You can also check your progress by comparing your monthly statement balances. Tracking your progress will serve as motivation and prevent you from steering off track.
If you own a business but have limited credit history or a poor credit score, consider a secure business credit card. Backed by a deposit, this will help your business establish or rebuild credit when making timely payments every month. Whether using a secured business card or not, any interest and late fees paid on your business credit card can be deducted on your taxes as long as the expense was for business purposes. Keep track of your receipts for your tax documents and be sure to speak with your accountant about other tax deductions for which you may be qualified.
- Most importantly, Pay On Time!
Missing payments can damage your personal and business credit score making it harder to get approved for loans and credit in the future. As 35% of your FICO score is determined by your history of paying bills, a few late payments can cause some damage. Make paying your credit card bill on time a priority.
For more information on accounting, tax planning and financial management, visit www.nlgroup.com. If you have questions specific to your financial situation, give us a call at
410-453-5500 and one of our staff members will be happy to consult with you.