Interest is no fun unless you are earning it. When you have to pay for it, it can be a major hindrance. It’s even worse when you have capitalized interest that starts to compound. So how do you avoid that? Keep reading to learn more about how capitalized interest works and how borrowers can avoid it or pay it off on their student loans.

What is capitalized interest?

In simple terms, capitalized interest is when unpaid interest is added to the principal balance of your loan and then your lender charges your existing interest rate on the new, higher balance.

Essentially, your outstanding interest charges are added to your total loan balance—and interest is charged on the higher balance. Student loans are among the most common places to find a capitalized interest example.

Capitalized interest student loan costs can greatly increase the total cost of a loan. If you want to avoid paying more than you borrow, avoiding this type of interest is best.

How capitalized interest works on student loans

Let’s start with how a student loan works. When you take out a student loan, you’re charged interest. The interest charges are essentially the cost of the loan, as most lenders won’t let you borrow money for free!

The total cost you pay for a loan is determined not just by how much you borrow but also by the interest rate. A higher interest rate will increase the overall cost of a loan.

Additionally, the time you take to repay the student loan will affect your total costs.

Capitalized interest on student loans can further increase overall costs. As interest increases, your monthly payment goes up, making it even harder to pay back your loans.

An increased principal increases the total amount you must pay back over time. Thanks to the effects of compounding on that principal and interest. Yup, it’s one of the examples of compound interest!

Capitalized interest vs accrued interest

You might be wondering if capitalized interest is the same as accrued interest. While they’re related, they’re not the same.

Capitalized interest is the accrued interest that your student loan lender adds to your principal amount when the interest goes unpaid.

Accrued interest is interest that increases with time. Essentially, it’s the amount of interest that has grown since your last payment, but you haven’t paid it yet.

If you don’t pay the interest on your loan as it accrues, your lender can add the accrued interest to the principal, resulting in capitalization.

For instance, interest could accrue while you are in school. Thanks to deferment periods, you don’t have to pay it back until you graduate.

However, this means your lender can add your unpaid interest to your total loan balance at the end of the deferment period. They can also charge you interest on the new balance.

Capitalized interest example

As a capitalized interest example, let’s talk about it works on student loans work. Say you take out a student loan for $20,000 at 5.8% for ten years. You defer payment through 4 years of college and a six-month grace period.

The interest accrues and capitalizes, and now $20,000 is over $34,000. It’s likely to be even more when you factor in fees. The capitalized interest alone would be over $7000.

Interest can impact your life in the long term. It can make it harder to accomplish your other financial goals if you have the addition of unpaid interest. In my experience, getting out of debt is much harder than avoiding it in the first place.

Expert tip: Don’t skip over reading your loan agreement

Interest capitalization can happen on both federal student loans and private loans. To avoid it, be sure to carefully read your loan agreement so you know when interest will be capitalized. Do this regardless of whether your loan is federal or private.

How do you end up with a capitalized interest student loan?

Interest capitalization on your student loans can happen for several different reasons. Generally, interest capitalizes after a period of not paying the loan’s balance.

With federal loans, interest capitalizes when:

• The grace period of your unsubsidized loan ends
• When you consolidate your loans
• When you leave an income-based repayment plan like Pay As You Earn (PAYE)
• During forbearance or after a period of deferment (for unsubsidized loans after deferment, not subsidized)

For example, let’s say you take out an unsubsidized student loan over four years. The loan is for $27,000 with an interest rate of 4.53%. After your four years are up and the end of the grace period, six months after you graduate, you will have thousands of dollars in unpaid interest.

That means while you thought your loan was only $27,000, it’s now over $30,000. And don’t forget—you now have to pay interest on that higher balance.

How can you avoid a capitalized interest student loan?

The average cost of a four-year college is around $26,000 a year, according to Education Data Initiative, you might have to take out some student loans to cover costs.

Of course, no one wants to pay more than they have to. Capitalized interest on student loans will definitely increase your payments.

The good news is there are many ways to avoid capitalized interest on your student loans altogether.

Pay student loan interest while you’re in school

Your education is a long-term asset, and student loans may be necessary to help you earn your degree. However, that doesn’t mean your loans should define your future. If possible, start paying off your student loans while you are still in school.

Not everyone can afford to make loan payments while in school. This is why loan deferment and post-graduation grace periods exist.

However, one of the easiest ways to avoid capitalized interest is to pay your student loan interest costs even while the loan is deferred. Try to find a way to pay your interest while in school. You can avoid hefty costs when you graduate.

Make extra payments

While it might not be possible to pay off your loans while you are still in school, you can make extra payments later. Once you’re graduated and financially secure, you can lower your interest costs by paying down your balance with extra payments.

Paying extra doesn’t necessarily avoid the interest, but it does help reduce your loan balance after adding capitalized interest. The more you can lower your loan balance, the less you’ll pay in interest charges over the life of the loan.

For example, I paid off my last car loan over two years early by making extra principal-only payments every few months, which saved me over $1,000 in interest.

I got the loan with a higher interest rate than I was hoping for, so I knew I needed to be aggressive with repayment to lower the overall cost of my vehicle. Each time I found myself with extra cash, I made an extra payment on the car because I really wanted to get out of my car loan.

Additionally, if you can make any extra payments while in school, doing so can only help. If you begin to make extra money from a job or find that you have some cash available, using it to pay off student loan interest that could be capitalized is a smart idea.

Pay tuition without student loans

If you’re lucky enough to be able to, avoid student loans altogether.

Instead, you can use grants, scholarships, and work-study to pay for school. Researching alternatives to loans before going to college may be helpful.

I was lucky enough to graduate college without any student loan debt, thanks to a combination of education savings and scholarships. I chose a school that offered a range of merit-based scholarships and was known for awarding high-dollar scholarships to students with similar extracurricular resumes and grades to mine.

You may also choose to start working and going to school over a longer period of time.

Use passive income to get ahead

While you might be quite busy with your classes for the next few years and focusing on your studies is important, you can still make money. Passive income can be a great alternative to working a job while in school full-time.

How does it work?

Passive income generally requires some work to set up. After setting it up, however, your passive income stream generates revenue with little to no work from you.

There are a lot of passive income ideas for students that you can try out, including renting out your car, textbooks, and other belongings. It will help your financial situation and eliminate student loans and interest.

Know when interest will capitalize

Regarding student loan interest, a proactive approach is generally better than a reactive approach. One of the best ways to avoid capitalized interest on your personal balance sheet is to know when interest will capitalize and keep yourself out of those situations.

I suggest contacting your loan servicer or provider and asking them directly what would lead to interest capitalization. Loan agreements can vary, so situations that capitalize interest for a friend might not apply to your loan.

Going straight to the source will tell you when your interest might capitalize.

Additionally, it will tell you how you can stay away from these situations.

Negotiate with your loan servicer

Speaking of reaching out to your loan servicer, you can always try to negotiate your loans with your provider.

Whether you have federal or private student loans, you may be surprised how many interest repayment options might be available to help you avoid capitalized interest. Many providers are especially willing to work with you if you’re struggling financially.

Remember, the worst outcome that can happen is your loan servicer saying no.

Refinance or consolidate loans

A word of caution: refinancing or consolidating your loans may trigger capitalization of outstanding interest. This might not be a big issue if you snag a great rate on your new loan because you’ll save enough to cover the additional balance.

However, if your rate isn’t significantly lower, you may need to pay off outstanding interest before refinancing. Paying the lump sum of your currently owed interest before refinancing means there won’t be any outstanding interest to capitalize when you refinance or consolidate.

Get a part-time job to pay loans

Do you have some extra time around your studies? You may want to get a part-time job to use exclusively to pay your student loan interest. Depending on how much you’ve borrowed, your part-time job may not need to be a huge time commitment to help you avoid interest.

Additionally, a part-time job in your preferred industry (or even an online part time job) could help you land a full-time career after graduation—which in turn helps you avoid deferment and capitalized interest charges.

In college, I knew several people who used their part-time jobs to help pay for college and advance their future careers.

For example, a friend of mine majored in finance and worked part-time as an accounts receivable clerk at a local business.

After graduating, they had both their degree and their part-time work in accounting to help them land a high-paying accounting job. They could immediately start paying their student loans without worrying about capitalized interest from the grace period.

Why am I paying capitalized interest?

You might be paying this cost on your student loans for a few reasons. It’s important to carefully go over your loan terms so you know what triggers will cause interest to capitalize.

Some of the most common reasons you might pay these costs include:

• You’ve reached the end of your post-school grace period.
• You’ve accrued interest during a deferment period or forbearance, which is added to your balance at the end of the period.
• You switched repayment plans, and unpaid interest was capitalized.
• Your income increased, and you no longer qualify for an income-driven repayment plan.

What are the rules for capitalized interest?

The exact rules can vary based on your student loan agreements.

For example, your loan agreement might capitalize interest if you enter a forbearance period. The best way to learn the rules of your loans is to talk to your loan servicer and ask which events will trigger interest capitalization.

Articles related to interest and student loans

Did you find this information about student loans and interest helpful? Then read these posts to find out more!

• Should You Pay Off Student Loans Or Invest?
• Key Tips For College Student Credit Card Debt
• Balancing School And Work Plus Financial Tips For Every College Student
• How Do Student Loans Work?

You can minimize your interest costs with some preparation

If you want to become debt-free and pay off your student loans, one of the things you can do is avoid interest capitalization. Pay off your loans as often as you can to help with this.

Student loans are unavoidable for many students, but that doesn’t mean you should have to pay more than you agreed upon. The easiest way to pay off your student loans is to avoid extra costs, especially capitalized interest.

If, for some reason, you need to pause payments, you can use a student loan calculator to find out how much you will owe if you let the interest capitalize. It can help you decide if it’s worth letting the interest pile up.

It may seem challenging, but with some guidance and planning, you can avoid capitalization and get to work paying off your principal balance. Want to learn more? Our free 3-course bundle on how student loans work can guide you in the right direction.

The post What Is Capitalized Interest On Student Loans? appeared first on Clever Girl Finance.

Your credit score is an important number that can have a big impact on your life. Although it is just three digits, it can tell potential lenders a lot about your creditworthiness. If you regularly monitor your finances, you may notice when your credit score lowers. If it happens unexpectedly, you might ask, “Why did my credit score drop?”

In this article, I’ll walk you through some of the reasons behind a drop in credit score. Plus, I’ll also highlight ways to get your credit score back on the right track. 

Why did my credit score drop? 11 Common factors

A credit score is a reflection of your credit report. The factors that affect your credit score can pull it down or build it up depending on your choices and things like length of credit history, payment history, and more.

So wondering, “Why did my credit score drop?” Let’s look at eleven common reasons for a decrease in your credit score.

1. Too many hard credit inquiries

When applying for new loans, you are likely keeping a close eye on your credit score. You may notice a sharp drop while you are in the midst of applying for new loans.

In this case, the drop in your credit score is likely a result of too many hard credit inquiries. When you apply for credit, lenders and credit card issuers will pull your complete credit report to determine your creditworthiness.

Although credit inquiries play a small role in your overall credit score, it could be the reason behind your most recent drop.

If you’ve applied to several new lines of credit in the past month, this is the most likely reason for the drop. If you’re concerned that checking your credit score lowers it, know it is not considered a hard inquiry. You’ll only need to worry about hard inquiries if you apply for a new loan or line of credit.

2. Late and missed payments

A late payment can blemish your credit report, decreasing your credit score. That is especially true if you make late payments consistently. If you missed a payment altogether, that could cause your credit score to drop too.

Lenders favor borrowers who can make on-time payments regularly. A lower credit score could indicate to potential lenders that you aren’t consistent about making on-time payments.

3. Growing balances

The balance of revolving credit lines—like credit cards—can fluctuate each month.

For example, if you have credit card debt, it can grow each month that you don’t pay off your credit card account balance in full.

A growing amount of revolving debt leads to an increase in your credit card utilization ratio. If you have a $10,000 credit limit with a balance of $5,000, then you have a utilization rate of 50%.

In the FICO scoring model, around 30% of your FICO score comes from amounts owed. Knowing this, I recommend keeping your credit card and other revolving balances as low as possible. Many experts recommend keeping your credit utilization rate under 30% to prevent a negative impact on your score.

4. Why did my credit score drop after closing an old account?

Although it can be tempting to close an account because you may think it’s the best way to get out of debt, that can lead to a drop in your credit score.

FICO credit scores factor in the length of your credit history when calculating your score. Older accounts are considered a positive feature of your credit history.

After all, if you’ve been able to manage your credit for a long period of time responsibly, then lenders want to work with you. As you close older accounts, the average age of your credit accounts will fall and possibly drag your credit score down as well.

5. Bankruptcies on your credit report

Foreclosures and bankruptcies can significantly impact your credit score. A big dip in your credit score could result from a recent foreclosure or bankruptcy.

In most cases, this kind of mark on your credit report will have a large negative effect on your score. Unfortunately, the effects could impact your credit score for years.

6. Identity theft

Why did my credit score go down when nothing changed?

This question gets asked a lot. After all, why would your score drop if nothing has changed in your financial situation? One reason is identity theft.

Being a victim of identity theft is one of the worst reasons there is a drop in your credit score. If this happens, people can use your identity to apply for loans such as credit cards, open utility accounts in your name, and even steal your tax refund!

That’s why I suggest monitoring your credit regularly so you can ensure everything on it is legitimate. If someone is racking up debt and not paying bills in your name, it can be detrimental to your finances.

7. An error on your credit report

Another answer to the question, “Why did my credit score go down when nothing changed?” is simply a mistake on your credit report.

It’s sometimes possible that creditors made an inaccurate report to the credit bureaus (Equifax, TransUnion, and Experian). The error, in turn, impacts your score.

As soon as you identify an error, contact the reporting company to dispute the error on your credit report. You might also want to contact the credit bureaus to inform them of the error.

8. Credit limit was reduced

Another reason you could have a drop in your score is if a credit limit was reduced due to lack of use or due to changes in your credit. It could reduce your overall debt-to-credit ratio, which could impact your score.

You can contact the company to ask why they decreased your limit and possibly have it restored if possible. Also, paying down the balance will improve your score, so work on a debt reduction strategy and pay off your card monthly.

9. Paid off a loan

“I paid off a loan, so why did my credit score drop?”

While paying off a loan is a good thing—after all, you’re getting out of debt!—it can negatively affect your credit score. There are a few reasons for this:

• You reduced your credit mix.
• You closed the last account of a certain type of credit.

Paying off a loan reduces the amount of debt you owe and the type of credit accounts you have. Part of your credit score for most scoring models includes your credit mix and how many different types of credit you have.

Having a manageable mix of auto loans, student loans, mortgage payments, and credit cards can help show lenders you’re a responsible borrower—regardless of the type of credit being offered. When you pay off a loan, like a car loan, you’re removing a type of credit from your credit report.

10. Charge-offs on unpaid balances

If you simply stopped paying your debts, your creditors might write off the debt as uncollectable, known as a charge-off. It doesn’t mean you don’t have to pay your debt, but you may be paying a debt collection agency instead of your original lender.

Having a charge-off on your credit report can have negative effects. A charge-off can show up on your credit report for years to come. This makes improving your credit score or securing new credit accounts even harder.

Luckily, you may be able to remove a charge-off from your credit report.  

11. Debt settlement

Debt settlement is negotiating with creditors to pay off your debt for a smaller amount than you owe. While this might sound like a good way to reduce debt, your credit score will feel the effects of settling debt.

When you settle a debt, you and your creditors are agreeing that you will never have the funds to pay all of the amount owed. The creditor takes a loss on the debt in the hopes of recouping some of the money they’re owed. This agreement is reported to the credit bureaus, who add it to your credit report.

Debt settlement is generally preferable to bankruptcy, but it can cause similar problems to your credit score. Settled debts tend to stay on your credit report for seven years, according to Experian. When a new lender sees that you settled a debt, they may be wary of lending money to you.

Expert tip: Don’t panic if your credit score changes slightly

Credit scoring models, like FICO, use formulas to calculate credit scores. Small changes in these formulas can cause your credit score to fluctuate slightly.

If you find your score went up or down slightly, it’s not usually a cause for concern. I recommend focusing on making payments on time, paying off debt, and watching your credit score for any big changes.

Why did my credit score go down when nothing changed and how can I tell?

The best place to start is by regularly monitoring your credit score. I have two favorite resources that will allow you to monitor your credit report for free:

Credit Karma

Credit Karma is a user-friendly site that will send you helpful alerts about your credit score. If there is a drop, then you’ll be able to act quickly.

With Credit Karma, you’ll have access to your credit score and credit reports from two of the three major credit bureaus.

The reports are updated weekly, so you’ll be able to check your credit report whenever you’d like to.

Annualcreditreport.com

The name gives away the services offered by this site; you’ll be able to see a credit report every 12 months. With this free credit report, you can check to ensure all your information is accurate every year.

Both options are trusted and useful ways to monitor your credit score. Take a minute to consider these options and decide which option will work best for you.

4 Ways to increase your credit score after a drop

If you’ve noticed a recent drop in your VantageScore or FICO credit score, rebuilding your credit might be a top priority. Luckily, it is completely possible to rebuild your credit.

As you improve your credit score, you’ll unlock better loan terms and rates for big purchases such as a house down payment or car. Better loan terms can result in thousands of dollars of savings over the lifetime of your loan.

If you implement the strategies below, you might be surprised how quickly your score can rebound. Let’s take a closer look at the best ways to start improving your credit score.

1. Pay down revolving debt balances

Revolving debt is associated with lines of credit that you can access with ease, such as your credit card or your home equity line of credit. Each month, you can potentially increase or lower the amount of this revolving debt.

These loans differ from installment loans, such as a personal loan with a scheduled repayment timeline and monthly payment. If you’ve allowed your credit card balances to grow, that will likely hurt your credit score, causing it to drop.

The solution is to pay down credit cards fast. Although becoming debt-free can be challenging, paying down your debt is completely possible.

Consider using the snowball method to kickstart your debt repayment journey. Along the way, you may need to consider starting a side hustle to increase your income or meal planning to stay on budget.

As you start to pay down your debt, celebrate the small wins. Every dollar you pay down is progress on your journey. It may not be an overnight path, but every step you take will bring you closer to being debt-free.

Plus, you’ll likely raise your credit score in the process.

2. Make on-time payments

Lenders value borrowers who can consistently make on-time payments to their debts.

In fact, making on-time payments is one of the fastest ways to improve your credit score. One way to consistently make on-time payments is to automate your finances.

Automation can be the key to learning how to manage your money efficiently. You’ll no longer need to worry about whether or not you remembered to pay your bills. Instead, all of your debt payments will be made on time without any headaches for you.

3. Credit builder loans

A credit builder loan is a surefire way to improve your credit score if you can make on-time payments. If you take out a credit builder loan, the loan amount will be held in a bank account until you repay the loan. Throughout the loan, you will make on-time payments that the lender reports to the credit bureaus.

The payments you make along the way will include both principal and interest. At the end of the loan term, you will receive the money the lender has been holding in your account. You’ll be able to build your credit score and learn how to save money at the same time.

4. Take our free course on how to build good credit

Since a good credit score can save you thousands of dollars, it is vital to take action. If you want to learn more about the ins and outs of building credit, then our free “Build Good Credit” course is a great resource.

You’ll learn more about the factors that affect your credit score.

Additionally, you’ll learn more about specific action steps that you can take to improve your credit score.

How long does a credit score drop last?

The amount of time a drop in your credit lasts depends a lot on what caused it to drop in the first place. Using a large amount of your credit card limit or having a few hard inquiries on your credit report, for example, often only drops your score temporarily.

Missing several payments or settling a debt, on the other hand, will likely cause a large drop in your score—and therefore take longer to build back up.

The best thing you can do if your credit score drops (after checking for fraud) is to continue making on-time payments and working to lower the amount of credit you use.

Why is my credit score so low when I have no debt?

There are lots of reasons why your score might be low even if you’re not carrying debt—and your lack of debt may be part of the cause. Creditors generally like to see a mix of different credit types when looking at your credit score.

For example, a person with a good credit mix might have a car loan, mortgage, and credit cards with on-time payments.

Articles related to credit scores

This post offers much information to answer, “Why did my credit score drop?” To find out more about credit, check out these other great reads!

• How Does Credit Work? Here’s What You Need To Know
• The Credit Builder Loan And How Credit Builder Accounts Work
• How To Use Credit Cards Wisely

It’s possible to rebuild your credit!

A good credit score can unlock better loan terms for the big purchases in your life. With better loan terms, you can potentially save thousands of dollars over the lifetime of these major purchases, such as a home.

Remember, at the end of the day, it’s all about using credit wisely. For more terrific financial tips on improving your credit, ditching debt, saving money, and building wealth, tune in to the Clever Girls Podcast and YouTube channel!

The post Why Did My Credit Score Drop? 11 Reasons appeared first on Clever Girl Finance.

The credit card industry is definitely a lucrative one. And that doesn’t come as much of a surprise, considering most of us are walking around with a credit card in our wallets. But how do credit card companies make money?

Credit card companies make the most profit from interest charges and other fees. In fact, In 2022 alone, U.S. credit card companies made $130 billion off of consumers. But if you use credit cards wisely, you can often avoid paying these at all!

It all starts with learning the specifics of how credit card companies make money. We’ll be answering that question in this article, as well as sharing a few tips on how you can save money on credit cards.

Types of credit card companies and how they work

Before we dive into how credit card companies make money, let’s talk quickly about what they are and how they operate.

How a credit card company works depends on what kind of company it is. There are two main types of credit card companies: issuers and networks. Let’s learn about each type:

Credit card issuing bank

A credit card issuer is generally a financial institution that issues your credit card and who you pay your bill to each month. Examples of big credit card issuing banks include Capital One, Chase, and Wells Fargo. Smaller credit card issuers are out there too—for instance, even your local credit union.

Credit card network

A credit card network processes the credit card transactions. Major credit card payment networks include Visa, Mastercard, Discover, and American Express. And in the case of Discover and American Express, the companies act as both the card issuer and card network.

Both of these company types are involved with all the credit card purchases you make. When you use your credit card, you’re borrowing money from the credit card issuer. The card network acts as the middle person to process the transaction.

How do credit card companies make money? 3 ways

Credit card companies make money in more than one way. So what are at least two ways credit card companies make money?

There are actually three main ways when it comes to how credit card companies make money. They include:

1. Interest charges

When you use your credit card, you’re borrowing money from a financial institution. If you don’t pay off your balance in full at the end of the statement period, your balance begins to accrue interest.

Credit card companies make the most profit from interest, particularly when the interest grows and compounds. Remember that $130 billion figure we mentioned in the beginning—the amount credit card companies charged consumers in 2022? Well, $105 billion of that came from interest alone.  

Unfortunately, this doesn’t come as much of a surprise. According to Experian, the average credit card balance rose to $5,910 in 2022. 

Furthermore, the average annual percentage rate (aka APR, or interest rate) on credit cards has recently reached record levels of over 24%. You can keep tabs on the latest figures through Investopedia.

That means the average American is carrying a relatively high balance, and paying a high APR on it.

2. Card user fees

Beyond interest charges, credit card companies also make money on the fees they charge cardholders. Here are a few of the common fees they charge:

Annual fees

Many credit cards don’t require an annual fee at all. However, companies often charge these on cards that come with significant sign-up bonuses or user perks such as cash-back and miles. 

The average credit annual fee is about $94. But keep in mind that high-fee premium cards bring this average up.

Balance transfer fees

A balance transfer is when you transfer the balance of one credit card to another card, usually to get a lower interest rate. When you transfer the money, you often pay a balance transfer fee. These fees often range between about 2-5% of the amount you’re transferring.

Cash advance fees

A cash advance is when you withdraw cash from your credit card account. It’s similar to taking out a loan, but you’re simply borrowing against your credit card balance. In addition to the interest you pay on these advances, many companies also charge a fee. 

These costs can quickly mount, since the average cash advance fee is 5% of the amount you withdraw. 

Late payment fees

How do credit card companies make money from late payments? Well, when you don’t pay your credit card bill by the due date (or at least the minimum payment), you’ll usually be hit with a late fee. In 2022, the average fee for late payments was roughly $32, and U.S. consumers paid a total of $14.5 billion in late payment fees. 

While credit card companies make the most profit from interest by far, late fees take second place on the consumer side of things.

Foreign transaction fees

Foreign transaction fees may be charged on transactions made in a foreign currency or through a foreign bank. This fee is meant to cover the costs associated with currency conversion and processing payments through global networks. 

If you’re a frequent traveler, it’s worth looking for a credit card that doesn’t charge foreign transaction fees.

3. Merchant processing fees

In addition to the fees they collect from consumers, credit card companies also collect money from the merchant or retailer who accepts credit cards. These fees, known as interchange fees, cover the cost of processing the transaction. Often, the profits are split between credit card issuers and networks.

In 2022, the nation’s six biggest credit card companies collected a combined $31.9 billion in interchange fees.

Sometimes, small businesses charge an extra fee to use credit cards, and this is why. It costs them more to accept credit cards, so they have to weigh whether they can afford it without passing on the costs. 

Expert tip: Always read the fine print for your credit card

When you get a credit card, it can feel easier to just throw away that huge terms and conditions sheet that comes in the envelope. But the last thing you want is to be blindsided by unexpected fees. So take the time to understand the terms you’re agreeing to!

For instance, research what late payment fees and interest charges you may face if you miss a credit card payment. Before you travel, make sure you’re aware of any foreign transaction fees.

If you’re trying to use your credit card to get money at an ATM, understand what cash advance fees you’ll face for the privilege. And if the card is subject to an annual fee, keep track of when it will renew.

Knowledge is power, so knowing the terms of your credit cards will help you maximize the value you receive from them.

How to reduce credit card costs

There’s no doubt that credit card companies make a lot of money from consumers. But there are plenty of ways to reduce the amount you’re paying to credit card companies.

In fact, if you use your credit cards responsibly, none of your money has to go to credit card companies at all.

Pay your balance in full every month

The best way to save money on your credit cards is to pay your balance in full every month. When you do this, you don’t have to worry about paying interest. You’re only paying back the amount you actually borrowed. 

As an added bonus, paying off your balance doesn’t just help you save money on interest. It also reduces your credit card utilization, which can boost your credit score.

It’s all about using credit cards wisely.

Pay your bill on time each month

Another way to avoid giving your money to credit card companies is to pay your credit card bill on time each month. Doing so can help you to avoid late fees and maintain good credit.

And if you’re having a difficult time remembering to pay your bill, you can set up an automatic payment, so you never have to worry about it. (Although even if you set up autopay, make sure to review your history periodically to make sure your purchases look right.)

Negotiate your interest rate

Credit card interest rates aren’t set in stone. If you find that a lot of your monthly payment is going toward interest, call your credit card company and negotiate a lower rate.

It won’t always work, but it’s worth a shot. Here’s a script that you can use on your phone call.

Search for cards with no balance transfer fees

If you’re transferring your balance to help avoid paying interest, shop around for a card with no balance transfer fees. Depending on the size of your balance, this could save you a considerable amount of money.

Negotiate your annual fees

If you have a credit card that charges an annual fee, you may be able to negotiate with them to waive or reduce your annual fee. Never hurts to ask!

It’s smart to always weigh the annual fee against the rewards you’re getting from the card. If the fee amounts to more than the value of your annual rewards, it might be best to downgrade the card to a fee-free version, or close it.

Have an emergency fund to avoid cash advances

A cash advance is typically only used in the case of an emergency where you need cash immediately and don’t have another way to get it. And while these situations are often inevitable, having an emergency fund in place in a traditional bank account can help you save money. 

Rather than paying a cash advance fee and interest, you can earn interest on your emergency fund while it sits in a savings account, and then it’s there to protect you when you need it. 

Ask for a late fee waiver

If you lost track of time and got slammed with your first late fee, don’t despair! Many credit card companies will gladly waive them as a one-time courtesy. It helps if you have a history of on-time payments and a good relationship with the issuing bank.

Check your credit card statement regularly

Many of us have had a situation where we check our credit card statement, only to find something that shouldn’t be there. Sometimes it’s an honest mistake, and the credit card company fixes it, but sometimes it’s a fee that we weren’t expecting.

And in the worst-case scenario, it’s a case of identity theft where someone has used your credit card number. Checking your statement regularly can help ensure you aren’t paying for any fees or purchases that you shouldn’t be.

How do credit card companies make their biggest profits?

Credit card companies make the most profit from the interest charges they levy on cardholders. Even though credit card companies have a variety of revenue streams, this one stands out above the rest.

Thanks to sky-high annual percentage rates, credit card companies can earn a lot of money from users who don’t pay off their balances. But you can hack the system and pay zero interest charges by paying your statement balance in full each month!

Why are credit cards so profitable to banks?

Thanks to the triple-whammy interest stream of interest, consumer fees, and retailer fees, credit cards can be quite profitable and lucrative for an issuing bank. Even when you factor in the credit card rewards they pay as user incentives, the banks still come out ahead in profits.

Do credit card companies make money if you pay in full?

Yes, credit card companies can still make money even if cardholders pay their full balances each month. So how do credit card companies make money if their customers are all financially savvy?

While they won’t earn interest or late payment fees from those who clear their balances on time, credit card companies still have other revenue streams. These include the transaction fees they charge to merchants, annual cardholder fees, balance transfer and foreign transaction fees, etc.

What are at least two ways credit card companies make money?

Credit card companies use various strategies to generate revenue. But when you look only at their main sources, how do credit card companies make money?

The top two ways credit card companies make money are:

1. Interest charges
2. Merchant fees

This means that the biggest sources of credit card company income are split between consumer and retailer charges.

Now you know how credit card companies make money

Credit card companies make billions of dollars each year, primarily from their customers. Unfortunately, many people don’t realize just how much of their hard-earned money is going to their credit card company.

If you use a credit card, it’s important that you understand the advantages and disadvantages. It’s also important that you plan your finances and budget accordingly so you can pay off your credit card balances as soon as you can.

Luckily, following the tips above can help you to avoid unnecessary interest and fees and keep more of your money for other financial goals.

The post How Do Credit Card Companies Make Money? 3 Ways appeared first on Clever Girl Finance.

How do student loans work? If you’re seeking the answer to this question, you’re not alone. Student loans can be a useful way to fund your education and there are many types of student loans available for undergraduate students.

Many students look to loans as a solution to their cash flow issues, but it’s important to understand exactly how student loans work.

Especially since 43.6 million borrowers currently have federal student loan debt, and the average balance is $37,718. Finding the right product for you at the lowest cost can make a huge financial difference.

So, how do college loans work? What types of loans are available? And how do student loan interest rates work?

In this article, we’ll take a closer look at how student loans work, along with their interest rates, repayment options, limitations, and more. Once you’re armed with our guide, you can move forward with confidence.

How do student loans work?

Student loans are a type of loan available for borrowers to pay for education. You can secure student loan financing from the government or through private lenders. In either case, you’ll usually be expected to repay the loan (with interest on top) following your studies.

When you take out a student loan, the process will depend on the type of loan you are pursuing. But whether you are taking out federal or private loans, the purpose remains the same: funding your education.

Keep in mind that the loans you take out will need to be paid back within a specified time frame. Not only will you have to repay the loans, but you’ll also have to pay any interest attached.

In many cases, you will not need to start making loan payments until after your graduation. Plus, some lenders will even give you a grace period of a few months between your graduation and the start of your repayment.

That said, it’s important that you’re clear on your specific loan terms before signing on the dotted line of your agreement. This includes your loan’s interest rate and the repayment requirements.

Most common uses of student loans

There are a variety of expenses that college students generally face. How do student loans work when it comes to covering them all? Let’s look at a few common categories of expenses that students might use their loan money for.

Tuition and fees

This, of course, is the “big one.” With tuition costing thousands (or even hundreds of thousands) of dollars over your college career, loans can make it possible for you to get through the door in the first place!

Room and board

Whether you’re bunking up in a dorm or renting a spot off-campus, student loans can help you afford housing near your school. There’s nothing more quintessentially “college” than a cozy study pad! Plus, the “board” in “room and board” means your loan can cover things like your meal plan at the cafeteria.

Textbooks, supplies, and tech

Ever cringed at the price tag on a textbook? We’ve all been there. Student loans can help you get the books and other school supplies you need. If you don’t already have a good computer, you can use your loans to set yourself up with the technology you need to get your work and research done.

Other living expenses

Life doesn’t pause just because you’re hitting the books. Student loans can lend a hand with everyday living expenses, from groceries to bus fare. Good budgeting tips for college students will help you make the most of your money!

Student loans vs. scholarships and grants

As you dive into student loan financing, note that loans are very different from scholarships and grants. The main difference? You don’t have to repay scholarships or grant funds. But you will have to repay the student loans you take out, plus interest.

Scholarships

Scholarships are merit-based awards given for achievements, skills, or sometimes just for being you. They can come from your school, private organizations, or local businesses who want to support students in their community.

Grants

Grants are similar, but they are usually need-based instead of merit-based. Federal and state governments, as well as private organizations, may offer grants to students, with their eligibility based on their financial situation.

Of course, the ideal solution is to focus on scholarships and grants to fund your education. You might even be able to get a full-ride scholarship that covers all your college costs!

However, it’s more likely to get a partial scholarship that contributes a smaller amount toward your education. Thus, many recipients also need student loans to cover any gaps.

Types of student loans available

How does a student loan work from a logistical standpoint? To answer this properly, we’ll have to get into the different types of student loans.

The two main student loan options available are federal and private funding. Let’s take a closer look at both, so you know exactly how student loans work.

Federal student loans

Most people who get student loans start by applying for federal loans. Federal student loans often offer more appealing loan repayment terms. And in general, the interest rates are more affordable compared to private student loans.

That being said, there are different types of federal student loans you should be aware of:

1. Direct subsidized loans

A direct subsidized loan is made directly by the U.S. Department of Education. The government will offer you one of these subsidized direct loans if you can demonstrate a financial need.

How does this work? The government will pay all of the accrued interest on your student loans until six months after you leave school. You’ll then start making your principal payments and any applicable interest following this initial six-month period.

2. Direct unsubsidized loans

Direct unsubsidized student loans are available for students who aren’t able to demonstrate a financial need. They’re available for undergrads, graduates and professional students.

The main difference between subsidized and unsubsidized direct loans is that interest accumulates from the beginning of an unsubsidized loan. However, these loans still offer a low, fixed interest rate and flexible repayment terms.

3. Direct PLUS loans

With Direct PLUS loans, parents of dependent undergraduate students help cover the cost of their child’s undergraduate tuition. You’ve probably heard this type of loan referred to as a “Parent PLUS loan.” They can be a great option for parents who want to invest in their child’s education.

A similar Grad PLUS loan can also be an option for graduate or professional students who need loans to cover their education expenses.

Applying for federal student loans

If you want to take out federal student loans, find out if you are eligible through the Free Application for Federal Student Aid (FAFSA).

With FAFSA, you’ll fill out your financial information and your parents’ financial information. After looking at your numbers, the school will send you an award letter highlighting the type of financial federal aid you’re eligible for. This could include scholarships and grants, as well as student loans.

Private student loans

Private loans can help you make ends meet during school if you don’t have access to federal loans or have already reached your cap.

How do college loans work from private lenders? Well, it’s pretty similar to taking out any other type of loan. You’ll borrow money from banks, credit unions, or online lenders, then repay it according to whatever terms are in your contract.

Eligibility for private student loans is often based on creditworthiness  and a credit check will determine this. Since many college students haven’t established credit yet, they usually need a cosigner with good credit who is willing to help them get the loan.

Potential downsides of private student loans

If you work with a private lender, you may have less flexibility in terms of repayment. While the federal government might be willing to work with you on forbearance or a forgiveness plan, private lenders are less flexible.

The terms of a private student loan can also vary dramatically. You may need to undergo a more stringent application process with a cosigner to take out private student loans. They usually look at things like your (or your cosigner’s) credit history and credit score.

The biggest downside of a private student loan is you may face higher interest rates. Since private student loans can have variable interest rates, this could be as high as 18%! Beyond that, you might be required to start making payments while you’re still in school.

With that, it is important to shop around before committing to a private student loan lender.

How much can you borrow in student loans?

There is a limit to how much money you can borrow in federal student loans. Here’s the breakdown:

Independent undergraduates

Independent undergraduates may be able to borrow up to $12,500 per year in federal student loans. Only $5,500 of that can be subsidized.

Dependent undergraduates

Dependent undergraduates may be able to borrow up to $7,500 per year in federal student loans. But only $5,500 can be subsidized.

Graduate students

Graduate students may be able to borrow up to $20,500 per year in subsidized loans.

Student loan limitations and key considerations

There are some other limitations to consider. First, with federal loans, the amount you borrow cannot be more than the cost of attendance determined by your school. Your school’s financial aid office should have this information.

Additionally, you are only eligible to take out federal student loans for 150% of the published timeline for your degree. For example, if you’re in school for more than 6 years to complete a 4-year degree, you wouldn’t be eligible for additional student loans.

If you’re unable to afford school with federal student loans alone, you’ll have some flexibility to borrow more money through private lenders. Each lender will have different limitations on how much you will be able to borrow.

Expert tip: Don’t borrow more than you need

Even if you qualify to borrow more money than you need to survive your years as an undergraduate, you should be careful about borrowing more funds than you actually require. The more debt you have, the more difficult it will be to repay down the line.

Enjoy your time at college, but maintain the mindset that student loans aren’t free money. It’s more like borrowing money from your future self. So if you can live in a cheaper apartment or buy textbooks secondhand, future you will appreciate it!

How does student loan interest work?

When it comes to interest, how do student loans work? Three key components will determine how much you pay back overall when you take out a student loan.

The principal

When you take out a loan, you’ll be required to repay those funds in full (unless you qualify for special circumstances). The principal on a loan is the base number that you owe to repay the lender without any interest.

Let’s say you borrow $5,000 a year for 4 years. That means your principal loan amount would be $20,000 total, before any interest is factored in.

The interest rate

Next, how does student loan interest work? Essentially, the loan’s interest rate is the premium a lender charges for allowing you to borrow the funds. The rate is applied to your principal balance.

Interest rates are always fluctuating, so there’s no simple answer for how much interest you can expect to pay. However, as of 2023, the average student loan interest rate was 5.8% among all existing borrowers (federal and private).

Unfortunately, interest payments can add up quickly. For one thing, interest on your loan may be capitalized, meaning that unpaid interest is added to your loan principal and compounds. In this scenario, debt quickly mounts.

The loan term

The final piece of the puzzle when it comes to understanding student loans is the length of the term.

With federal loans, the standard repayment term is ten years, but it can be extended to 25 years. Private lenders may imitate the ten-year term, set shorter terms, or allow longer spans of 20-25 years.

But remember, the longer you take to pay off your loans, the more interest you’ll accrue over time.

Example of how student loans work

The three numbers above determine how much the total loan costs. But what do they look like in real life?

For example, let’s say you took out $20,000 in student loans over the course of your education with a ten-year term and a fixed interest rate of 6%.

With that, you’d have a monthly payment of $222. If you repaid the loan in ten years, it would cost you $26,645.

As you can see, the interest on your loan can add up quickly.

What are your student loan loan repayment options?

So, how do student loans work when you’re planning how to pay back the money you’ve borrowed? You’ll need to create a repayment plan. As you weigh your options, it’s important to consider all the alternatives available to you. So let’s explore them now!

Loan forgiveness

There is an opportunity to have your loans forgiven if you took out federal student loans. The federal government offers several student loan forgiveness plans. Here are the most popular options:

1. Public Service Loan Forgiveness (PSLF)

The PSLF will forgive the remaining balance of your student loans if you make 120 qualifying monthly payments and work full-time for a qualified employer.

If you work for non-profit organizations or a government agency, then it’s possible that you qualify. Be sure to confirm your employer offers this program and that you qualify for it before assuming you’ll get it.

2. Teacher Loan Forgiveness

The Teacher Loan Forgiveness program is designed to reward teachers who work full-time in low-income elementary schools, secondary schools, or educational services agencies.

You may apply to have $17,500 of your federal student loans forgiven if you teach for five consecutive years in a qualifying school.

If you are considering either forgiveness option, find out more about the qualification details. Your loan officer will help you understand if you meet the forgiveness requirements.

Payment plans

The federal government offers a variety of repayment plans. The best option for you will depend on your personal situation. You can check out a loan calculator on the federal government’s website to explore your options further.

Here are the repayment options available for federal loans:

1. Standard repayment plan

With a standard repayment plan, you’ll pay the fixed amount you owe on your loan each month. If you keep up with these payments, you could pay your loan off in 10 years.

2. Direct consolidation loans

With a direct consolidation loan, you’ll repay your loan within 30 years. This type of loan works by combining two or more federal loans into a new loan. This new loan has a fixed interest rate based on the consolidated loans’ average rate.

3. Graduated repayment plan

A graduated repayment plan works on the basis that when you start your career, your income might be lower than after a few years of experience. The graduated repayment plan recognizes that and sets up the monthly payments accordingly.

Typically, you’ll start by making smaller payment amounts. After two years, your monthly payment will increase. Your payment will increase further every two years until you’ve repaid the loan at the ten-year mark.

4. Extended repayment plan

An extended repayment plan is suitable if your income doesn’t support a high monthly student loan payment. This option allows you to stretch out your loan obligation. Instead of repaying your loan in 10 years, you’ll have 25 years to repay the loan.

Although your monthly payments will be lower, this option will cost you more interest over the loan term.

5. Pay as you earn repayment plan (PAYE)

With PAYE, you’ll make monthly payments equal to 10% of your discretionary income. However, the payment would never exceed the amount you would have paid under the standard repayment plan.

If there is a balance left on your loan after 20 years, your debt will be forgiven. However, you might have to pay income tax on the forgiven amount.

6. Income-based repayment plan (IBR)

This is also known as the income-driven repayment plan. A large student loan payment can dramatically impact your monthly budget. You might even have trouble paying for the essentials with a student loan taking a large bite out of your income.

The income-based repayment plan will allow you to cap your payments at 10% of your discretionary income. This can be a relief if you’re struggling to put food on the table while making your student loan payments.

This is quite a popular option, so we break down everything you need to know about income-driven repayment plans here.

7. Income-contingent repayment plan (ICR)

With the income-contingent repayment plan, you’d pay the lesser of the following two options. Either you’ll make a monthly payment of 20% of your discretionary income, or it’ll be the amount you’d pay on a 12-year fixed repayment plan.

What to do if you can’t repay your student loan

For many college graduates, you only have a six-month grace period before you have to start repaying your loan. Even if you haven’t found regular work by this stage, you’ll often need to start paying back your loan regardless.

But how do student loans work if you don’t have the money to pay? Here are some things you can do:

Contact your loan provider

The first thing you need to do is to contact your loan provider. Being honest about your situation is the best way to learn about available options without getting deeper into financial difficulty. Find out if you’re eligible for any forgiveness plans, or otherwise, learn what options are available to you.

Apply for student loan deferment

Student loan deferment is a temporary pause in your student loan payments. Deferment is typically granted for specific reasons, such as returning to school, economic hardship, or unemployment.

You’ll have to reach out to your lender and complete a deferment application. It will usually ask for details about your circumstances and possibly supporting documentation to demonstrate your need.

If you’re approved, your loan servicer will specify the duration of the deferment period and any other conditions. For instance, interest may continue to accrue and add to your loan.

Switch to an income-driven repayment plan

Switching to a flexible repayment plan based on your income may be a possibility. Meaning the lower your income, the lower your student loan repayments. Bear in mind that it might take longer to pay back your debt if you’re not able to tackle your debt aggressively.

Tackle your budget

By slashing your expenses and increasing your income, you may discover there’s more room in your monthly budget to repay your student loans on time.

It’s never too early to learn about budgeting. In fact, using a college student budget will ensure you don’t borrow more money than you need during your studies.

Consider refinancing

Beyond repayment plans, student loan refinancing is also an option. By refinancing, you would take out another loan to cover your student loans. With your new loan, you would find a lower interest rate and terms that suit you better.

It is important to note that student loan refinancing is not the best option for everyone. But if you have private student loans with a high interest rate, then it is something that you should consider. You can also check out more advice for student loans and the best loan resources.

Is it worth it to get a student loan?

This is a very individual decision. Student loans can be a valuable investment in your future, opening doors to better job opportunities and higher earning potential.

However, it’s essential to weigh the costs (including interest) against the potential benefits of your chosen education path. Research the average salaries in your chosen field and consider whether you’ll be able to live (and pay your loans) comfortably.

How are student loans paid back?

Student loans are typically repaid in monthly installments. You’ll work with your loan servicer to determine a repayment plan that fits your financial situation.

How do you actually get student loans?

To get student loans, start by completing the Free Application for Federal Student Aid(FAFSA). The FAFSA determines your eligibility for federal student loans (and grants, too!). Once you receive your financial aid offer, you can accept or decline the loans.

If federal loans aren’t enough, you’ll need to complete separate applications with private lenders to get the remainder of the funds you need.

Why is it so hard to pay off student loans?

High tuition costs, constantly accruing interest, and unpredictable job markets can all make it difficult for borrowers to pay off their student loans. And life just likes to throw curveballs sometimes!

For many who are struggling, the key lies in understanding their available repayment options, budgeting effectively, and looking for ways to increase their income. Most importantly, don’t get discouraged or give up.

Articles related to debt and student loans

If you enjoyed this article on how student loans work, check out this related content:

• Should You Pay Off Student Loans Or Invest?
• Key Tips For College Student Credit Card Debt
• What Is Capitalized Interest On Student Loans?
• How To Avoid Student Loans: 7 Key Ways
• Should I Refinance My Student Loans?

Now you know how student loans work, is it the right choice for you?

A college education can help you move forward in your career. But student loans can be a drain on your personal finances for years. So, if possible, seek out ways to avoid taking on any student loan debt.

If this isn’t possible, then be aware of all the available student loan options so you make the best choice for your specific situation.

Student loans can be a good way to fund your education. Just make sure you fully understand student loans and their impact on your financial future before signing up.

The post How Do Student Loans Work? appeared first on Clever Girl Finance.

What is credit, how does credit work, and why is it important? When it comes to making big purchases like buying a home or financing a business, knowing and understanding your credit is super important! Find out all you need to know about credit here!

Your creditworthiness is used to determine your eligibility for “pay to use” services like your cell phone or your apartment rental. It’s also used to determine your interest rate on your credit cards and loans.

Some employers may even use your credit report as a determining factor when considering you for a job! Given how important your credit is, let’s get into how credit works.

What is credit and what makes up your score?

Your credit is essentially your ability to borrow money in the form of a loan or credit card at a specific interest rate based on your past borrowing and payment history. Your credit score is made up of several factors, including history, payments, debt to credit ratio, age of the debt and more.

That said, in order to full answer the question, “how does credit work?”, it’s important to know more about each of these different factors.

Credit history length

Your length of credit history is how long you’ve had credit for. If you’ve had an account open for many years, it’s usually better for your credit score.

It obviously takes time to build up a good credit history length, so this isn’t something you can immediately change. If you have no credit at all, you can start building the history length by opening an account.

Your credit history is a compilation of all credit cards and loans you’ve ever had. All the way back to that first credit card you signed up for in college in order to get the free t-shirt (been there, done that!).

It’s the history of how (well) you’ve paid your bills in the past, and it records the amount of cards you have, how much you owe, etc.

If you are new to building credit, you might have an insufficient credit history. But this can be remedied over time by mindfully applying for credit and paying your bills on time.

Credit mix

There are a lot of types of credit, including credit cards, mortgages, student loans, etc. So, your credit mix is how much of the different types of credit you have.

The Ascent from Motley Fool explains that having a good credit mix means a balance of both revolving and installment credit.

History of payment

History of payment is a very big factor that helps determine your overall credit score. It is how well you’ve paid back your debts over time, and it accounts for 35% of FICO scores as well as being important for VantageScore, claims Forbes.

So, if you’re wondering where to start with building good credit, paying on time is an extremely important thing.

Credit utilization (Debt to credit ratio)

Credit utilization is another very important thing for determining your credit score. It is also known as your debt-to-credit ratio, and it is essentially how much you owe, divided by the amount of available credit you have. Using more than 30% of your available credit can make your score drop.

So you want to be careful not to take on any debt that you don’t need to and pay off your credit cards and loans as soon as possible.

New credit

Any new credit cards or loans can affect your credit. If a hard inquiry (when your credit is checked for a loan or credit card) is made when you apply, it can affect your score.

However, Bankrate explains that new credit may also have a positive impact if it improves your credit mix or utilization.

So it’s important to be aware of how this can impact your score before you apply for anything new.

Two types of credit

So, how does credit work when it comes to the types of credit that exist? There are two main types, called revolving and installment credit. Here are the details.

1. Revolving credit

Revolving credit allows you to continue to borrow money on a revolving basis, even if you are currently paying the money back. The best example of this is a credit card, which allows you to make payments while simultaneously using the card. But be sure to learn how to use credit cards wisely.

Other examples of revolving credit include home equity lines of credit and personal lines of credit.

2. Installment credit

Installment credit is a fixed amount of money that you borrow and then pay back over time. You’ll make payments on it continuously until the amount is paid back. But you will pay back with interest.

A home mortgage is one of the best examples of an installment loan, and there are also student loans and other types of loans. Other examples of installment credit include car loans and personal loans.

How your credit score is calculated

So, how does credit work when it comes to your credit scores? In the US, there are 3 major credit bureaus: Equifax, Transunion, and Experian.

Their main job is to collect your credit information from various sources, aggregate them into a report, assign you a credit score based on their methodology, and make this information available to your potential lenders.

You’re assigned a credit score, a number typically between 300 to around 850. Your credit score basically reflects how well you’ve managed your credit cards and loans in the past. A good credit score is deemed as 700 and above.

There are two main credit scores used by these bureaus:

FICO score

The FICO score is the most popular scoring method. Factors used to calculate your FICO score include payment history, debt owed, age of credit, new credit/inquiries, and types of credit.

90% of the top lenders use FICO scores. Score range: 300 to 850.

Fico scores are extremely important to consider, but there is another main scoring method.

VantageScore

The VantageScore is another scoring model. It was created by the three major credit bureaus.

Factors used to calculate your VantageScore include payment history, credit utilization, type of account and age, and credit behavior. Score range: 300 to 850.

Expert tip: Credit isn’t everything

Your credit score does matter for a lot of things, for you as a borrower, from getting a mortgage to being approved for a new credit card.

However, it’s essential to remember that your credit score is just part of your financial picture. There are other things that matter just as much, like saving, investing, and retirement planning.

If you are trying to build your score and it isn’t where you’d like it to be, don’t worry. Focus on the things you can control by continuing to choose financial wellness, and your credit will eventually improve with this intentional action.

Key tips to build and maintain your credit

Now that you’ve answered how does credit work, let’s focus on the best way to build credit.

Building your credit

It’s a smart idea to try to improve your credit score as much as possible. It can help you getting the best interest rates on loans, credit cards, and many other types of debt.

Employers may even leverage your credit score as part of their background checks depending on the role you’ve applies for. Here’s what to do to make your credit score better.

Understand your current credit standing

In order to improve your credit score, you need to know your current credit standing. This is essentially the starting point when it comes to the best way to build credit.

So, what is your credit score? When was the last time you checked your credit? Is everything on your credit report documented accurately?

Furthermore, are you paying all your bills on time? Are you aware of any delinquencies?

You should be able to answer all of these questions about your credit at any point in time. Then, you’ll have a good idea about your credit status before you apply for any loans.

Knowing your credit score and what is in your credit history will also make you aware of credit fraud or identity theft of your personal information. Then, you can figure out what to do if your identity is stolen.

It is very important to catch this early because if you catch it too late and your credit has already been damaged, it can be a pain to fix.

In the US, you are entitled to a free copy of your credit report from each of the three bureaus once a year, according to USA.gov. Check out your free credit report at annualcreditreport.com.

It’s a good idea to obtain a copy of your current credit report from all three credit bureaus. After all, you want to know where you currently stand with your credit.

You need to understand what has been reported about you to the credit bureaus. That means information regarding your payments, how much you owe, your different account types, and any late payments or delinquencies.

Pay your bills and loans on time

Paying your bills on time is a big part of how credit works. It proves your creditworthiness to lenders and has a huge impact on your credit score.

If you are behind on any payments or have bills piling up, you should try your best to catch up as soon as you can. Call your creditors to create payment plans and set up new payment dates.

It’s also a good idea to set reminders for yourself for all your bills. Then you can make sure you don’t forget to make any payments in the future.

Build all your recurring payments (along with their due dates!) into your budget. Also, consider automating your payments.

Reduce your overall debt-to-credit ratio

You can do this by paying down debts and/or paying them off each month. Your overall debt load, as well as your percentage of credit utilization, affects your credit score. You can calculate your credit card utilization here.

Let’s say you have a credit card with a limit of $1,000, and you owe $950 on it; your utilization is 95%. High utilization can count against you because creditors use it as a gauge to see how likely you are to pay back what you owe.

You can also try to add to your credit limit and pay down debt at the same time to make your debt-to-credit ratio smaller.

Don’t close old accounts

So, how does credit work when it comes to your old credit accounts? Your credit card accounts make up a vital part of your credit history, so if you have accounts that show you’ve been paying your bills on time consistently, you’ll want to keep them as part of your credit history.

If you have accounts you’ve paid off, keep them open and make the occasional small purchase on them. Pay them off in full each month.

Monitor your credit

Many banks and credit card companies now provide free updated credit scores as well as daily credit monitoring. It’s worth looking into these services to stay on top of your credit score.

Maintaining your credit score

Once you finally get to a point where your credit is good, how do you ensure you stay there? By maintaining your score. Here’s how:

Pay off and avoid debt

Paying off debt shows your creditors that you are financially responsible, and avoiding it as a whole (especially credit cards) will give you fewer bills to pay each month. It will also allow you to focus on what really matters – building wealth.

So learn how to pay off credit cards fast and use your debit card for purchases.

Build an emergency fund

Your emergency fund is essentially your backup plan in the event the unplanned occurs. Having one means you won’t have to rely on debt to resolve your situation, which in turn means you can keep your credit utilization ratio low.

Save for retirement

Just like with having an emergency fund, over the long term, saving for retirement reduces and hopefully eliminates any reliance you have on debt. A solid nest egg for your future self means you won’t need to finance the costs of your lifestyle come retirement.

So consider different tips for retirement and start planning.

Check your credit frequently

Checking your credit frequently will inform you of what’s being reported, this way, you can take any necessary actions to rectify inaccuracies if they occur.

Apply a credit freeze

It’s also a good idea to establish a credit freeze that prevents the opening of new lines of credit in your name. It can help protect you from credit fraud. If you are not applying for a new line of credit or loan anytime soon, it’s definitely something to consider.

Find out more about the process if you’re wondering, should I freeze my credit?

These are all things you should be doing over the long term. Establishing good financial habits ensures you avoid scenarios that will impact your credit.

3 Common credit myths

Now that we’ve gone over the question of what is credit, plus some ways to build your credit and stay in good standing, let’s dispel some of the myths people commonly believe about their credit.

Having a thorough understanding of these incorrect assumptions will help you make sound financial choices.

There are a number of myths going around about how credit works, including:

Myth: Holding a credit card balance is good for your credit

Wrong! Carrying a balance isn’t a great idea. Not only will you owe money, but you will also be paying interest.

That means the price of whatever you paid for on credit will cost you more money every month that you carry a balance.

You should strive to pay your credit card bill in full and on time every month to build and protect your credit score.

Myth: Checking your credit report will reduce your credit score

If you are applying for loans or lines of credit, there will likely be hard inquiries made on your credit report.

A hard inquiry for credit card applications or credit checks can cause a temporary dip in your score, but soft inquiries such as checking your credit score through credit monitoring tools will not impact your score.

Myth: Once a credit score is bad, it can’t be rebuilt

Your credit can be rebuilt over time if you focus on developing good credit habits and working through the issues on your credit report.

Things like paying your bills on time and in full, coming to agreements with collection agencies for any accounts that are delinquent, getting consumer credit counseling or coaching, etc., are all steps you can take towards rebuilding your credit.

What is a simple definition of credit?

A simple definition of credit is being able to borrow to pay for things and then pay it back at a later time. So your credit cards and any loans you obtain are all considered credit.

You can use credit for many good things e.g. to purchase an asset like a home that has the potential to appreciate. But that said, because you are borrowing money, it is a potential debt that has to be paid back, so you should use it with caution and with a plan.

What is a good credit score?

The general consensus is that a good credit score is 700 or higher. With a credit score like this, you’ll likely get approval for a loan at a good interest rate. An excellent credit score, on the other hand, is about 800 and higher.

How does credit build up?

Credit builds up over time and with good credit behavior. Paying off your debts on time, keeping accounts open, your credit mix, and other factors can help build up your credit.

It takes time and patience to build your score, so don’t expect overnight results.

However, you can consistently take steps to improve your score and make good money moves.

Is credit the money you owe?

Credit isn’t the money you owe, it’s the amount you can borrow and will need to pay back. Credit, however, has the potential to become money you owe, but only if you use it.

For instance, if you have a credit card that you can spend $5,000 on, then you have $5,000 worth of credit. But if you use some of it, then there is less that you can borrow.

What builds your credit score the most?

Your payment history over time builds your credit score the most. That said, there are many factors that contribute to credit.

FICO suggests keeping credit accounts open, using a low percentage of the credit available to you, and not trying to get too much new credit to start.

Articles related to the best way to build credit

If you enjoyed learning about how credit scores and credit works, then you’ll like these other blog posts!

• 27 Tips For How To Pay Off Credit Cards Fast
• The Advantages And Disadvantages Of Credit Cards
• Why Did My Credit Score Drop?
• How Do Credit Card Companies Make Money?
• Can You Pay A Credit Card With A Credit Card?

Learning how credit works can benefit you financially!

So, now that you know how does credit work, remember you should use credit wisely and to your advantage. That means using it to obtain a home loan, get a cell phone, sign a lease for an apartment, or for business financing (with a solid business plan).

Don’t use it to rack up credit card debt, which, over the long term, is to your disadvantage. Learn more about building good credit with our free course!

The post How Does Credit Work? Here’s What You Need To Know appeared first on Clever Girl Finance.

Pre-approved credit cards are one way that credit card companies attract new customers. These offers are typically sent by mail to potential cardholders who meet some minimum criteria for approval.

If you’ve ever received one of these offers, you may be wondering how it impacts your credit score. Or perhaps you are wondering what to do next. But first off, what does pre-approved for a credit card actually mean? Unsure what it means to be pre-approved or what to do if you are pre-approved? Keep reading!

What does pre-approved for a credit card mean for you?

Being pre-approved for a credit card means that based on certain criteria, you are likely to be approved for a credit card if you were to apply. This may also be referred to as pre-qualification. However it is not a guarantee.

In most cases, it simply means you have a minimum credit score and a good credit history. Sometimes the issuer asks you for more information such as pay stubs or annual income. You will still have to go about completing that application process to be approved for the advertised credit card.

Additionally, in most cases, a pre-approval is simply a form of promotional and marketing material. The purpose is to encourage you to apply for the credit card that is being offered. In some cases, you may be offered specific rewards for applying. It’s a tactic credit cards companies typically use to get new customers.

Keep in mind that getting a pre-approved credit card offer in the mail, by phone, or email does not mean that you have been fully-approved.

What is the difference between pre-qualified for a credit card and pre-approved for a credit card?

So what does a pre-approved for a credit card mean versus being pre-qualified? Pre-approved vs pre-qualified credit cards are often used interchangeably but they do have one slight difference.

Pre-approval credit card offers

A pre-approval offer is initiated by the credit card company e.g. American Express, Discover, Bank of America, Chase etc.  When you’re pre-approved for a credit card, it typically means that the credit card company has reviewed your credit history and financial information in more detail and has determined that you meet their criteria to apply for the card.

Pre-approval often involves a soft credit inquiry, which does not impact your credit score. However, the issuer may still perform a hard credit inquiry when you formally apply for the card. In some cases they may run a hard inquirary on your credit score. They may also ask for additional information about your financial situation, such as your pay stubs or W-2 statements.

Pre-approved offers are more likely to result in an actual approval when you submit an application. However, they are still not a guarantee.

Pre-qualified credit card offers

Contrarily, a pre-qualified offer is an earlier step in the screening process. A pre-qualified offer is usually based on even more limited information about your credit profile, but does not involve a hard credit inquiry or other financial information.

When you’re pre-qualified for a credit card, it means that the credit card company believes you may be eligible for their card based on the information they have. That said, it’s not a guarantee that you’ll be approved when you officially apply.

Now you know how to decipher what pre-approved vs pre-qualified means the next time one of these offers come your way.

Expert tip: Only apply for a credit card if you are ready

While getting an email or letter that says you are pre-approved for a credit can be exciting, don’t be swayed into getting a credit card unless it makes sense for your finances.

Even if a credit card offers a ton of rewards, it can still lead to a life of debt. If you do get a credit card, make sure you are responsible with it and pay it off in full each month to avoid getting into debt.
How to get pre-approved for credit card offers

Credit card issuers and other lenders have the ability to access information on your credit report in order to offer pre-approval to you.

Consumer reporting companies, or credit bureaus, provide a list of qualifying persons who meet the company’s requirements for pre-approval. Obtaining this information is considered a soft inquiry on your credit report.

In general, if you maintain a good credit score and have a good credit history, you’ll increase your approval odds. You don’t have to wait for an offer to be pre-approved for a credit card. Most credit card companies allow you to check to see if you are pre-approved for their credit cards by completing a brief application on their website.

By filling out a short form with your social security number, information about your income, employment, and financial obligations, you can quickly find out if you qualify.

A pre-approval offer isn’t necessary to apply for a credit card, though. You can simply apply for a card directly on a card issuer’s website.

Do credit card pre-approvals impact your credit score?

When a credit card issuer does a soft inquiry on your credit report to check for pre-approval, it does not negatively affect your credit score. These types of credit checks also do not lower your credit score. You will be able to see them in your credit history if you request your credit report from any of the three main credit reporting bureaus: Experian, Equifax, and Transunion.

However, when you actually apply for a credit card, a hard inquiry is made. This does lower your credit score. Because of this, you want to limit the number of hard inquiries made on your credit.

Before applying for a credit card, check to see if you are pre-approved on the card provider’s website. This will help you avoid having a hard inquiry that lowers your credit score for a card that you don’t qualify for.

What to do if you get pre-approved for a credit card

If you get pre-approved for a credit card, the first thing that you should do is decide if a credit card is right for you.

You may not have been thinking of applying for a credit card prior to receiving the promotion, so don’t feel pressured to apply. If a new credit card isn’t right for your financial situation, simply toss the offer away (securely). There are many advantages and disadvantages of credit cards, so make sure it makes sense for you before you apply.

If you are in the market for a new credit card, follow the instructions provided in the offer to apply. Remember, applying requires a hard inquiry on your credit. So be sure that you are truly interested in applying.

What to consider before applying for a credit card

A credit card can be a big financial commitment. Before applying for one, there are a few things that you need to take into consideration.

Interest rates

The annual percentage rate (APR) is the interest rate that you will pay on any balance that you carry from month to month. The higher the rate, the more money you’ll have to pay above your principal balance amount.

Credit card interest rates can get extremely high, so it’s important that you know this rate before applying for a card.

Fees

Some credit card companies charge annual fees, foreign transaction fees, and late fees. These are charges that you should be aware of and prepared for as a potential cardholder.

You don’t want to be blindsided by additional fees on your bill. Take the time to review these fees beforehand so that you can learn how to avoid them.

Rewards

Credit card companies are always competing on incentives to attract new customers. Some offer cash back incentives, while others may offer travel points. Look up the different rewards offered by the credit card company.

Take these into consideration when you’re deciding which credit card offer to apply for. Ideally, you’ll want to apply for a card with rewards that are advantageous to you.

Your current debt load

A credit card should always be handled responsibly. Without a solid financial plan to manage your money, you can easily find yourself in mounds of credit card debt.

If you already have a significant amount of debt, applying for a credit card may not be the best option for you. Instead, work to pay off your debt first.

Does pre-approval mean you will get approved for a credit card?

Pre-approval for a credit card increases your likelihood of approval, but it doesn’t guarantee it. Pre-approval is based on a soft credit inquiry and preliminary information.

Final approval, on the other hand, depends on a more comprehensive assessment, including a potential hard credit inquiry and the credit card issuer’s discretion. Your financial situation can change between pre-approval and formal application, impacting the final decision.

Can you be denied a pre-approved credit card?

Yes, you can be denied a pre-approved credit card. Pre-approval is based on a preliminary assessment and soft credit inquiry, but the credit card issuer may still decline your formal application after conducting a more thorough review, including a hard credit inquiry. Factors like changes in your financial situation or discrepancies in your application can lead to a denial despite pre-approval.

Is getting pre-approved a good thing?

Getting pre-approved for a credit card is generally a good thing. It indicates that a credit card issuer believes you meet their initial criteria, increasing your likelihood of approval when you formally apply. However, it’s not a guarantee of final approval. You should still consider factors like interest rates, the annual fee, and any rewards before deciding to accept the offer.

Will accepting a pre-approved credit card hurt my credit score?

Accepting a pre-approved credit card normally include a soft credit check, which does not hurt your credit score. However, in some cases, it can involve a hard credit inquiry.

A hard inquiry can temporarily lower your credit score by a few points. However, this impact is usually minor and can be offset by responsible credit card usage over time.

More articles related to credit

Found this article on what pre-approved for a credit card means? Check out this related content!

• Does Checking Your Credit Score Lower It?
• Does Refinancing Your Car Hurt Credit?
• How To Use Credit Cards Wisely
• 27 Tips For How To Pay Off Credit Cards Fast

Make smart choices if you are pre-approved for a credit card

Now that you know what pre-approved means for a credit card, you can figure out your next steps. Remember that getting pre-approved for a credit card does not guarantee that you will be approved. It also doesn’t mean that you even need to apply. It is simply an offer to apply that you can choose to accept or decline.

If you no longer want to receive these offers, you have the legal right to opt out of this marketing at OptOutPrescreen.com. Note that it can take up to 60 days before you stop receiving these offers.

Ultimately, credit cards can be used responsibly to build your credit. If you’re interested in learning more about building or improving your credit, enroll in our free credit course!

The post What Does Pre-Approved For A Credit Card Mean? appeared first on Clever Girl Finance.

Debt can make finances difficult and cause stress. That being said, it’s important to prioritize paying it off so you can focus on your other goals. The good news is that if you have the right mindset and you use these tips, you’ll understand how to pay off credit cards fast.

However, to get in the right frame of mind, it’s worth understanding why credit card debt is so bad.

Why debt can hurt your finances

Having debt from credit cards that you are unable to pay in full each month can impact your financial goals.

The worst-case scenario is bankruptcy (find out about types of bankruptcies). 

However, even the smallest debt owed to your credit card issuers can limit your ability in terms of how much you save and, in turn, how much you are able to invest. This is because your money goes towards making credit payments each month.

If you are able to create a debt repayment plan and knock down your credit card balance fast, you can then apply the money toward your goals. You can save and invest more and achieve your financial goals quickly.

How to pay off credit cards fast

Wondering how to pay off credit cards fast? Below is a list of 27 ways to rapidly knock down your credit cards (or other debt).

For the biggest impact, use a combination of these tips in your debt-repayment strategy. If you stay focused for a few months, you’ll be surprised by the difference these small changes will make in paying off your debt.

So here are our key tips on how to pay off your credit cards fast:

1. Develop the right money mindset

Your mindset is your thought process and the way you think about things. Having a positive money mindset when it comes to paying off your debt is really important because you empower yourself and tell yourself that you can get rid of it.

Studies even show there is power in positive thinking, according to U.S. Preventative Medicine. Paying off debt can take time, so you want to make sure you are mentally prepared.

Tell yourself things like “I can do this,” “Being debt-free is worth it,” and “Goodbye debt.” Not only should you tell yourself these things, but you need to believe them as well.

2. Create a budget for your spending

Creating a budget is your next step on how to get out of credit card debt. Here is an example of a budget to help you out!

Develop a spending plan each month that accounts for not only what to do with savings, bills, and debt payments but also any other spending, like unplanned trips to Target. Don’t add to your debt for these things.

A spending plan will help you be more mindful of your purchases. It’ll also provide a reference to compare what you planned to spend to your actual charges.

Consider checking in on your planned versus actual spending at least weekly. Doing so will help you take the guesswork out of what adjustments you’ll need to make to stay on track.

Then, you can avoid taking on additional debt.

3. Tally it all up and determine how much debt you owe

A big step in how to lower credit card debt is to determine how much you owe, to whom, and the associated interest rates. Bankrate’s credit card payoff calculator is a good place to start. I’m going to be honest and tell you that you can’t bypass this process.

It’s essential to figure out how much debt you have in total in order to create a plan of attack. And if that means breaking out your favorite glass of wine, playing some Beyonce, or calling up your bestie to get it done, then do it!

4. Create a financial plan; be patient and consistent

Get a financial plan in place to set goals, reduce credit card debt, save, invest, and create a good life for your future self.

While a budget is also necessary, it’s not the same as a financial planning process. A plan takes into consideration not just your bills and debt but where you want to be in the next few years and how much money you need to save and invest to get there.

A financial plan is a great way to figure out how to get rid of debt and help you stay focused and stay aggressive in becoming debt-free.

Give yourself time to make progress and start trusting the process to achieve the results you want. You might only be making a little progress at the start, but it’s all worth it.

5. Create a $1,000 emergency fund

It’s really important to have an emergency buffer even while paying off debt. If something happens, you can use this cash instead of going back to your credit cards.

Plan to contribute to your emergency fund a little bit at a time, e.g., $100 a paycheck. Also, consider opening a dedicated savings account, such as Christmas Clubs, for your emergency fund. It will help you to avoid accessing the funds until necessary.

6. Work out the fastest way to pay off credit card debt

You will eventually repay your debt by making your minimum credit card payments. As long as you don’t add any more charges and your interest rate remains fixed.

But it’s essential to create your own debt reduction strategy. Creating your own debt strategy will allow you to get out of debt sooner.

Two popular options for a debt management plan are the debt avalanche and debt snowball strategies.

With the debt snowball method and debt snowball worksheet, you’ll tackle your smallest balance first. As you eliminate one source of debt, you’ll move your minimum payment plus any extra funds set aside for debt repayment across to tackle your next-smallest debt. Your snowball will keep growing as you tackle larger and larger debts until you’re finally living debt free.

The debt avalanche vs snowball method is focused on the interest rates attached to your debt. In the debt avalanche method, you’ll start by paying off the loan or credit card debt with the highest rate before moving on to the next highest interest rate. It has an avalanche effect on the remaining amount you owe.

Take a look at your individual debt pile, and work out whether the snowball or avalanche method will be the fastest way to pay off credit card debt in your situation.

7. Stop all spending on credit

Once you decide you are done with debt, you need to be REALLY done with debt. Not making room for debt in your life means using your debit card instead and no more spending on credit unless you have to make payments that require a credit card. And in that case, you should be paying off those charges in full each month.

Otherwise, grab your Ziploc, put in your credit cards, fill it with water, and throw it in the freezer!

Sometimes using your credit card is safer than using a debit card. Especially when it comes to online shopping fraud protection and travel protection. In this case, be sure you build that spending into your budget.

This approach is the fastest way to pay off credit card debt simply because when you stop increasing your debt, the only place for it to go is down.

8. Consolidate your debt into lower interest rate payments

You may be wondering, is debt consolidation a good idea for you? You can consolidate your debt into one monthly payment by transferring the balances from your different credit cards and loans to a new single credit agreement that has a 0% Annual Percentage Rate (APR) or very low introductory interest rate.

These lower interest rates will help you reduce the amount of interest you are paying back. Keep in mind a debt consolidation loan only makes sense if you can pay off your debt within the time frame of the low introductory rate.

Depending on your credit score and the amount of debt you have, you may want to consider transferring your credit card balance to a 0% APR card.

However, be careful when taking this route because you’ll need to pay off your balance before the promo rate expires.

Otherwise, the rate can skyrocket, and you will end up paying costly interest on your debt. So, if the 0% APR offer is for 18 months, you need to figure out if you can afford to pay it off within that amount of time.

Also, if you do transfer your balance, commit to not using the existing card (or even close it!). The last thing you want to do is have another credit card lying around, especially if you have a shopping addiction.

9. Consider a balance transfer card

Part of your debt consolidation plan may be to apply for a new balance transfer credit card offering 0% interest. Balance transfers let you move your debt to a new credit card in place of the old one. (First, find out how do balance transfers on credit cards work.)

There is a balance transfer fee associated with the debt you’re moving across to your new card issuer. After all, credit card companies want to make money off the deal.

If you want to know how to pay off credit card debt fast, then chances are you might be in a rush! But be sure to read the fine print very carefully so you understand exactly how your balance transfer card works.

You also want to make sure you have a good sense of how the interest is applied. Look out for higher interest rates kicking in once the intro period has expired.

10. Pay more than the minimum payment

Whether you have a personal loan, auto loan, or credit card, your lender will specify the minimum payment you must make each month. But this is often a very small amount.

Paying more than the minimum saves you money on monthly interest payments, which in turn will help you with how to use credit cards wisely, in addition to how to pay off credit cards fast.

Make it a goal of yours to pay as much as you can each month towards your debt to reduce the amount of overall interest you’ll be paying back to your creditors.

11. Reduce the number of credit cards you own

A key tip on how to lower credit card debt is to reduce the number of credit cards you have. You don’t need 5-10 credit cards that are tempting you to spend money you don’t have.

Everyone is different, but most people have at least three credit cards, according to Investopedia. Credit cards can be useful when used correctly.

As long as you can learn how to stop spending money, having three cards allows you to carry two cards and leave one in a safe place at home.

However, you should have a rainy day fund so you don’t have to rely on your credit card if an emergency pops up.

12. Use non-retirement or non-emergency savings

Got money sitting in a savings account earning little or no interest? You might want to consider using those funds to pay down your debt.

Why?

Well, if you look at the big picture, you’ll see that the interest you are paying on your credit card is not worth the pitiful interest rates you’re earning on your savings account.

Once your debt is paid off, you can put the money you would have otherwise made on high-interest credit card payments toward savings.

Caveat: If the money you have set aside is your emergency cash, it’s important not to touch this in case of an unexpected expense cropping up.

13. Sell stuff you no longer use

You can make some quick cash by getting rid of things you don’t use.

For instance, electronics, clothing, shoes, and accessories you’ve never worn or no longer wear.

You can use online sites to make your sales, like eBay, Facebook Marketplace, and Poshmark. Alternatively, check out your local consignment stores.

Tip: Price your items competitively and review the feedback of your potential buyers very carefully before you sell.

14. Start a side hustle

Are you good at a particular craft? Do people compliment you on your skills all the time? When it comes to how to pay off credit cards fast, maybe it’s time you start charging for those skills by starting a side hustle to earn some extra income.

If you’re a pro at baking, crafting, graphic design, etc., why not earn some money with your talents and apply it to your debt?

15. Get a part-time job

If running your own side hustle is not your cup of tea, consider getting a temporary part-time job until your debts are paid off. Be sure to remind yourself why you are working the extra hours – because you’ve been eager to learn how to pay off credit cards fast and get rid of your debt.

Choosing one of the best work from home jobs could be a great way to earn some part-time income.

16. Cut cable

Cutting cable can also save you a lot of money each month. If you’re not an avid sports fan, you might not miss cable at all. There are also tons of cable alternatives.

Consider switching to an online streaming service like Netflix, Hulu, or Amazon Video (included with Amazon Prime) to save some extra cash until your debts are paid off.

17. Lower your cell phone plan

Cell phone plans can get crazy expensive, especially when it comes to data. Try calling your service provider to see if there are any specials or offers they can give you for being a loyal customer.

Otherwise, consider downgrading your plan to one that costs less. It will lower your monthly expenses so you can put more money towards debt payoff. It may even help you learn how to spend less time on your phone.

18. Take lunch to work every day

Eating out every day adds up, especially if the average lunch is $10 to $15 dollars.

Instead, plan your lunches for the week based on what you have at home, or try these cold lunch ideas. Groceries are less expensive overall than takeout.

Budget meal planning is a great way to get creative and reduce your food spending, which can add up quickly. You can also check out our 30-day meal planning challenge for some motivation!

19. Skip the movies and nights out for a couple of months

Movies and nights out also add up. Don’t want to give up going out? Then skip the ridiculously priced popcorn and beverages at the movies and plan to skip the alcohol on nights out.

These items are heavily marked up, and you can put that money towards your debt instead.

20. Carpool with co-workers

Do you have any co-workers who live close by? See if you can set up a carpool schedule to save money on the amount of gas you purchase each week and put those savings toward your debt.

Carpooling saves money in the long run, and it doesn’t require much extra effort.

21. Cut down on your grocery spending

Saving a few dollars off your bill by frugal grocery shopping can go towards your debt repayment. Do you really need all those ice cream flavors?

Before you hit up the grocery shop, make sure you have a list and a full stomach. This way, you don’t get sidetracked by buying what you don’t need or by wanting to buy something to eat right away while you are there.

22. Cancel unused memberships at the gym

If you barely go to the gym, why waste money on a subscription that you could use against your debt? Love working out? Try working out at home or outdoors and see how you feel!

There are so many amazing and free workout videos on YouTube. Plus, apps like Nike Training Club and Nike Run Club offer free workouts as well!

23. Put any extra money you make like tax refunds and bonuses toward your debt

Those refunds and bonuses can make a huge impact on your debt and help you gain momentum to pay it off. But maybe you’ve been waiting all year to treat yourself. That’s okay, but think of how much happier you’ll be with no debt.

Plan to put most of that extra cash against your debt and learn how to pay off credit cards fast.

24. Contact a credit counseling service

If you’re really struggling with how to lower credit card debt, it may be worth speaking to professional credit counselors. They can help you come up with strategies to pay down your debt faster.

A credit counselor may negotiate on your behalf with credit companies to get you a lower interest rate and make your situation more manageable.

If you want to reach out to a credit counselor, the best place to start is by understanding how to find the right counselor. The Federal Trade Commission explains you can look for reputable counselors at universities or credit unions and check out resources such as your state consumer protection agency for complaints, in addition to other background checks.

25. Build up a cash cushion

A lack of a financial buffer to cover an unexpected cost can contribute to credit card debt. That’s why it’s important to build up a cash cushion to avoid creating new debt when these situations come up.

A cash cushion can be separate from your emergency fund, and it can cover things like variable or one-time expenses or anything that you forgot to budget for.

If you’re wondering, “How much should I save each month?” review your last twelve months of spending. Identify the total amount of unexpected expenses you charged on credit. Use this as your initial cash buffer goal.

26. Automate your payments

Learning to automate your finances can help with your debt freedom journey.

However, it’s important you pay more than the minimum. Figure out your debt payoff plan, then budget your payments to be automatically transferred for that amount.

For example, let’s say you have an additional $200 a month to pay toward your debt. Set up an automatic payment of $200 every month to knock down your balance fast.

Automating your payments will prevent you from paying your bill late and keep you on track toward becoming debt-free!

27. Find accountability partners

Getting an accountability partner is one way to ensure you don’t slack on your new responsibility of debt payoff, which will allow you to achieve your short term savings goals as well as more long-term goals.

Their job is to assist you along your journey, motivate you, keep you grounded and focused, and help you prioritize your goals.

Expert tip: Pick a few ideas and get started

There are a lot of ways to pay off debt. But to avoid overwhelm, remember this: the most important thing is to make a plan and a budget.

From there, you can decide on a couple of ideas that you want to pursue, such as reducing the number of credit cards you own and carpooling to work.

Choosing a few things to do and getting started is better than not doing anything at all because you don’t know where to begin.

What are the best 3 ways to pay off credit card debt fast?

The best 3 ways to pay off credit cards fast include using the debt avalanche or the debt snowball method or earning more money to put towards debt payoff.

The first two are methods you can use to determine the order you pay off your debt. The avalanche method involves paying the debt with the highest interest rate first, and the snowball method involves paying the smallest debt first.

But another idea to add to these is to make more money by trying some unique side hustles or asking for a pay raise and using all the extra money to get rid of your debt that much faster.

What is the fastest way to pay a credit card bill?

The fastest way to pay a credit card bill is to find one method to use for debt payoff and stick with it. If you spend too much time deciding on what is the best method and you never get started, it wastes valuable time.

You can choose any method or idea for paying off debt. Just make sure that you really are focused on it, and you’ll see progress.

How do you pay off $2,500 in credit card debt fast?

The best way to pay off $2,500 in credit card debt fast is to earn some extra money. $2,500 might seem like a lot, but if you take on a temporary side job or do some freelance work, you can likely pay it off in no time.

So earn some quick cash and get rid of that debt!

Articles related to how to pay off credit card debt fast

If you liked learning about the various ways to pay off credit cards fast, check out these articles next!

• Key Tips For College Student Credit Card Debt
• How To Use Credit Cards Wisely
• The Advantages And Disadvantages Of Credit Cards
• 5 Tips To Stop Paying Credit Card Debt And Stop Worrying About It!

Now you know how to pay off credit card debt fast!

Implementing one, some, or all of these 27 tips will definitely get you well on the way to learning how to pay off credit cards fast.

You might start out only being able to afford small amounts, but those amounts really do add up. Every single dollar you pay counts and will make a difference toward staying out of debt. Don’t forget to build your repayment plans into your budget and track your progress.

Remember, you are doing all of these things for a reason, and that is to get and stay debt-free, so keep thinking about that – it will be well worth it in the end. Focus on the good and keep track of your progress, and you will succeed!

The post 27 Tips For How To Pay Off Credit Cards Fast appeared first on Clever Girl Finance.

Credit cards might be incredibly convenient, but the weight of accumulating credit card debt can lead to overwhelming stress. So if you’re struggling to get out of credit card debt, know that there are ways to break free from its grip. If you have the right tools, it’s possible that you can stop paying credit card debt and stop worrying about it.

Here, we’ll delve into practical strategies, such as the debt avalanche vs snowball methods, to help you regain control.

Additionally, we’ll explore frequently asked questions about what happens if you are late on payments, or stop paying credit card debt, and what protections you have.

Ultimately, you’ll learn to stop paying credit card debt and stop worrying about it. Financial peace is achievable no matter your current situation!

Five tips to stop paying credit card debt and stop worrying about it

Are you sick of the debt stress and anxiety that come with credit card debt looming over your head?

If so, it’s time to take control of your financial situation, stop paying credit card debt and stop worrying about it. These are five actionable tips to help you with debt and additionally, you’ll regain your peace of mind:

1. Choose a specific payoff method

When tackling credit card debt, the first step is to choose a specific payoff method. There are two popular approaches to consider: the snowball method and the avalanche method (more on those below).

Both methods have their advantages and disadvantages. The snowball method offers quick wins and psychological motivation, while the avalanche method focuses on saving money by targeting high-interest debt.

Consider which approach aligns better with your personality and financial goals. You might even choose to combine elements of both methods for a customized approach that suits your preferences.

If you’re unsure which method to choose, calculate each approach’s potential savings and timeline. Thinking this through can help you decide which path to take based on your financial priorities and also personal core values.

2. Get another job

If you’re committed to debt payoff, getting another job can significantly boost your income. It doesn’t have to be a full-time commitment – even a part-time job, weekend side jobs, or freelancing can help you generate extra funds. If you use this money solely to pay off your credit card debt, you’ll be debt-free before you know it.

In addition, taking on extra work can help you pay off debt faster and even provide a way to develop new skills and broaden your network.

If you find opportunities that align with your skills and interests, you’ll be one step closer to paying off debt and building your skillset, setting yourself up for future opportunities.  

3. Have a written plan

A written plan is a powerful tool to help you on your debt payoff journey.

How does this work? List all of your debts, their interest rates, and minimum payments. Then, decide on a specific monthly amount you can allocate towards paying off this debt.

Having a clear plan keeps you accountable and motivated.

Creating a spreadsheet or using one of the best budget templates can be a helpful way to organize your financial information and track your progress. Update the spreadsheet regularly to monitor your debt payoff journey and then stay on top of your financial goals.

4. Set a goal date for payment

Setting a (realistic) date for when you want to be debt-free gives you a clear target to work towards. Having a deadline creates a sense of urgency and helps you stay focused on your mission. If you can visualize the moment when you’ll make that final payment, it can help you feel more connected to that end goal.

A great way to do this is by breaking down your larger goal into much smaller milestones.

For example, you could set a goal to pay off a certain percentage of your debt within three months. Achieving this smaller milestone will provide a sense of accomplishment and will then reinforce your dedication to becoming debt-free, allowing you to keep on going.

5. Get your spending under control

One of the most effective ways to stop paying credit card debt and stop worrying about it is to prevent accumulating more debt. So assess your spending habits to see where you can cut back, or even try a no spend month.

Create a budget that allocates funds to necessities and debt repayment while limiting unnecessary spending. It might help to switch from credit cards to cash to put a stop to buying things you don’t really need.

When starting out, to gain a clearer picture of your spending, try tracking all of your expenses for a month. Categorize your spending into essential categories like housing, transportation, groceries, and discretionary spending.

Doing this can reveal areas where you might be overspending and provide opportunities for cutting back.

Expert tip: Stop paying credit card debt and stop worrying about it by celebrating milestones

Paying off debt, no matter how you do it, is a huge accomplishment. You should definitely celebrate your victories along the way.

Whether it’s treating yourself to a small indulgence or simply acknowledging your progress, these celebrations reinforce your commitment to becoming debt-free. They provide positive reinforcement and motivate you as you continue on your journey. Consider setting up a reward system for yourself.

For instance, for every debt milestone you achieve, treat yourself to something you don’t normally buy or spend money on. This not only provides motivation but also helps you balance debt repayment with enjoying life along the way.

Different debt pay-off approaches

As noted above, there are two main debt pay-off approaches: the snowball method and the avalanche method. Here is a little bit more about both, so you can decide if one is right for you:

Snowball method

This strategy involves tackling your debts from the smallest to the largest balances by paying more than the minimum payment to the smallest debt. While it might not be the most mathematically efficient method, it provides quick wins as you pay off smaller debts.

Additionally, as you eliminate each small debt, you gain a sense of accomplishment, which fuels your determination to tackle the bigger ones. You can try out this debt snowball worksheet to help you get started.

Avalanche method

With this approach, you prioritize debts based on their interest rates.

First, you make more than the required minimum payments to the debt with the highest interest rate, which can save you more money in the long run. So this method is ideal if you’re motivated by the idea of reducing high-interest debt quickly.

What happens when you quit making credit card payments?

When you stop making credit card payments it can have serious consequences and is not something to take lightly. If you are looking to stop paying credit card debt and stop worrying about it, missing payments is definitely not the way to go.

Let’s break down what could happen when you stop making credit card payments at different times:

30 days late

Missing a payment by 30 days can result in late fees and can even damage your credit score, according to CNBC. Even though it’s only 30 days, it’s still important to address this issue as soon as possible to minimize negative impacts.

If you do miss a payment, contact your credit card issuer right away and explain your situation. They might be able to work with you and offer you a solution that won’t hurt your credit score or result in too many fees.

60 days late

If you miss two consecutive payments, the situation escalates.

For instance, you might face increased late fees and the potential for higher interest rates, claims Capital One, making it even harder to catch up and pay off your debt.

In addition, your credit card issuer might start contacting you more frequently to collect overdue payments, which can be stressful.

90 days late

Reaching the 90-day mark without making payments can lead to the account being charged off, says Bankrate. A charge-off has a significant negative impact on your credit score and often results in debt collection actions.

At this point, your credit card issuer might sell your credit account to a collection agency, which will be tasked with trying to collect your debt.  

What should you do if you are late on making credit card payments?

If you find yourself late on credit card payments, instead of stopping payments and ignoring the problem, take these steps to regain control:

1. Assess the situation

First, it’s important to review your financial situation. You will want to start prioritizing your debts.

Then determine how much you can allocate to credit card repayment. Creating a detailed overview of your income, expenses, and outstanding debts will help you make informed decisions moving forward.

2. Contact your credit card issuer

Communicate with your credit card company as soon as possible. They might offer options to help you manage your debt, such as setting up a repayment plan, temporarily lowering your interest rate, or waiving late fees.

Being proactive and honest about your circumstances can lead to more flexible solutions. It’s always better to be upfront about things than to hide and pretend there isn’t a problem.

3. Negotiate new terms

Did you know that you can negotiate with your credit card issuer? It never hurts to ask! You might be able to secure lower interest rates or more favorable repayment terms, making it easier to pay off your debt.

Remember, credit card companies want to recover their money and are often open to finding arrangements that work for both you and them. 

Can I just ignore my credit card debt?

Ignoring credit card debt is not a solution. It’s actually a misconception that can lead to serious consequences. When you ignore your debt, you open the door to damaging your credit and even facing potential legal action.

Ignoring the problem will only cause it to worsen over time. How so? Interest and penalties compound over time, making your debt even more challenging to overcome.

Ignoring your debt only prolongs your financial stress and can limit your opportunities in the future. That’s why it’s so important to face your debt head-on and take proactive steps to address it.

What’s the worst that can happen if you stop paying a credit card?

If you stop paying a credit card, it can lead to several scenarios. For instance:

Creditors contact debt collection agencies

Your creditor might contact a debt collection agency and sell your debt to them. If this happens, it can damage your credit score and result in persistent collection attempts.

Debt collection agencies can be quite aggressive, and dealing with them can add to your overwhelm and stress.

Legal actions

If your debt remains unpaid, creditors might sue you for the owed amount, resulting in court judgments against you. This can lead to wage garnishment, property liens, and additional financial strain. Legal actions can have lasting implications on your financial well-being.

Bankruptcy

Prolonged neglect of credit card debt could eventually lead to bankruptcy, which has long-lasting consequences. Bankruptcy can impact your credit for years and make it more challenging to do everyday things, like get a loan or rent an apartment.

What protections do I have if I stop paying credit card debt?

If you stop paying credit card debt, you do have rights that you should be aware of. Actually, the Fair Debt Collection Practices Act (FDCPA) allows for consumer protections when dealing with debt collection which you want to be aware of:

Understanding FDCPA

The FDCPA regulates debt collection practices and aims to prevent abusive tactics used by debt collectors. It provides guidelines on how debt collectors can interact with you and how they must respect your rights as a consumer.

Prohibited practices

Debt collectors are prohibited from engaging in practices like harassment, making false statements, or using deceptive methods to collect debts. They are not allowed to threaten you, use abusive language, or misrepresent the amount you owe.

Consumer rights

It’s important to understand your rights under the FDCPA. You are always allowed to dispute a debt, and you can request validation, according to the Federal Trade Commission, and you can also file a complaint and seek recourse against a debt collector if you are worried that they have violated your rights.

How do I stop worrying about credit card debt?

Take these practical steps to get credit card debt out of your life for good:

Create a repayment plan

Develop a plan for how to pay off credit card debt fast. A clear roadmap can ease anxiety and give you a sense of control over your financial future. Break down your debt repayment goal into smaller ones.

For example, you could set a goal to pay off a certain percentage of your debt within a specific timeframe. Achieving a milestone provides a sense of accomplishment and reinforces your dedication to becoming debt-free.

Focus on financial literacy

By educating yourself about personal finance, you give yourself the ability to make informed decisions and prevent future debt. Learning about budgeting, saving, investing, and credit management can help you take control of your financial well-being.

Consider seeking out resources such as books, online courses (Clever Girl Finance has plenty, and they are all free!), and workshops that provide valuable insights into managing money effectively.

Consider debt consolidation or debt settlement

If your debt has become overwhelming, consider exploring options like, is debt consolidation a good idea or maybe choosing a debt settlement. These approaches can help you manage your debt more effectively and potentially lower your interest rates.

However, it’s important to thoroughly research and understand the implications of these options before proceeding.

Seek professional help

If you’re feeling overwhelmed, don’t hesitate to seek assistance from approved credit counseling agencies via the United States Department of Justice.

These agencies can give you guidance based on your unique financial situation. They can help you develop a repayment plan, negotiate with creditors, and provide strategies to improve your financial outlook.

Articles related to paying credit card debt

If you learned a lot from reading this post, check out these other articles about debt payoff!

• How To Stop Worrying About Money
• How To Pay Off Debt In Collections
• 10 Quick Tips To Reduce Credit Card Debt
• Key Tips For College Student Credit Card Debt

Yes, you can stop paying credit card debt and stop worrying about it!

Paying off or starting to reduce credit card debt can end the cycle of worry, and it’s within your reach. By taking proactive steps, you can gain control of your finances and build a debt-free future. Remember, every small victory along the way is worth celebrating – and your journey towards financial freedom starts today.

As you implement these strategies, you’ll conquer your credit card debt and gain valuable financial knowledge. Your efforts today to learn how to be better with money will pave the way for a more secure and confident financial future!

The post 5 Tips To Stop Paying Credit Card Debt And Stop Worrying About It! appeared first on Clever Girl Finance.

If you’re one of the households relying on credit cards to get through the end of the month, it might seem like you’re in an endless cycle of debt. Fortunately, even if you can’t pay off your credit cards immediately, you still have options, including learning how to negotiate credit card debt.

Credit card debt has risen to $1.03 trillion in the 2023 second quarter, according to the Federal Reserve Bank of New York. So if you have credit card debt, you aren’t the only one.

In this article, learn just how to negotiate credit card debt. Plus find out the different ways you can tackle the negotiation process. 

What happens when you don’t make your credit card debt payments?

If you have a very high credit card balance and have missed a few payments, your card company will likely reach out regularly.

If you fail to make minimum payments, you could be faced with late fees and a higher penalty APR. Missing credit card payments is getting a lot more expensive than it used to be, NPR explains.

If you don’t communicate with your credit card company, you could end up in default, resulting in your debt being moved to collections. This could hurt your credit score, making it difficult to get other loans further down the line. 

Negotiating your debt with your credit card lender can help you avoid facing default and may be the best way to get out of debt.

Credit card issuers know that when people are in a financial bind, unsecured debt from credit cards tends to be the last paid bill. They may be more willing to consider negotiating your debt so that they get some money back rather than having to sell your debt to a collection agency for pennies. 

Choosing a system to help negotiate credit card debt

Wondering how to negotiate credit card debt? There are three main ways that you can negotiate with your credit card company to either decrease your monthly payments or find a solution to help you tackle your debt. 

Hire a debt settlement company

One option is to hire a debt settlement relief company to help negotiate your debt on your behalf.

However, the Consumer Financial Protection Bureau explains that this option could be risky, as these companies ask for a high fee and don’t always deliver. Debt settlement companies can charge fees as high as 25% of the settled debt, according to In Charge Debt Solutions, which means you may end up owing more money. 

These companies claim they will negotiate with creditors to reduce the debt you owe, but they could leave you in deeper debt than when you started. If you’re considering a debt settlement company, be wary of any company that guarantees they can make your debt go away and charges you before they settle your debt. 

Consult a credit counseling company

Credit counselors advise you on your money and debt, helping you figure out a healthy debt management plan. Many credit counseling organizations are nonprofits with certified counselors.

If you’re finding it challenging to pay off your credit card debt, a credit counselor could help you come up with better budgeting and figure out the best way to negotiate your debt. Many will provide free or low-cost services, but they can charge a fee.

Be wary of any counselor who tries to push a debt management plan before they’ve taken the time to analyze your financial situation. 

Do it yourself

Another way to negotiate your credit card debt is to reach out to credit card issuers directly. While not all will negotiate with you, it doesn’t hurt to reach out and try.

One of the most common ways of negotiating is asking for a debt settlement or debt adjustment. This is when you pay a reduced amount in full to settle the debt. 

Before you start to negotiate or begin a debt reduction strategy, consider any possible consequences, especially as it will affect your credit score. And if you lower or defer your monthly payments, it could take you longer to pay off your debt.

If creditors accept your settlement offer, they will report your debt as paid-settled to credit bureaus, which can impact your credit report for up to seven years. 

How to negotiate credit card debt

Negotiating credit card debt might seem intimidating, but it doesn’t have to be. With some organization, you can easily reach out to your credit issuer directly. The worst thing that will happen is that they say no, and you are still where you left off.

Want to learn how to negotiate credit card debt yourself? Keep reading and follow our step-by-step guide.

1. Confirm your account balance

Before you start negotiating with a credit card issuer, it’s essential to have a clear understanding of your current account balance. Go over your credit card statements to get an accurate picture of the total debt you owe.

Confirming your account balance will provide you with a starting point for negotiations and help you set realistic money goals.

2. Figure out the type of debt settlement you want

There are a few different ways to settle credit card debt, each with its own positives and negatives. Some of the most common debt settlement options include:

Lump-sum settlement

In this approach, you negotiate to pay off a portion of your debt in a single payment. The credit card company agrees to consider your debt paid in full with this reduced amount.

Payment plan

Alternatively, you can negotiate a structured payment plan that allows you to pay off the debt over a set period of time. This can make the debt more manageable.

While it may take time to pay off your debt, it can be worth it in the long run.

Workout agreements

A workout agreement is an opportunity for a borrower and a lender to make a contract that changes the terms of the loan. This may happen if the borrower hasn’t been able to pay the loan.

You can keep this in mind as an option if you think that your lender would be willing to work with you.

Hardship programs

Another option to consider is a hardship plan. A hardship program may be possible if you are experiencing a financial struggle and can’t afford your credit card debt.

Experian explains that a hardship program with a credit card issuer may allow a later payment or lower the APR for the card for a time, among other things.

Be sure that you know exactly what you’re agreeing to if you decide to do this. Hardship plans often offer temporary help, but you will still need to pay back the money.

3. Find out if you qualify for relief

Before or during your call with your credit card issuer, ask them about any relief programs they might offer for individuals struggling with debt management. Doing this may help alleviate some of your debt stress.

Some credit card companies have hardship programs to help temporarily lower your interest rate or waive certain fees. This can be a great way to buy some time while working on a more permanent solution.

4. Contact your credit card issuer

Once you’ve decided on the type of settlement you’re aiming for, it’s time to contact your credit card issuer. You can usually find their customer service number on the back of your credit card or on your monthly statements.

Prepare by practicing what you want to say with a friend or family member. Make sure to have your account information ready when you call. 

5. Define the terms of your payment plan or debt solution

If you want a payment plan, be prepared to negotiate the terms.

Explain your financial situation honestly and propose a payment plan that you believe you can realistically adhere to. The credit card issuer could be willing to work with you to create a plan that suits both parties.

If you don’t want a payment plan but have another option in mind, like a lump sum payment, make sure you know exactly what you’re agreeing to first.

6. Review

After your initial conversation, don’t just wait for a response. Try following up with the credit card issuer to check on the progress. They may come back to you with a number or payment plan larger than you want to pay, so be prepared to renegotiate again. 

Persistence can show your commitment to resolving the debt and might encourage them to take your case more seriously. Make sure to keep the dialogue civil and respectful during the negotiation process. 

7. Get everything in writing

Once you’ve reached an agreement with your credit card issuer, getting the terms in writing is crucial.

This protects both parties and ensures that there’s a clear record of the agreement. Ensure the document includes details such as the settled amount, payment schedule, and other relevant information.

Expert tip: Make a plan for what to ask for when you negotiate your debt

When negotiating your credit card debt, make sure you are clear about what you want, whether that’s lower payments, a debt settlement plan, or debt relief. Be respectful and persistent while negotiating. 

It wouldn’t hurt to write down all of your questions and any ideas you have about debt repayment prior to speaking with the credit card issuer. You can also take notes as you talk with them, so you remember everything important that you discuss.

Keep in mind that settling your debt can impact your credit score so make sure it’s the best way to tackle your debt. 

Be aware of credit card debt scams

Unfortunately, people struggling with financial hardship can attract scammers. These scammers often offer quick fixes that sound too good to be true.

Always verify the legitimacy of any debt relief agencies or services before sharing your personal and financial information.

If something sounds fishy or too good to be true, it probably is. Watch out for red flags of debt settlement scams, such as unsolicited debt relief robocalls, requests for upfront payment, result guarantees, or a general lack of clear explanations about the debt settlement. 

Does negotiating debt hurt credit?

Yes, negotiating debt can hurt your credit score. That’s because creditors report any debt settlement to credit bureaus as paid-settled.

This tells other creditors that you weren’t able to pay off your credit in full, and it can stay on your credit report for seven years, states Lending Tree. 

What percentage will credit card companies settle for?

When learning how to manage credit card debt, the percentage that credit card companies settle for varies, but in most cases, it’s between 10% and 50% of the loan’s original value, Investopedia explains.

In some cases, according to Experian, you need to pay as much as 80% of the debt owed.

What percentage should I offer to settle debt?

A good rule of thumb for the percentage you should offer to settle the debt for is 30% to 50% of the original credit amount.

However, the amount that the issuer accepts will vary on several factors, including the total loan amount and how long you’ve had the credit card. 

How much does the average credit card debt settle for?

On average, credit card debt settlements cover 10% to 50% of the original debt amount, though this can vary.

Remember, though, that creditors are not obligated to accept an offer and reduce your debt, so you may end up having to settle for more. 

Is it possible to negotiate a credit card debt settlement myself?

Yes, you can negotiate a credit card debt yourself.

In many cases, you’ll need to offer a lump sum, so once you have enough set aside, you can contact your creditor directly and make an offer. 

Articles related to credit card debt

If you learned a lot from reading about credit card debt, check out these other great articles!

• Is Debt Consolidation A Good Idea?
• How To Pay Off Credit Card Debt Fast: 18 Tried And True Methods
• How To Get Out Of Credit Card Debt
• The Best Way To Get Out Of Debt For Good

Take charge of your finances by negotiating your credit card debt starting today!

Now that you understand how to negotiate credit card debt, you can take proactive steps toward regaining your financial wellness. By knowing how much you owe, deciding on the type of debt settlement you want, and being persistent, you can confidently reach out to your credit issuers.

Remember that open communication, honesty, respect, and persistence are key elements of successful debt negotiation. Overcoming debt and managing your money is a huge part of achieving success in life, and you can do it!

The post 7 Tips For How To Negotiate Credit Card Debt appeared first on Clever Girl Finance.

Ah, credit cards! They can be super helpful tools for managing your finances, but they can also leave you scratching your head in confusion and overwhelm. One common question that often pops up is this: can you pay a credit card with a credit card?

The answer is: sort of. Let’s dive into the world of balance transfers to get to the bottom of the question, “Can you pay off a credit card with another credit card?” once and for all!

Is it possible to pay a credit card with a credit card?

You cannot directly use one credit card to pay off another. But, there is a way to use a credit card to pay off another one called a balance transfer. So, how do balance transfers on credit cards work, you might ask?

A balance transfer involves moving an existing credit card balance from one card to another. The new card usually has a lower interest rate and sometimes even a promotional offer. 

Sound confusing? Picture this: you have a credit card with a balance that’s slowly but steadily accumulating interest. Meanwhile, you come across another credit card offer with a tempting 0% introductory APR (Annual Percentage Rate) on balance transfers.

A balance transfer means you can move your credit card debt to the new card, in a way paying off one credit card with another.

Now you know how to answer the next time someone asks, “Can you pay a credit card with a credit card?”

The benefits of a balance transfer

Let’s explore some of the advantages of a balance transfer. Why might you want to take this approach?

A lower interest rate

One of the primary reasons people opt for balance transfers is to take advantage of low or 0% introductory APR offers. By transferring your balance to a card with a low rate, you can save money on interest payments, helping you with how to manage credit card debt.

Consolidate your debt

If you have more than one credit card, each with an outstanding balance, a balance transfer can help you consolidate them into a single card. It can simplify finances (and who doesn’t want that!) by reducing the number of bills you need to manage each month.

Potential for long-term savings

Suppose you have a credit card with a high-interest rate, and you transfer the balance to a card with a lower or no interest rate.

In that case, you could potentially save a significant amount of money over time, especially if you pay off the debt before the promotional period ends.

New card benefits

Some credit cards offer perks, such as free airline miles and other travel rewards, cash back, or access to other loyalty programs. When considering a balance transfer, you can also take into account the rewards and benefits provided by the new card. This can add value beyond the balance transfer itself!

The negatives of a balance transfer

As with any financial decision, balance transfers also come with their fair share of drawbacks. Here are some cons to consider:

Introductory period limitations

Remember that enticing 0% APR? Well, it usually has an expiration date. The promotional period typically lasts anywhere from a few months to a year.

After that, the interest rate on the card reverts to the card’s regular APR, which might be higher than your previous card’s APR. Make sure to pay off your balance before the promotional period ends to avoid unexpected interest charges.

Balance transfer fees

While some credit card issuers offer promotional periods with no balance transfer fees, most charge a fee of about 3% to 5% for moving your debt from one card to another.

It’s crucial to factor in these fees when calculating the potential savings from a balance transfer. Online tools can help you calculate how much the transfer fee will cost. 

Impact to your credit score

Applying for a new credit card and initiating a balance transfer could impact your credit score (see more on that below). Opening a new account may cause a temporary dip in your score, and the overall credit utilization on your transferred card may increase, potentially affecting your creditworthiness.

Temptation to overspend

When you transfer your balance, you risk falling into the trap of additional spending. The new card may come with a higher credit limit, tempting you to use it for new purchases.

It’s important to stay disciplined and avoid accumulating new debt while you focus on paying off the transferred balance. Knowing how to stop overspending is half the battle.

Expert tip

Be intentional about learning how to build discipline and resist the temptation to accumulate more debt. Paying off a credit card with another one doesn’t mean you can spend irresponsibly.

Instead, focus on developing sound financial habits, like budgeting and reducing expenses.
By adopting a holistic approach to managing your finances, you can break free from the cycle of debt and work towards long-term financial stability.

Alternatives to paying a credit card through another credit card

It’s always best to explore various options before choosing how to pay off your debt. While paying a credit card with another credit card through a balance transfer is one avenue, it’s not the only solution available. Here are a few alternative methods that can help you navigate your credit card payments more effectively:

1. The debt snowball method

The debt snowball worksheet and method can help you tackle your credit card debt systematically.

Here’s how it works: you start by making the minimum payments on your credit cards except the one with the smallest balance. You allocate any extra funds towards paying off that card as quickly as possible. Once the smallest balance is paid off, you move on to the card with the next smallest balance, and so on.

One of the best things about this approach is that it provides you with a sense of accomplishment and momentum as you gradually eliminate your debt!

2. Increase your income

One effective way to accelerate credit card debt repayment is to find out how to increase your income. Consider taking up a part-time job, freelancing, or exploring side hustles to generate extra income that can be dedicated to paying off your credit cards.

3. Reduce expenses

At the same time, evaluate your spending habits. What are the areas where you can cut back? By adopting a frugal mindset and reallocating funds toward debt repayment, you can significantly reduce your credit card balances.

4. Opt for a low-cost personal loan

Can you pay a credit card with a credit card? Sure. But another alternative is understanding the pros and cons of personal loans.

Personal loans typically offer fixed interest rates and extended repayment terms, making them an attractive option. Unlike credit cards, personal loans often have lower interest rates. This can end up saving you money in the long run.

Other things to keep in mind when choosing how to pay a credit card

So you’ve read through the pros and cons above. Now can you pay off a credit card with another credit card?

Before making a final decision, there’s one more thing to keep in mind. And that is that you should think of the long-term financial effects of paying off a credit card with another one.

Here are some tips on how you can approach this decision to see if it’s right for you:

1. Think long-term when reviewing the fees

First, make sure to review the fees associated with the process. Some credit card issuers may charge high fees, which can impact the overall cost-effectiveness of the balance transfer.

Take the time to compare different offers and calculate whether the fees outweigh the potential savings from the lower interest rate. Remember to think long-term because all of those fees can add up over time.

2. Be mindful of the impact on your credit score

Opening a new credit card account will result in a hard inquiry on your credit report. This can temporarily lower your credit score.

If you have plans to apply for a loan or other forms of credit, it’s important to consider how the balance transfer may impact your creditworthiness and overall financial position.

3. Carefully review the terms and limitations

Third, carefully review the terms and limitations of the promotional period associated with the balance transfer offer.

Make sure you understand the duration of the promotional period and whether it allows you enough time to pay off the transferred balance in full. Failing to do so could result in higher interest rates once the promotional period ends, which might negate the initial savings you achieved through the balance transfer.

Can I pay a credit card payment with another credit card?

It’s the ultimate question, and the answer is yes. It is possible to pay a credit card payment with another credit card using a balance transfer.

However, while this option exists, it can be a costly method.

You need to keep in mind the fees, the new card’s interest rate, terms, and conditions. It’s essential to thoroughly understand the terms and any potential interest rate changes after any promotional period ends.

And remember, balance transfers should not be used as a long-term solution to reduce credit card debt. The main purpose of one is to help you consolidate your debt or take advantage of promotional interest rates.

It’s crucial to have a plan to pay off the balance before any promotional periods expire and regular interest rates come into effect.

What happens when you pay a credit card with a credit card?

When you pay a credit card with another credit card, you typically incur balance transfer fees. Balance transfer fees are charges credit card issuers impose for transferring the balance from one card to another.

For example, if you want to pay off a $1,000 credit card debt using another credit card with a 3% balance transfer fee, you would be charged $30 for the transfer. This fee is added to your new credit card balance, increasing the overall debt you owe.

Be sure to factor in these fees when considering using a balance transfer to pay off a credit card.

Does paying credit with a credit card affect your credit score?

Paying credit with a credit card can potentially impact your credit score.

When you pay credit with a credit card, it involves shifting balances from one card to another. Depending on the timing of the transfer and payment, both credit cards might show a balance before one gets fully paid off. This situation can have implications for your credit score.

Knowing how to calculate credit card utilization, which is the ratio of your card balances to your credit limits, is a big factor in determining your credit score. When you transfer a balance from one card to another, the old card may still show a balance until the transfer is completed and processed. Simultaneously, the new card will also reflect the transferred balance.

If both cards show balances, your overall credit utilization ratio can increase. Higher credit utilization ratios can negatively impact your credit score, as it may indicate a higher risk of being unable to manage debt effectively.

The good news is once the balance transfer is complete and you make payments to reduce the transferred balance, your credit utilization ratio will decrease. This can actually have a positive impact on your credit score over time!

Articles related to paying off a credit card

Can you pay a credit card with a credit card? Now you know! If you found this article about credit cards helpful, read these next!

• How Do Balance Transfers On Credit Cards Work
• How Do Credit Card Companies Make Money?
• How To Get Out Of Debt On A Low Income
• How To Use Credit Cards Wisely

A credit card with another credit card is possible but not always the best option

So, can you pay off a credit card with another credit card? The answer is yes, through a balance transfer.

However, it’s essential to carefully consider the pros and cons before taking the plunge.

A balance transfer can be the right move if it helps you consolidate debt, lower interest rates, and save money. But remember to factor in balance transfer fees, be mindful of the introductory period limitations, and be aware of how it could impact your credit score.

As with any financial decisions, understanding the details and weighing the pros and cons is the key to making an informed choice and learning to live richer!

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