So you’re finally getting serious about your credit card debt. That probably means you’ve started paying more than the minimum due each month in order to whittle your balance down to zero faster. Congratulations! You’ve made a first step in the right direction.
But a good payoff plan is about more than just throwing money at debt. It also includes knowing what kinds of credit pitfalls to avoid so that you aren’t slowing down — or even reversing — your progress.
Not sure what we mean? We asked several LearnVest financial planners to share some of the biggest mistakes they’ve seen people make while trying to pay off credit card debt. Here’s what they had to say — along with some advice for avoiding these common credit traps.
1. Using Credit Cards to Pay for Everything
This is a big one, because it can be second nature to a lot of people to reach for their plastic, whether they’re paying for a week’s worth of groceries or a pack of gum. But “it’s difficult to take steps forward when you are taking steps back,” says Dillon Ferguson. Translation: It’s twice as hard to pay down your balances when you keep adding to them each month.
The problem is that when you pay for every purchase with plastic, it’s more difficult to keep track of your spending. Then you’re stuck with a credit card bill at the end of the month that you can’t pay off in full.
The best ways to tackle this problem? For starters, set a budget (one that accounts for fixed and flexible expenses, as well as contributions to goals like retirement or paying off debt) so that you aren’t spending more than what you’re bringing in each month. “Without a budget, you really have no plan to pay off credit cards,” Ferguson says. “It’s like trying to drive across the country without a map.”
Then make it harder on yourself to ring up your credit cards. By that, we mean tricks like unlinking your card from online accounts (Seamless, we’re looking at you), unsubscribing from flash-sale emails or even rerouting your daily commute to avoid passing your favorite coffee or takeout spot, suggests Alex Call.
Phil Workman also encourages clients to use cash only to pay for the flex spending portion of their budget. He’s found this helps them “put more thought into where their money is going and whether they need to purchase something right then, or if it can wait,” he says.
Still can’t stop overspending? “Put your card in the sock drawer — or better yet, literally freeze your cards by putting them in water at the back of the freezer,” Call adds.
2. Treating Your Credit Card Like an Emergency Fund
One of the consequences of having zero emergency savings is that when a bum transmission or chipped tooth strikes, you have to turn to your credit card to bail you out.
That’s why it’s important to have at least one month’s worth of take-home pay in a rainy day fund as a starting point, says Call, before ultimately working your way to three to 9 months of pay. That way, when the next surprise expense pops up or you temporarily find yourself without a job or regular paycheck, you’ll have funds ready to dip into instead of having to go into debt.
3. Paying Off Too Much Too Soon
Yes, you read that right. While it may seem counterintuitive, you could wind up hurting yourself and your finances by throwing too much toward your balances.
“Credit card debt is such a heavy emotional burden that [people will] do anything to pay it off,” says Britt Barney. “If the minimum is $50 they’ll pay $300 without realizing that now there’s no cash left to spend on the day-to-day — so they’re right back to using their cards to fill the gap.”
Having to rely on your cards again after leaving yourself cash poor is called the “pay-spend-pay” cycle. The key to avoiding this trap is making sure that your debt payments are at a level that you can reasonably afford and that leaves you with enough to cover your other expenses and savings contributions. “It’s important to find a balance between debt pay-down and day-to-day savings that allows for sustainable spending and gets the debt paid off in a timely manner,” Barney says.
4. Paying Off Debt With Debt
When you have multiple credit card balances vying for your attention, taking out a separate loan to pay them off so you have just one monthly payment can seem like a simpler and more efficient practice. The problem, however, is if you haven’t addressed your spending habits, seeing a zero balance may tempt you to run up your credit cards again.
Workman recalls a client who took out a loan from her retirement account to pay off $50,000 in credit card balances — then went on to accumulate another $50,000 in credit card debt, which she paid off with a home-equity loan. “Her continued overspending was made easier by the fact that all her cards were paid off and she could run up the balances again,” he says.
Another potential downside is that even if you’re getting a loan with a lower interest rate than your credit cards, your new monthly minimum payment may be higher than what you can afford, leading to the pay-spend-pay cycle again, cautions Sara Wright. So if you do decide to go this route, it’s important to read the fine print and know both your interest rate and your expected minimum payment due each month.
Then, make sure you curb that spending. “It’s important to change your spending habits,” Wright adds. “Consolidating debt can be a great solution if you can commit to stick with a budget.”
5. Using Credit Card Perks as an Excuse for Spending
Another day, another offer in the mail for a credit card that has better perks than the ones you have. But before you succumb to that new offer, it’s important to figure out whether those benefits really will benefit you.
Take balance transfer offers. As with loans, a 0% balance transfer can work to your advantage when used responsibly — but not if it’s a quick fix to free up your credit, only to run it up again. In addition, these offers come with a lot of fine print that could end up doing more harm than good.
For instance, if you haven’t paid off your card by the time the 0% introductory offer expires, the credit card company could capitalize whatever interest you would have owed onto your remaining balance, says Ferguson. This could ultimately cost you more than if you’d never transferred the balance, depending on what your new APR is.
And if you are attracted to cards that dangle rewards points, miles or cash back in front of you, think about what the trade-off will be. For example, “receiving 3% cash back while paying 23% interest leaves you on the wrong side every time,” says Scott McKeever. “There is no reward a company can provide that tops being debt-free.”