If you’ve always paid your credit card balance in full every month, it can be disconcerting to find yourself carrying a balance for the first time. The balance might be the result of having a little more fun than your cash flow can accommodate, or it might be a consequence of something serious, such as a job loss or medical emergency. Either way, it’s a sign that you might need to re-evaluate your use of credit cards, and think about how to manage your new balance responsibly.
Here’s how to manage the debt and prepare for the next financial challenge.
Before you look to the future, it’s useful to look at how you got here. If your credit card debt was the result of a one-time event, consider what you can do to be more prepared next time. If you have an emergency fund, you’re less likely to need to lean on credit cards when disaster strikes.
But if your credit card balances have been steadily growing, to the point where you can’t cover them with your disposable income, it’s likely the result of overspending. Your expenses may have simply grown faster than your income, or perhaps you’ve developed some new habits that have pushed your lifestyle over the line into being unsustainable. Try tracking your spending for a few months. You may be able to free up cash by cutting back on restaurant meals, turning your thermostat down (or up, depending on the season) by a couple of degrees or choosing more modest entertainment options.
An even bigger source of savings may be recurring expenses, says Sean McQuay, NerdWallet’s resident credit card expert. “Do you still need cable?” he says. “Do you use your gym membership? Can you sell the spare car you never use? Can you downsize? Because those expenses are recurring, any cost savings will compound over time.”
You don’t have to reduce your fixed expenses or stop spending money on fun stuff forever. Temporarily spending less will give you more cash to put toward eliminating your credit card debt, and will buy you some time to think about how you can avoid getting into debt in the future.
» MORE: How to pay off debt
We’ve talked about reducing your spending, but there are some strategies for managing the debt itself that could help you pay it off faster.
Credit cards often have very high interest rates. When you pay your balance in full each month, however, you never actually pay any interest. Once you start carrying a balance, that changes. Interest begins to accrue, and a portion of your payment will go toward paying off the interest, rather than paying down your debt. If you make only the minimum payment, your payment might even be all interest, which won’t reduce your debt at all.
If you have good credit, you can often get a break from paying interest by applying for a balance transfer credit card. These credit cards give you a 0% annual percentage rate period for a specified length of time — often a year or longer.
Sounds dreamy, right? The catch is that most of these cards (but not all of them) charge a balance transfer fee of 3% to 5% of the amount you’re transferring. They might still be a good deal, but you need to calculate how much you’d save in interest and make sure it’s worth it.
McQuay has used a great trick for making sure he pays off a balance before the 0% APR period ends. He calculates how much he owes, and divides it by the number of months before the 0% period ends. Then he schedules automatic monthly payments to come out of his checking account, timing things so the balance will be completely paid off before the introductory APR period is over.
Of course, this works only if your balance is small enough to be paid off within the allotted time. But if your balance isn’t gargantuan, automating payments may help you wipe it out.
“One of my favorite things about credit cards is the financial freedom they provide, including the ability to carry debt on a card when needed,” McQuay says. And credit cards can help you out of some tight spots.
Despite this flexibility, it’s a bad idea to get in the habit of carrying significant balances on credit cards. Carrying a balance can lower your credit score, and you may not be able to get 0% balance transfer offers forever.
So it’s best to eliminate your balance and get back to a paid-in-full lifestyle as soon as you can.