This post is sponsored by Lexington Law Firm.
You’ve inserted the chip or swiped the plastic. That dreaded moment is now in your face–the beep of denial, rejection, and embarrassment. Your card is denied, so you try another one, and another. The realization that you’ve run out of credit can be terrifying, overwhelming, and seemingly impossible to remedy. It can feel like drowning. The boat is right there, but you can't climb back in and the swift interest currents keep tugging and pulling you farther away.
I don’t think any of us plan to use all of our credit, but sometimes life requires more financially than we can handle and the plastic is there. So, before you find yourself in this situation, let’s discuss what does happen when you run out of credit.
How Did You Run Out of Credit?
The first thing you want to do is make sure all the charges are legitimate, especially if you’re surprised by the news that you’ve run out of credit. Unless you’re like my sister and obsessively examining your statements each month, it’s vital to take a good look at your credit report and monthly statements to check for errors. If you find any marks on your report that don’t appear correct, consult Lexington Law Firm right away. They can help clean up mistakes on your credit report for a very affordable fee.
If you use all of your available credit, your credit score will be negatively affected. However, if you continue to make payments on time, it won’t completely ruin your score. To learn more, read my post: 12 Things I Didn’t Know Would Affect My Credit Score.
If you’re out of credit, budgeting is paramount, but also quite tricky. With credit cards maxed out, it’s likely that you’re being hit with high interest rates. If you’re only paying minimums each month, it could take decades to get out from under the principal debt.
You must initiate a strict budget for which the accounts with the highest interest are paid off first. If you’ve never made a late payment, your good credit score might enable you to open a new account with a promotion for 0% interest on balance transfers. Transferring as much debt to a 0% interest plan will help save a tremendous amount of interest payments and cut down the principal debt owed, making monthly budgeting more manageable. For example, if you owe $10,000 on a credit card with a 26.9% interest rate and you qualify for a card with 0% interest for 18 months on balance transfers with a limit of $3,000, transfer $3,000 to that card. Then, pay $166.67 ($3,000 divided by 18 months) a month. You won’t pay any interest on this amount, and by paying on time every month, it can help your credit score. Plus, by paying off the full amount within the promotional period, you can avoid paying additional fees.
Now, you still have $7,000 on that high-interest card. If you can repeat the process above on another account, that may be a good option, but be aware that opening multiple new accounts in a short time period will ding your credit score. If this isn’t an option, you can try calling your credit card company and asking for a lower rate. Again, it is SO important to pay your bills on time–doing so will keep your account in good standing, even if you’ve reached your maximum spending limit. Regardless of the rate you end up with, allocate a payment that is at least double the minimum amount every month.
Stay organized and do your math! Make sure you’re paying the right amounts each month to pay off accounts with 0% interest in full within the promotional period and throw all you have at the account with the highest interest first.
Once you dig yourself out from under credit card debt, the worst thing you can do is stop using your cards altogether and have accounts closed as a result. Credit doesn’t need to be an enemy; it just needs to be used wisely and with discipline.
Only use what you can afford to pay every month. NEVER make late payments. Cherish your oldest accounts–these allow for a long credit history and are good for your overall credit score.
For an example of how to keep your bills in order, visit this post: How to Build Credit as a Single Mom on a Budget.