How to avoid defaulting on your credit card

Consider all your options before you miss your next payment. (iStock)

The coronavirus pandemic has put a strain on millions of Americans. With spiking unemployment rates and businesses being forced to close or cut hours, many people in the U.S. may be struggling to keep up with their minimum debt payments and wind up defaulting on credit cards.

Defaulting on your credit card can damage your credit and cause your account’s interest rate to go up, so it’s essential to take steps to avoid that situation. While credit card forbearance is available for borrowers who have no other options to avoid credit card default, there are a few opportunities for paying off credit card debt before you get to that point.

1. Credit card consolidation through a personal loan

Debt consolidation loans are personal loans that you can use specifically for paying off credit card debt.

If you’re close to defaulting on your credit card, using a personal loan to pay it off can reset the clock on your payment situation. It can also provide more structure to your repayment plan and potentially even save you money if you qualify for a lower interest rate.

Visit an online marketplace like Credible to shop around and compare rate offers based on your credit history.

SHOULD I USE A PERSONAL LOAN TO CONSOLIDATE DEBT?

Keep in mind, though, that depending on your repayment term, your new monthly payment may be higher than the minimum payment on your credit card. If your problem is that you can’t afford your monthly payments, using a personal loan to consolidate debt may not work.

Use a personal loan calculator to run the numbers for your situation.

2. Open a balance transfer card

Balance transfer credit cards allow you to achieve credit card consolidation by using one credit card to pay off another. These cards also offer introductory zero percent APR promotions, which you can use to pay down your credit card debt interest-free — it can also reduce your minimum payment, making it more affordable.

Depending on the card, you could get a balance transfer promotion for up to 21 months. Depending on the length of your promotion, how much debt you have, and your ability to pay it off, you could save hundreds of dollars in interest.

Two things to keep in mind: first, moving a balance from a card with a high credit limit to a card with a lower one could increase your credit utilization rate, which could hurt your credit score. And second, these cards charge a balance transfer fee, which can range from 3%-5% of the transfer amount. But in many cases, the interest savings outpace that upfront cost.

Visit an online marketplace like Credible to compare balance transfer card options.

PROS AND CONS OF BALANCE TRANSFER CARDS

3. Utilize the snowball or avalanche repayment methods

If you have multiple credit cards and get to the point where you can afford to make more than the minimum payments, consider using the debt snowball method or the debt avalanche method.

With both approaches, you’ll make just the minimum payment on all of your credit cards except for one, which is where you’ll apply for your extra payment. Once you’ve paid off that balance in full, you’ll take the amount you were paying on the card and apply it to the next card on top of its minimum payment. You’ll continue this process with each of your credit cards until you get rid of your credit card debt completely.

The only difference between these two methods is which cards you target first. With the debt snowball method, it’s the card with the lowest balance, and with the debt avalanche method, it’s the card with the highest interest rate.

DEBT SNOWBALL VS. DEBT AVALANCHE: WHAT'S THE DIFFERENCE?

What to do if you’re out of options

If a personal loan, balance transfer card, or one of the debt payoff methods won’t work for your situation, contact your credit card company and ask about its credit card forbearance program.

Many credit card issuers will allow you to pause your payments for a few months while you get back on your feet financially.

If that’s not enough, consider consulting with a credit counseling agency. Credit counselors can provide much-needed advice and information about how to proceed. They can also help you set up a debt management plan, which can help manage your debts.

HOW DOES THE DEBT SNOWBALL METHOD WORK?

Through a debt management plan, you’ll make one payment to the credit counseling agency, and it will make payments to your creditors directly. The counselor may also be able to negotiate lower interest rates and payments with your credit card companies.

These plans typically last three to five years, and you’ll need to pay a modest one-time fee to get started and a relatively low monthly fee throughout the plan period. However, in the right situation, it can be a good way to avoid bankruptcy, which can wreak havoc on your credit score.

Whatever you do, take some time to research and consider all of your options before you make a decision. Just know that there are options to avoid credit card default.