Steps to Paying Off and Minimizing Credit Card Debt
Paying Off Credit Card Debt
Sometimes paying down credit card debt can seem like an insurmountable task. Below are three strategies for whittling away the pile of dollars you owe to credit card companies.
Three Strategies for Paying Off Credit Card Debt
Below are some strategies that are worth trying.
- Pay off small balances first.
Pay off the smallest balances first and then retire that card. Made popular by a prominent Christian financial adviser Dave Ramsey and often used by savvy borrowers, paying off the smallest balances first can help you put a quick dent in the amount you owe.
Once you pay off those small balances, add the monthly payment amount of those retired cards – since it’s already in the budget – to the payments on cards with the next highest balance. It might not make the best sense from a financial perspective, but many say the emotional satisfaction that comes paying off small balances makes it a worthwhile strategy. For another view, see CBS news video on How to Improve Your Credit.
- Pay off high interest cards first.
Pay off the cards with the highest interest rate next and then retire the card. This method makes sense from a dollars-and-sense standpoint. Then, you can add the monthly payment you were making to the credit card with the next highest interest rate.
- Pay more than the minimum amount due.
According to the Center for Responsible Lending (CRL), paying more than the minimum can save you as much as two dollars for every extra dollar you pay. Boosting your payments is even more effective for getting rid of credit card debt under rules put into play by the Obama Administration. For example, in the past, paying $100 extra could save you $164 in interest charges, but now that same payment amount can save you $224 under regulations passed by the Obama Administration.
Note that the bottom line is to pay off the debt and then to use only cash for future purchases. For more on this topic view Dave Ramsey’s Truth About Credit Card Debt. For more money tips and to listen to his show.
Can’t Pay it Off? Then Minimize The Debt
If paying your credit cards off isn’t in the cards for you right now, below are three strategies for minimizing debt.
1. Consider a balance transfer.
If you’ve got a card with a low interest rate that hasn’t been maxed out, consider transferring the credit card balances from the cards with the highest rates to the card with the lowest rate. Often, there are fees involved unless you take advantage of a special offer extended by the credit card issuer, so you’ll want to take those fees in account when determining the best course of action. It is important to know your credit score. For tips concerning your credit score, check out these resources: What is your Credit Score and Why Does it Matter and How Can I Improve My Credit Score?
2. Be wary of penalty rates.
A penalty rate means that your credit card issuer can raise your interest rate on your new balances if you miss a payment. If you get hit with a penalty rate, pay more than the minimum due. Doubling your payment could reduce your interest charges over the next four years by more than half, according to CRL. Get helpful tips on hidden credit card fees.
3. Avoid over-the-limit coverage.
Over-the-limit coverage is bad news for consumers because it means that if you exceed your limit, the credit card company will extend you additional credit. While that might sound like a good thing, there is a catch: The additional credit often comes at a very high interest rate. In some instances, credit card issuers charge borrowers as much as 4,215% APR (annual percentage rate) instead of rejecting the transaction. A better option would be to call your credit card issuer and ask them to raise the credit limit or to apply for additional credit elsewhere.
4. Get you annual credit report and credit score.
Ancient Wisdom says, “if you know the truth, the truth will set you free.” You should always obtain your annual credit report and credit score. This information can be obtained from the three major credit reporting agencies: Experian, Trans Union, and Equifax. You will need to give some personal information in order to receive this report. Request your annual credit report now. Knowing this information will help you as you navigate through your personal financial life.
- 6 Keys For Young Adults to Become Debt Free, by Dave Ramsey Life and Money
- Credit Cards and Understanding Your Credit Card Statement, U.S. Federal Reserve Consumer Information
Continued Learning Sites (Free Classes)
- Classes and Coaching, by Dave Ramsey
- How Real Life Revolves Around Money, by Dave Ramsey
- Debt Sucks – Build Wealth, Not Credit Score, by Dave Ramsey
- Making Financial Decisions, by Earlham Community School. The course covers basics for financial decision making.
- Liberty University’s Personal Finance, by Fundamentals
- Missouri State University’s Personal Finance, by Good for Beginners