Paying Off Credit Cards

With the “Credit Crisis” going on, we’re all thinking about money.  Need to pay off some debt?  If you’re like me, you have multiple credit cards and tend to carry a regular balance.  You may have some other debt or loans out there that you want to pay off, too.  (Sub-prime mortgage, anyone?)

I won’t take credit for this one, since the advice has been out there for some time.  But, paying off higher interest rate credit cards first will have the biggest impact on your debt, and keep the most money in your wallet, rather than your financial institution’s wallet — they’re getting bailed out by the government anyway.

I know what you’re thinking: “I pay as much as I can on ALL my cards, that’s the best I can do.”  WRONG!!!

Here’s a simple system to help bring down your debts as fast as possible, without putting too much strain on your monthly budget.

Information Gathering

We need to start with some basic information about your debts…

  1. Take all your credit cards, loans, and other debts, and total up all the money you pay to them now each month.  If you only pay the minimums, add $20, $50, or whatever extra you can afford.  We’ll call this your Budget Number — it’s the amount of money we know fits in your budget.
  2. Next, take all those same credit cards, loans, and other debts, and total up all the Minimum Payments.
  3. Now, subtract your Minimum Payment Total from your Budget Number.  We’ll call this difference your Paydown Amount.
  4. Finally, take that list of all your loans, and put them in order, starting with the Highest Interest Rate first. Don’t pay any attention to the balances — it doesn’t matter if your highest balance credit card, or the biggest loan is at the bottom of the list — it’s the interest on each dollar that hurts you, not the fact that it’s debt.  In fact, if two cards or loans have the same interest rate, put the SMALLER BALANCE FIRST ON THE LIST.

You now have all the information to systematically pay down your debt, as fast as possible, and paying the least amount of interest on it.

The Method

For most people, this isn’t going to make much sense, but, it really is the best solution.  And, if you stick with it for a few months, you’ll see your credit card balances drop, and once you pay off that first debt, the others will drop even faster.  Here’s what you do:

  1. Pay ONLY THE MINIMUM PAYMENT on all your debts… except one.
  2. On the debt with the highest interest rate, pay the minimum payment PLUS YOUR PAYDOWN AMOUNT. This is very important: highest interest rate, NOT highest balance!
  3. Once you have paid off the highest interest rate debt, ADD THAT LOAN’S MINIMUM PAYMENT TO YOUR PAYDOWN AMOUNT — THIS IS YOUR NEW PAYDOWN AMOUNT.
  4. Repeat at Step 1, and continue with the next highest interest rate debt on your list.

That’s it… Oh, and the less additional debt you ADD, the faster this work.  I can’t stress it enough, so I’m going to say it again: IGNORE THE BALANCES, FOCUS ON THE INTEREST RATE.  And, if you can get some of those “0% Interest on Balance Transfers” – take advantage, but don’t use the card once you do! (See “Gotchas” below.)

For those with nothing extra…

Hopefully your Budget Number is bigger than your Minimum Payments — even by a little bit.  If you’re only paying the Minimum Payment on all your debts each month, and can’t afford more, look into a Debt Consolidation Loan.  At least you’ll be able to improve your cashflow situation, just don’t add more to your debt!

Credit Card “Gotchas”

I do have to add some additional information here, because not knowing can really get you into trouble.  It’s very important to pay attention to these to keep your credit card debt safely under control.

  • All credit cards have multiple rates.  These are usually the rate for charges, the rate for cash advances, and the Default Rate — which comes into play if you miss a payment — and often a special rate on balance transfers from other cards.  LOTS of gotchas about rates.  Read on…
  • The Default Rate is usually VERY high — often 25% or more — so don’t miss payments.  The other thing to be aware of, is depending on the card’s terms, your rate can get jacked up to the Default Rate if you miss a payment on A DIFFERENT CARD OR DEBT. Yes, that’s right, miss a payment on your MasterCard, and your Visa can jump to HUGE interest.  Get behind on your mortgage, same deal.  Don’t do it.
  • ALL cards will make you pay off lower interest balances before higher interest ones.  For example, you get a card with a 0% balance transfer rate — so you transfer $1,000 to the card.  Then you make a single $10 purchase, at the normal 18% rate.  You’ll have to pay the entire, $1,000 off, all while you’re paying 1.5% per month on that stupid $10 charge.  KEY TIP: Don’t buy stuff on a card with alot of low-interest debt on it!
  • TIP: Call and ask your credit card company for a lower rate.  Believe it or not, sometimes they’ll give it to you, usually because you qualify for it, but they aren’t going to help you out if they don’t have to.
  • TIP: Don’t cancel a credit card until you’ve paid it off.  This is really bad for your credit rating.
  • Pay attention to variable rates!  Sometimes the card’s rate changes based on some published value.  Keep an eye on it each month, especially if the card is close to your

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