It is not difficult to rack up credit card debt. Maybe you had some car trouble that was more than you could afford. Perhaps you are self employed and had a tough month. Or even more likely, there were some items you wanted that you couldn’t afford. (Don’t worry, we have all done it) So why is it so easy to build debt, but seems almost impossible to pay off? While I can’t help you pay off your credit cards, I can give you a few tips on how to pay them off more quickly.
o Call your credit card company and ask them to lower your interest rate: You may be surprised at the result. As long as you have not missed a payment, it is likely that they will review your account and if possible, lower your rate. Let them know you have been a long time customer. If they refuse at first, let them know you are being offered lower rates elsewhere and while you can move, and are tempted to, you would prefer to stay where you are. Be persistent, but pleasant. If they will not make an adjustment, look for a low rate balance transfer offer or low interest credit card.
o Look for a low balance transfer rate or low interest credit card: There are many online resources to compare credit card rates. While your credit score will have a big impact on the rate you are offered, you should explore which options are available to you. If you find a low balance transfer option, there are a few things you should be wary of.
1.) Make sure you know the term for the lower rate- it is usually limited to 6 months to a year.
2.) Ask if there are any consequences if you do not pay off the entire balance in the specified time- in some cases, the credit card company will charge you a retroactive rate if your balance is not paid off at the end of the term. This can be very costly.
3.) Ask what the balance transfer fee is- Most balance transfers I have encountered charge a 3% balance transfer fee.- This is not a problem, but is something you should be aware of.
4.) Do not miss a payment or make a payment late!- If you do, your interest rate will likely jump up to a very high rate.
5.) Do not make any additional purchases on this card- Typically, any additional purchases you make are charged the regular rate for the card. You do not have the option to pay this balance off first. Since this is the case, this purchase will continue to be charged interest until you have paid off the entire balance transfer!
o Determine how much you have charged on which card, and what the corresponding interest rates are: If you have 3 credit cards, one with $10,000 charged, one with $3,000 charged and one with $6,000 charged, do you know which one has the highest interest rate? By examining this, you will have a better idea of what you are working with.
Credit Card 1: $10,000 debt with an interest rate of 26%
Credit Card 2: $6,000 debt with an interest rate of 15%
Credit Card 3: $3,000 debt with an interest rate of 9%
o Pay off the card with the highest interest rate first: Once you have identified which card has the highest rate work on paying off the highest interest rate first. While you may be tempted to put the most money towards the card with a $3,000 balance, “just to get it paid off”, that is not the best option. Rather, you should put more money towards the credit card with the higher interest rate of 26%. While you are paying down the highest interest rate card, make sure you are making the minimum payment on your other cards. Why would I make this recommendation?
$10,000 * 26% = $2,600 of interest you will pay each year
$3,000 * .09% = $270 of interest you will pay in each year
By paying off the highest rate card first, you could save yourself thousands of dollars in interest payments.
Let’s say over the course of the year, you are able to pay off $3,000 in debt in addition to your minimum payments. By putting that $3,000 towards the higher rate card, paying your balance down to $7,000, the interest you will owe next year on that card will be $1,820, or $780 less than the prior year. If you had put that same $3,000 towards your 9% card, you would only be saving $270!
While debt can be frustrating, there is often a simple solution to the problem. If you need personalized assistance in building a plan to get your debts paid off, contact Guide My Finances. We are happy to help!