Friday, August 12, 2022

What Credit Card Should I Pay Off First

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Make A Budget To Send Extra Money To Creditors

Should I pay off credit card debts first or save?

If you want to get out of credit card debt quickly, paying more than the minimum payment is essential. Once youve saved up enough money for an emergency fund, youll want to pay as much as possible on your credit card balances. The best way to do this is to make a budget so that you can limit spending and prioritize debt repayment.

There are many different ways to budget. One strategy is the 50/30/20 method, which allocates 50% of your income to needs, 30% to wants, and 20% to either savings or debt repayment. But you may decide you need a more detailed budget to ensure you have money for debt repayment. If so, you can make a budget that outlines where each dollar of income will go, putting as much money as possible to debt repayment. The Consumer Financial Protection Bureau offers a simple budgeting worksheet, which is a good place to start.

Whatever approach works best for you, make sure youve got a budget that helps keep your spending under control this way youll have a substantial chunk of cash to send to creditors each month.

Balance Transfer Your Existing Credit Card Balance

Top tip

Make sure you pay off your debt before the 0% introductory deal ends, otherwise you might have to pay a high rate of interest on the remaining debt.

One option for borrowers with existing credit card debt is to move it to a 0% balance transfer credit card.

These cards offer a period in which no interest will be charged on that debt. This means every penny of your repayments goes directly towards reducing the size of your original debt.

Youll usually need to pay a fee to transfer your debt over usually around 3% of the balance transferred . So if your outstanding balance is £1,000, it could cost you £30 to switch.

These cards are usually only an option if you have a good credit rating.

If you dont qualify for a 0% deal, look for a card with as low a rate as possible . But remember to look at the balance transfer interest rate, not the APR .

Find and compare balance transfer cards on the MoneySavingExpert website

How To Use A Credit Card: Best Practices Explained

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Editorial Note: The content of this article is based on the authors opinions and recommendations alone. It may not have been reviewed, approved or otherwise endorsed by the credit card issuer. This site may be compensated through a credit card issuer partnership.

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Whether you’ve been using credit cards for years or you’re applying for your first one, they can be confusing. Depending on how you use them, credit cards can either be incredibly dangerous or immensely helpful. This guide will walk you through what you need to know about using a credit card, building credit and earning rewards.

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If Youve Applied For Credit Cards Before

Applying for too many cards or regularly switching cards can affect your credit rating. Each time you make an application its recorded on your credit file. Your file will also show if an application is refused. When new providers check your credit file, it can look like you have lots of cards already or that no one else wants to lend to you.

If youre struggling to pay what you owe on a credit card, find out how to deal with the debt.

Does Paying Off Credit Cards Slowly Help My Credit Score

Which Credit Card Should I Pay Off First?

It’s an oft-repeated credit myth that carrying a credit card balance helps your credit scores. In reality, high balances on revolving credit accounts can mean high credit utilization, which can hurt your credit standing.

Your is a comparison of your credit card balance to your total credit limit, expressed as a percentage. It’s the second most important factor in your credit score calculation, making up 30% of your FICO® Score. To calculate it, divide your total credit card balances by your total credit card limits. The lower the ratio is, the better for your credit health. Keep it under 30% to avoid hurting your scores experts suggest keeping it under 7% for the best scores.

The effect credit utilization has on your credit scores is a strong argument for paying off your credit card balances every monthbut it’s not the only one. Carrying a balance can cost you heavily in interest.

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Exceed The Minimum Payments

Making minimum payments when paying off your credit card debt* only prolongs the payment process and can mean you pay more interest. This could damage your financial well being and disrupt any future plans. Instead, paying your entire monthly bill means you wont have to pay any interest.

Most standard credit cards offer 45 to 59 days interest-free credit when you consistently pay your bill in full each month.

How Does Credit Card Debt Impact Your Credit Score

Your the percentage of your available credit that youre using at any given timeis an important indicator of how you manage debt. As a result, its one of the major factors that help determine your credit score.

If youre bumping up against your credit limits, it could be damaging your score considerably. In other words, paying off your credit card debt can improve your credit and your overall financial well-being.

As you work on paying down your debt, make sure to check your credit score regularly to keep track of your progress. This practice can also help you spot other areas of your credit history that you can address to increase your credit score.

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Use A Balance Transfer

Typically used by borrowers who want to extend the time they have to pay off their credit card debt, this option involves moving your existing credit card balance onto a 0% balance transfer credit card. In most cases, these cards offer a set period where you will not be charged any interest. This allows you to focus on reducing the size of your original debt without accruing interest.

Balance transfers usually come with a fee, typically around 2-4% on your transferred balance, and are normally only available to those with good credit ratings. If youre not eligible for a 0% deal, you could still consider choosing a card that has lower interest rates than your existing card.

For example, other types of balance transfers available include the following:

  • Transferring your balance to a credit card with 0% fee, but pay a lower interest rate over a set period of time, for example, 4% p.a. for 48 months.
  • Transferring your balance to a credit card with 0% or low fee, but pay a relatively low interest rate until the amount is paid in full, for example, 6.9% p.a. until your balance is paid.
  • Exceptions To The Rule

    Which Debt Should I Pay Off First?

    Depending on your credit cards, there may be some exceptions. For example, if you’ve opted out of an interest rate increase and you close or cancel your credit card account, you can be required to pay off the balance within five years. All things being equal, paying down the balance will avoid hurting your credit score. Also, if you have balances with deferred interest, pay off those balances to avoid being hit with all the interest charges at the end of the promotional period.

    Keep in mind also that interest rates can change, particularly if you have a variable APR or you get hit with the penalty APR.

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    You Cant Pay Off One Card Using Another Card From The Same Bank

    Banks make money when you pay interest and other fees and generally wont allow you to pay off one card using another card from the same bank. If youre interested in a balance transfer offer, your best bet is to shift the balance from one bank-issued card to one with a 0% APR offer from a different issuing bank.

    You can get around this restriction by using the balance transfer offer as a deposit to your checking account, then using that money to pay your credit card bill.

    Consider A 0% Balance Transfer Credit Card

    If youre being charged interest on your credit card, a 0% balance transfer credit card could save you money. It allows you to move debt onto a card that offers an interest-free period on the money transferred. Not only can this give you more time to pay off your debt without being charged interest, it can help you pay it off quicker and cheaper.

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    Which Is Better A Debt Snowball Or Debt Avalanche

    Whether a debt snowball or a debt avalanche is better depends on whether we’re speaking in financial or psychological terms.

    In terms of saving money, a debt avalanche is preferable. Since it has you pay off debts based on their interest ratestargeting the most expensive ones firstit means you end up paying less in interest. That adds up to paying less money overallprovided you stick with the payment plan.

    But, as any behavioral finance expert will tell you, human beings are often irrational when it comes to money. They find it much easier to stay motivated when they pay off smaller debts first, regardless of their interest rates. So, even though it might cost more, the debt snowball is better, psychologically speakingdebtors are more likely to stick with the program because they have a stronger sense of making progress.

    Drawbacks Of Multiple Credit Cards

    Which Credit Card Should I Pay Off First?

    As fruitful as the benefits of having multiple credit cards can be, there are some general disadvantages to take note of.

    For one, it is quite common for people to mismanage their credit card usage in some way, and the biggest culprit is overspending. Statistics have shown that credit card debt is mostly due to spending more than what is affordable on unnecessary purchases, emergency services , necessities not covered by income, and necessities during unemployment. Unnecessary purchases are the largest contributor to credit card debt in the U.S.

    Unfortunately, credit cards are a form of unsecured loan with relatively high interest rates with late payment fees, and the penalties become steeper if timely payments are not made consistently. More credit cards will mean more to manage, including separate monthly payments, different due dates, etc.

    For more information about or to do calculations involving budgets, please visit the Budget Calculator.

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    Keep It Simpleand Start Now

    The decision to pay off debt is a major one, and figuring out where to start can be the hardest part.

    Keep it simple by focusing on your balances with the highest interest rates first, which will generally be credit cards. The same interest rate strategy applies when you’re determining the best order to pay off your loans. Because this approach helps you save money on interest, you’ll be able to free up cash to put toward other debtsand potentially achieve your debt-free goals sooner.

    What Order Should I Pay Off My Credit Cards

        When you have multiple credit cards, it’s more effective to focus on paying off one credit card at a time rather than spreading your payments over all your credit cards. You’ll make more progress when you pay a lump sum to one credit card each month.

        Even though you put most of your effort into paying off one credit card, you should continue to make minimum payments on all your other credit cards to avoid late payment penalties and to keep your accounts in good standing. The tough part is figuring out which credit card you should focus on paying off first.

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        I Have $7100 In Credit Card Debt And Almost All Of My Cards Are Maxed Out How Do I Decide Which Card To Pay Off First Anonymous

        There are a couple different ways to tackle credit card debt.

        While you’ll want to keep paying at least the minimum required on all cards, you’ll need to decide where extra money will go.

        Some people recommend focusing on the card with the highest interest rate first. Others suggest prioritizing the card with the smallest balance.

        But which approach is right for you?

        Before you get started, take a look at some of the questions below. Then, you can plan out your repayment strategy and hopefully avoid a similar situation in the future.

        Try To Limit How Many Credit Cards You Get

        Which Credit Card Should I Pay Off First!? (Velocity Banking)

        While there can be benefits to taking out separate cards for different types of purchases, generally speaking, the more cards you have increases your exposure to fraud. Also, each new credit card application you make leaves a trail on your credit report history, which can make it more difficult to take out other types of credit in the short term.

        With more cards, youll be exposed to more lines of credit and the overall amount you could borrow will be higher, meaning a bank might be less inclined to want to extend this further. The knock-on effect means it could be tough when youre looking to borrow for bigger things, such as taking out a mortgage.

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        Theres Often A Balance Transfer Fee

        Balance transfer fees typically range from 3% to 5% of the amount being transferred. If you transfer $10,000 to a card with a 0% APR offer but has a 3% balance transfer fee, youll add another $300 onto your debt. If possible, choose a card without any balance transfer fees.

        That said, even if you must pay a balance transfer fee, it could still help you save money overall depending on how much debt you have, what your cards interest rate is and how long you need to pay off your debt. It always makes sense to do the math for your personal situation before making a decision.

        Build Credit While Paying Down Debts

        The answer to which credit card to pay off first will depend on your personal situation. In reality, you dont have to use either of the methods described here. You could also divide the $500 monthly evenly between the 4 credit cards. It is up to you. The main thing is to make a plan you can stick to and clear your credit card debt as quickly as possible!

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        Find This Guide Useful Share It With Others

        • Work out which debt is costing you the most– before you decide which to treat as a priority
        • There are a number of factors to take into consideration, such as interest and charges, introductory offers and the amount owed
        • If your credit score is the most important factor, it might be better paying off credit card debt first to boost your credit utilisation ratio
        • You may also be able to get a better deal on your debts by consolidating
        • Show More

        Two Exceptions To The Rule

        What Debt Should I Pay Off First?

        The rule is based on the fact that the cost of debt is usually much higher than the benefit gained from savings. Therefore your pocket gains more by getting rid of the debt than starting to save. The exceptions are in the few occasions when debts are cheaper than savings, or cost so much to pay off that there’s no point:

        • The penalty exception. If you’re locked into the debt, so that paying it off incurs a penalty, as with some loans or mortgages, then leave the cash sitting in a savings account until the penalty’s small enough that it doesn’t matter.

        • There are a number of products where this is possible: introductory 0% credit card offers , 0% overdrafts and Student Loans .

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        Eliminate Transferred Balances During 0% Apr Period

        Another credit card balance that you want to pay off quickly because it offers an introductory rate is a balance transfer credit card. Balance transfer cards allow you to move balances from your existing cards to one with a lower interest rate. Many of these cards offer a 0% APR introductory period. You pay no interest for anywhere from six to eighteen months, depending on your credit score. Interest doesnt defer, but once the introductory period ends the normal interest rate on balance transfers kicks in.

        If you have a balance transfer card thats still in the 0% APR period, focus on paying off that balance quickly. Ideally, you want to eliminate the transferred balance in full before the 0% APR period ends.

        Dont let credit card debt take control of your budget. Find solutions to pay off your debt faster.

        Be Smart When Paying Off Credit Card Debt Early

        It might sound counter-intuitive, but you need to be careful not to pay your minimum fee too early as you could risk being charged a late fee for doing so. Lets say you get a credit card statement asking you to make a payment by 28 June and you pay off the minimum amount owed on 20 June. On the 27 June, you might decide to pay off a bit more than is owed, rather than worry about making a payment next month.

        As youve made two payments before the due date, the credit card company sees that you overpaid in June but didnt pay anything in July. This sort of well-meaning miscalculation will result in a late fee and could have an impact on your credit score. So make sure youre clear on the exact payment dates of your credit card.

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