To Maximize Financial Return Pay Later
Many Americans do pay off bills in full and many keep monthly spending well below the recommended threshold of 30%. People who do these two things reliably are more likely to have a favorable credit score. These routinely-responsible cardholders dont benefit much from rushing to pay off monthly bills.
Instead, late-cycle-payers can likely afford to take full advantage of the credit extended to them each month. Of course, the bill total will stay the same throughout a billing period, but cardholders can benefit from the time value of money extended to the amount owed. This value comes from the concept that there is value in simply holding a sum of money over time, based on its potential to earn.
Up until the time cardholders actually pay the bill, credit card users can still earn interest on the money owed. Whether that money would otherwise be invested somewhere or held in a checking account, the additional interest this would garner can add up to a significant sum over months and years. So, for cardholders unburdened by debt or a waning credit score, waiting to pay until close to the end of a billing cycle will almost certainly increase overall wealth, if just by a little at a time.
Tips For Managing Multiple Credit Cards
Only Paying The Minimum Balance
It’s tempting to send in minimum monthly paymentsoften $15 to $25when you’re under financial duress. Don’t do it. High-interest rates charged by credit card companies will keep the bill growing every month. Instead, send the highest payment you can afford and reduce spending in other areas to focus on paying off the debt. It might be worth going without extras like the newest smartphone or latest fashion if it means you’ll sleep easier at night, knowing you’ll soon be debt free.
It may not feel like you’re saving money when you increase credit card payments, but you are. Depending on the interest rate, you’ll save an average of 10% to 29% per year in interest on any balance you pay off. For example, if you pay off an extra $1,000 this year, you’ll come out $160 to $290 ahead, depending on the rate.
Money is probably already tight if you’re already in debt, so freeing up extra cash will give you some breathing room for the long haul. Whether you use this money to accelerate debt payments, start an emergency fund or invest in retirement. The power of compound interest will start working in your favor instead of against you.
Also Check: Can I Accept Credit Card Payments With Venmo
How Personal Loans Impact Credit Scores
Often, a personal loan has the potential to help you from a credit score perspective. Just be sure you make every payment on time. If you open a personal loan and pay it late, it could damage your scores significantly.
How Long Does It Take To Pay Off A Credit Card
When you owe money on your , you may be eager to become debt free as soon as possible. But figuring out how long to pay off credit card debt can be a challenge. That’s because your payoff timeline depends on your:
With the debt snowball method, you would make minimum payments on each, but put extra money toward the smallest balances first:
It would take you 42 months to pay off all three cards, and you’d pay $14,367 total.
RELATED: Check out The Ascent’s debt snowball calculator to see which debts you should pay off first when using this method.
You May Like: First Premier Gold Credit Card Reviews
How Do I Pay Off Debt With The Snowball Method
With the debt snowball, youll pay off your debts in order from the smallest balance to the largest. Heres how it works:
- Step 1: Make the minimum payment on all of your accounts.
- Step 2: Put as much extra money as possible toward the account with the smallest balance.
- Step 3: Once the smallest debt is paid off, take the money you were putting toward it and funnel it toward your next smallest debt instead. Continue the process until all your debts are paid.
Many people love this method because it includes a series of small successes at the beginning which will give you more motivation to pay off the rest of your debt. Theres also the potential to improve your credit scores more quickly with the debt snowball method, as you lower your credit utilization on individual credit cards sooner and reduce your number of accounts with outstanding balances.
With this approach, you take aim at your smallest balance first, regardless of interest rates. Once thats paid off, you focus on the account with the next smallest balance.
Think of a snowball rolling along the ground: As it gets bigger, it can pick up more and more snow. Each conquered balance gives you more money to help pay off the next one more quickly. When you pay off your smallest debts first, those paid-off accounts build up your motivation to keep paying off debt.
Example of the Debt Snowball in Action
Lets take the same accounts we used in the first example.
|Type of Debt|
To use the debt snowball method:
Build Your Credit Score
Here are a few tips to build your credit score:
- Pay your bills on time: Successful payments are recorded in your credit report and contribute up to 35 percent of your credit score.
- Keep an eye on your credit utilization rate: Credit utilization rate, one of the biggest factors impacting your credit score, is calculated by taking the credit and loan balances you currently owe and dividing them by the total limits of your credit lines. The optimal is less than 30 percent. For example, if you have one credit card with a limit of $1000 and you currently owe $250, your credit utilization rate is 250/1000 . Two ways to keep your credit utilization ratio low are by keeping credit card balances low and extending your credit limits. Use both tactics when you are confident that you can manage your credit spending and payments carefully.
- Keep your credit card open: Even if you pay off the entire balance of your card, keeping a card open can extend the age of your credit card and of your credit history. The age of your credit, in turn, provides 10 percent of your credit score. But check the card’s terms and continue to monitor your monthly statements, just to be sure that there are no penalties attached to keeping a zero balance on a card.
Recommended Reading: Does Venmo Allow Credit Cards
How Do I Pay Off Debt With Bankruptcy
Bankruptcy cant be encompassed in a few short steps, but the general process is:
- Step 1: Examine your debts, and determine your ability to repay them over time.
- Step 2: If you think your debts are insurmountable, and youve decided bankruptcy might be the right response, research bankruptcy attorneys in your area.
- Step 3: When you find the right attorney, he or she will instruct you on what to do. Youll need to submit comprehensive documentation of your debts, credit cards, loans, bank accounts, and other financial products, along with information about your assets and personal property. And more!
- Step 4: The attorney will collect your information and file the bankruptcy with the proper authorities.
- Step 5: If filing a Chapter 13 bankruptcy, youll need to make monthly payments for a period of 35 years.
- Step 6: When the bankruptcy is discharged, the included debts will be written off by the creditors, and youll no longer be responsible for them. Depending on the type of bankruptcy, it could be discharged within 34 months of filing or 35 years .
There are two types of personal bankruptcy:
- Chapter 7, which often requires you to surrender some of your property
- Chapter 13, which allows you to keep your property
Q& A Video: Is There Anything Worse Than Bankruptcy?
Pay Off The Card With The Highest Rate
- If youve got unpaid balances on several credit cards, you should first pay down the card that charges the highest rate. Pay as much as you can toward that debt each month until your balance is once again zero, while still paying the minimum on your other cards. The same advice goes for any other high-interest debt , which does not offer any tax advantages.
Pay As Much As You Can Each Month
If you can make higher repayments each month, you will pay off the debt faster and save money.
Work out the fastest way to pay off your credit card.
If you only pay the minimum, you’ll pay a lot of interest and it will take years to pay off your debt in full.
If you’re finding it hard to pay the minimum amount, contact your bank or credit provider straight away or talk to a free financial counsellor. Taking action early stops a small money problem from getting bigger.
Take Advantage Of Rewards Programs
If you feel you are comfortably meeting your monthly credit card payments, and are able to put more charges on your credit card, you can take advantage of reward programs by moving some of your regular monthly expenses to your credit card. If you do this, try to make your monthly credit card payments at least the amount of those monthly expenses, so that you don’t get lulled into a false sense of financial security and start living beyond your means.
Also Check: Lock Chase Credit Card
Pay Your Credit Card Balance On Time
On-time payments are crucial to building a positive credit history, and missing payments can tarnish your credit score for years. Be certain that you understand your due dates so that you don’t add late fees to your balance. You might also consider putting your minimum payments on autopay. While paying the minimum monthly payment might not help you chip away at your debt, it will at least ensure that you’re payment history is consistent.
First Choose Which Debt To Pay Off First
If you have multiple credit cards, loans or other debts, its important to look at a few factors when deciding which to pay off first. To save the most money in the long run, pay down the debt with the highest interest rate, or pay the debt that is closest to your credit max. Both of these options will help raise your credit score in addition to relieving some of your debt. If youre interested in learning more, check out our advice on Keeping Score.
Recommended Reading: Check Td Bank Gift Card
Reduce Your Credit Limit
To avoid the temptation to overspend on your card, ask your credit provider to reduce your credit limit. You can do this online, by phone or by visiting a branch. In most cases, it takes between one and two business days.
If you need to increase your limit to buy something special, aim to pay it off quickly. Then reduce your limit again to a manageable amount.
Ask Yourself Which Card Charges The Most
While credit card debt can be overwhelming especially when you have a balance on multiple cards there are some tried and true methods that can help you pay debt off as quickly as possible.
As a first step, find out how much each card charges in interest, expressed as APR, or annual percentage rate, says Alicia R. Hudnett Reiss, certified financial planner and founder of Business of Your Life, a Washington, D.C-based financial planning service.
Then you can use a debt payoff calculator to determine which credit card balance is costing you the most. Write down each of your cards total balances, interest rates, and monthly payments then you can use the calculator to see how much of your payment goes toward interest versus your principal balance.
For example, plugging in the below figures into this calculator:
- 18% APR
- $75 goes towards interest, and only $25 goes towards the principal balance.
- The total interest paid will be $4,311.18
- It will take 7.8 years to pay off the balance
Most people dont actually look at the interest rate on their cards, says Hudnett Reiss. Often, people charge purchases to credit cards to spread the cost out over a few months, without realizing that costs can balloon as the balance sits unpaid and accrues interest.
Read Also: Www.lowesvisacredit.com Pay Bill
Ways To Pay Off Debt On Multiple Cards
Ready to pay off your debt? The first step is to create a debt payoff plan.
If you only have one debt, your strategy is simple: make the biggest monthly debt payment you can handle. Rinse and repeat, until its all gone.
But if youre like most people in debt, you have multiple accounts to manage. In that situation, you need to find the debt elimination method that works best for you.
Many people turn to the strategies often exhorted by financial guru Dave Ramsey the debt snowball and the debt avalanche. Well explain both of those approaches below, as well as alternatives like balance transfers, personal loans, and bankruptcy.
We recommend using the debt avalanche method since its the best way to pay off multiple credit cards when you want to reduce the amount of interest you pay. But if that strategy isnt right for you, there are several others you can consider.
Does Carrying A Balance Help Your Credit
No, you do not have to carry a balance on credit cards to develop a positive credit history. In fact, when you pay your balance in full, lenders report a lower credit utilization ratio to each credit bureau. Ideally, your ratio should be below 30% to avoid hurting your score and risking low credit. But a lower ratio is even better.
Your credit score is very important. Many companies you do business with will perform a credit check, including landlords and lenders. If you have a good credit score or excellent credit and your credit report has no black marks, you will qualify for better terms. For example, you might be able to rent an apartment with a lower security deposit or get a better loan rate.
The good news is, since paying off a card doesn’t hurt your credit, there’s no reason not to get to work on repayment. Now you know how long it takes to pay off a credit card. So you can adopt the technique that works best for you and become debt free as soon as possible.
Recommended Reading: Pay Best Buy Credit Card Online
Save Money On Interest
If you’d rather save money on interest, then pay your credit cards starting with the highest interest rate balance first. Paying off the highest interest rate balance first may take less time and allow you to save money on finance charges, especially if your highest interest rate credit cards also have higher balances.
Make a list of your credit cards, ranking them in order from highest to lowest interest rate. Then, pay off the credit card with the highest interest rate first by making high lump sum payments to that card each month. Once you pay off the credit card with the highest interest rate, move on to the card with the next highest interest rate and so on, until all the credit cards have been paid off.
Open a credit card offering a 0% APR balance transfer deal for new cardholders to save even more money on interest. If you’re interested, check out our top picks for balance transfer cards to get started.