I receive an overwhelming number of e-mails and phone calls from people willing to know how they can pay off their credit card debts faster. And the numbers of calls have only gone higher with worsening economic crisis. Is there a way? In my opinion, there is no single formula, but there are some excellent strategies that can work wonders. Here are the smartest, fastest and safest ways to pay off your credit card debt.
Master the Basics of Budgeting
If you go back a little into your financial history, you’re likely to notice that this large pile of debts was a result of an unplanned budget; unless there had been an emergency.
- Make an income/expenditure statement, and see if there is a way to save a little more money.
- Cut or reduce the unnecessary expenses like entertainment, extravagant shopping, etc. Now you can conclude approximately how much money you’ll have every month on your disposal.
- Use this fund to pay off your debt. But don’t be crazy to pay more on credit card debts than you can actually afford. Be sure to have enough money for utilities, unexpected car repair and mortgages.
Gun Down the Debts Having Highest Interest Rate
Usually people get confused whether they should pay the highest balance first or the card with highest interest rate. My advice? Go for the one with highest interest rate. Because the large sum of interests itself is eating up into most of your resources. You should get over that burdensome debt, so that you can save money that would otherwise go only on paying high interests. Once you finish off that debt, turn your focus to the next highest one.
Many people argue on paying smallest balance first. Their reason – it gives you psychological relief that you paid a debt. That’s insane. As a savvy consumer, you want to get financial relief which comes only by paying the debts with highest interest first. When you get real financial relief, you’ll automatically get a psychological boost.
Pay More Frequently
If you have been paying your credit card bills only once a month, I advise you to pay fortnightly. This way you’ll pay more money per year because there are many months having more than four weeks. In the year, there will be two such months when you’ll be paying thrice instead of twice.
It helps lower the principal debt. But that doesn’t mean you should pay only the minimum amount now. Keep paying the same amount as earlier and you’ll see the debt disappearing.
Excited? I have something more to keep you excited. There is already a hidden magic taking place when you pay bi-monthly. The credit card companies calculate interest based on the “days in a billing cycle.” By paying one part earlier in the month, you slowly lower the average daily balance on which interest rates are calculated. Though the difference may not be very large, it adds up over time and reduces your overall burden.
Use Savings if Conditions Allow
To some it may seem weird; others say it’s the obvious way. But I have known many people with a fat bank balance having a large credit card debt at the same time. I understand that saving for emergency is a necessary part of financial planning, but it is depleting your financial strength. In fact, a heavy credit card debt is no less than an emergency. You can do yourself a big favour by using the savings that yield low interest to pay off high interest rate debts.
For example, if you have ?10,000 in a saving account that gives 5% interest rate, and one of your credit cards carries the same amount of debt and charges 15% interest rate. You can make an instant profit of 10% by paying off the debt. Now a large part of your monthly earnings will go to saving account instead of paying high interest rates.
It is equally important to have some money in savings any time. So I suggest keeping a couple of thousands in bank for emergency and use the rest to pay off the debt.
Debt Consolidation Loans
Last, but not the least, you could definitely apply for a debt consolidation loan to pay off your credit debt in its entirety. Well, this option works only if you have many other loans to pay off in addition to having a credit debt. You have to deal with just one debt consolidation loan instead of many other loans together.
Author Bio: Willie Rhoades is a finance analyst who enjoys writing about debt consolidation and other personal finance related topics. He has written many articles over the years and enjoys authoring reports offering money saving tips that can easily actioned.