Zero Out Those Balances on Your Credit Cards
03/11/09
Credit cards are a necessity for most people in this country. Everything from toll booth fees to library charges are put on credit cards. Many consumers use credit cards in lieu of paying cash or by check. Credit cards are a convenient alternative to carrying cash. Often, instead of using credit cards as a representation of cash, consumers will use them buy things they cannot yet afford. It used to be that consumers would save to make a big purchase like jewelry, a new couch or a new television. Given the trend of easy credit this last decade, many people buy things with their credit cards before they have the money in the bank for them. They purchase those items and, instead of paying off the credit card balance when the bill is due, they pay the minimum amount due. By continually paying off only the minimum balance, the majority of the payments are just pay the interest on the balance. That means that the banks make more and more money and those consumers pay down less of their debt. Of the families that have credit cards, it is estimated that one in six pay just the minimum monthly payments.
It is very easy to give in to the instant gratification of using a credit card. If you wish to not spend beyond your means, however, it is best to look at credit cards as if they were checks or debit cards. Before you write a check, you always assure you have enough money in the bank to clear it. For everyday purchases on credit cards, the philosophy should be the same. Do not purchase something that is not absolutely necessary, unless you think you can pay it off in a timely manner. Emergency expenditures on your credit cards are a different story. But if you keep your regular everyday spending in check, you will have more wiggle room for emergency expenditures that you may have to pay off over time.
If you carry a balance on your credit cards that is beyond your financial means and you wish pay off the debt, it is best to not make any additional purchases on that card. The second step is to pay more than the minimum balance whenever possible. Again, when you only pay the minimum payment, the majority of that payment is interest to the bank. The more money you pay them in interest, the less money you have available to pay off that balance. The bank makes less money off you, as you pay less interest on lower and lower balances. If you have several credit cards, look into consolidating the balances onto the card with the lowest interest rate. You should look into "snowballing" your debt, if you have hit the maximum on the lowest interest card. You focus on the credit card that has the lowest balance and pay it off first (while making sure you pay the minimum payments on your other cards), regardless of which one has the highest interest rate. Do not reduce the amount of your payment each month, even as that balance becomes smaller and smaller. After that credit card is paid off, focus on the credit card with the next lowest balance. Again, do not reduce the amount of each payment as the balance becomes lower. Add what you would be paying in minimum payments on the credit card you just paid off to the regular payments you were making, and apply that to the new credit card. This snowballing action will let you pay more of your debt as you reduce your balances more drastically. When you free up a card with a low interest rate during your snowball, consider moving your balances to that card. Doing so will free up even more money to pay down your debt, that you might have otherwise been paying in interest.
Many financial advisors find that snowballing gives consumers a rational and rewarding method to make payments and reduce credit card debt. Psychologically, it helps you focus on something tangible that will let you see results faster than if you try to tackle the balance on all your credit cards at once. While you are getting your snowball rolling, try not to charge any new things to your credit cards. If you do, you will have to take some discouraging steps backward, which might unravel your snowball.
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