Paying off Credit Cards

Here is one method for paying off all of your cards (or other debt) quickly. First, sit down and decide how much you can possibly afford to put toward your credit card debt every month. The amount should be higher than all of the minimum payments combined. Next, cancel any and all automatic payments coming from your card. Examples would be: monthly subscriptions, internet services, water delivery, etc. Then list your cards in the order of the balance with the smallest balance being on top. Finally, allocate the minimum payment to all cards except the one on top. Pay everything else to that card until it is paid off. Then take everything you were paying on the first card and apply it to the next card and so on until they are all paid off.

Here is an example (taken from One for the Money: Guide to family Finance by Elder Marvin J. Ashton)

DEBT-ELIMINATION CALENDAR
	Credit Card (min. $20)	Dept. Store (min. $70)	Dentist (min. $50)	Piano Loan (min. $75)	Auto Loan (min. 235)	Total Monthly
March	110	70	50	75	235	540
April	110	70	50	75	235	540
May	110	70	50	75	235	540
June	110	70	50	75	235	540
July		180	50	75	235	540
Aug.		180	50	75	235	540
Sept.		180	50	75	235	540
Oct.			230	75	235	540
Nov.			230	75	235	540
Dec.				305	235	540
Jan.				305	235	540
Feb.					540	540
March					540	540
Orig Bal.	400	675	750	1150	3450

In this example, the family could only put an extra $90 towards their debt, but it makes a huge difference in the amount of time it takes to pay off. In the example, if they had made only minimum payments and the interest rate was 10% on everything (for simplicity), it would have taken 21 months (instead of 13) to pay off all of the balances.

Company Secrets

Call your credit card companies and request a lower interest rate or ask to be given a short-term promotional rate. Many people do not realize that they can do this. If the first person you talk to says no, request to speak to a supervisor. Chances are, they will want to keep your business if you have been a good customer. Do not, however, close your account. If you do, you will likely have to pay a higher rate than what you are paying now. It is a nasty thing called an “account closed rate” that many card companies are now starting to use.

Something else that you may not have known: When you pay your credit card bill, the principle payment is paid toward the balance with the lowest interest rate first. Example: You have a card with a $500 balance (purchases) at 0%, a $1,500 balance (balance transfer) at 5.99%, and a $2,000 balance (cash advance) at 21.99%. You can not choose to pay the $2,000 balance portion off first; your payment will be applied first to the 0% balance, then to the 5.99% balance and only after those two are completely paid-off will your payment be applied to the 21.99% balance. The moral of the story is, if you must take out a cash advance, do it on a card that has no other balance on it. (I learned this the hard way when I was 18.)

Once you have your loans and credit cards paid off, you can call the card companies and ask them to lower your available credit if you want. If you are frequently tempted to “max-out” your cards, it is a really good idea to lower your available credit to something that you can readily pay-off in full.

In the process of paying off balances, watch out for fees!

Over-the-limit fee. This fee is assessed when you exceed your available credit. The sad thing is, that even a fee can trigger this fee. Example: Your credit line is $2,000 and your balance is $1,980. Your payment is 2 days late and you are assessed a $35 late fee. To add insult to injury, you will often also be assessed an over-the-limit fee since your balance is now $2,015. Additionally, they might raise your interest rate for making a late payment. (Your other cards might raise their interest rates too). Although some card companies are more forgiving than others, once the fee avalanche has started, it can be very difficult to stop. If you do receive a fee, call the card company and ask to have it reversed. If you have never had a fee reversed before, they will probably do it for you.