You already know that, to get out from under credit card debt, you have to do better than making minimum payments. But in a tough economy, you may be struggling to pay more than a couple of dollars over the minimum.
Even if you can’t raise the amounts you pay, there some things you can do to reduce the interest you owe on credit cards (or your mortgage). Your credit card company charges interest every day of the billing cycle. The earlier in the cycle you pay your bill, the less interest will mount because the balance will be lower.
Let’s say you get your paychecks on the 1st and the 15th. If your credit card bill is due on the 20th, you are probably in the habit of paying it on the 15th. By rearranging your finances to pay that bill on the 1st, less interest will build. The savings is modest, but will make a dent over time. Paying early also reduces the chance you will get busy and miss the deadline for the payment and end up incurring a heinous late charge.
Alternatively, you can break your payment up, paying half on the 1st and the 15th and still save some interest. Only one thing to beware of. If half a payment is less than the minimum, check with your bank to ensure there will not be a penalty. These days, most credit card companies will let you make multiple payments without any penalty. Assuming that is true in your situation, the more often you pay the better. If you receive weekly paychecks, break your payment into fourths. Not only do you save interest, but you even out your cash flow.
If you are on a fixed income and get a check only once a month, try to arrange your credit card payments so that you are always a month ahead. If you have several credit card bills, start by getting one at a time on an early pay schedule, till you’re ahead on all of them. Again, even if you can only pay just over the minimum, paying early will eventually make a difference.
Which Card to Pay Off First?
If you are going to focus on eliminating credit card debt, there are a couple of ways to do it, and the jury is still out on which way is best. Should you pay off the smallest debt first, or the debt with the highest interest rate? The idea behind paying off the smallest debt first is that you develop good habits and see the reward of an eliminated debt more quickly. Critics say that the benefit is mostly psychological and as adults, we don’t need that crutch.
Other financial experts advise you to start with the debt that has the highest interest rate and attack it first. In the end, you probably do save more interest. But both ways work. Whatever you do, don’t languish in indecision and end up doing nothing. Choose the method that suits you best and determine to free yourself from your slave-master of credit card and personal loan debt.
Don’t Be Blindsided by Savings
One final strategy, do you have a savings account and credit card debt? Maintaining a savings account is a great habit, but these days, the interest your money is earning is almost nothing. Meanwhile, the interest you are paying on credit debt is likely to be much, much higher. You should have a cash reserve, but don’t short-circuit your finances by building up interest debt while you have the cash to pay down those debts sitting in a savings account that is earning next to nothing.
If you want to experiment with various payment strategies, log onto this online calculator. http://www.bankrate.com/brm/calculators/creditcards/reduce_credit_card_debt.asp
Teresa Ambord is a former accountant and Enrolled Agent with the IRS. Now she writes full time from her home, mostly for business, and about family when the inspiration strikes.