Make More Than the Minimum Payments on Your Credit Cards
01/06/09
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 offer a safe and handy substitute for paying with hard cash. Some consumers, however, frequently use credit cards to purchase things for which they do not have the money. Not too long ago, if a consumer wished to buy an expensive item, he would save in advance of that purchase or use a lay away plan. Now that credit cards are so prevalent and easy to obtain, many consumers do not wait until they have the money to pay for big ticket items. They will then only make the minimum payment when the billing cycle ends. The bulk of the minimum payment is dedicated to paying interest on the balance on that card. 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.
The lure of overspending with a credit card is quite bewitching. But, to keep bills and spending habits in check, it is wiser to view credit cards as if they were checks. 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. If you cannot pay off what you wish to buy, think twice before putting it on your card. Emergency expenditures on your credit cards are a different story. If you have not overspent on unnecessary items and do not carry an unmanageable balance on your credit card as a habit, however, you will be more capable of handling emergency expenses and paying them off in a reasonable amount of 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 larger your payments, the less money you pay in interest. And the sooner you pay off that balance, the less interest you pay in the long run. If you have several credit cards, look into consolidating the balances onto the card with the lowest interest rate. If you have already reached your limit on the card with the lowest interest rate, you might consider what financial experts call "snowballing." The idea of snowballing is to simply pay off the card with the lowest balance as a first step, which gets the ball rolling. Obviously, continue to make the minimum monthly payment on your other cards, so you do not accrue penalty fees. Maintain the payment schedule until the card with the lowest balance is paid off. Move on to the next smallest balance, once the debt on the first card has been paid off. 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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