I have always advised my readers to be wary of using credit cards because I want them to avoid paying interest on things that they thought was a good buy at the time, yet after paying interest on these credit cards, the good deal seems almost a memory plus more – they might end up paying twice as much as they originally wanted to pay.
I remember when I was buried in credit card debt, I felt like I was always drowning. Looking at the interest I was charged every month was enough to make me wonder whether I would be able to pay it or not – ever!! Until I got wiser and wiped it all out. Yes, I wiped it all out. “How?”, you ask.
Well let me tell you this. I was fortunate enough to have encountered our financial guru such asÂ Suze Orman. She laid out simple ways to pay off your credit card. It is really simple, anyone can do it.
Let’s say you owe three credit cards and each of them have $1,000.00 balance. They seem equal, but they are not.
Card 1 – $1,000.00 @ 30% interest (yes, credit cards do charge that high now!!)
Card 2 – $1,000.00 @ 24.09 % interest
Card 3 – $1,000.00 @ 13.9 % interest
Although you owe the same amount, you are being charged different interest rates for each. The one with the highest interest will of course grow much faster and will take longer to pay than the one with the lowest amount.
Let’s say you try to pay evenly, $100.00 for each card (above the minimum) each month. You say to yourself, I am paying more than the minimum so it should get paid faster. Yes, that’s true but you would be paying all three cards longer and your interest rate charged will be up there too! That interest you are paying your credit card could be going to a savings account and making more money for you! (Remember, Making Money Work For You?).
Well, here’s the simple trick. Pay the card with the highest interest rate first and pay minimum on the rest. Why does this make sense? Because your goal is to pay off each card at the shortest amount of time and paying as little interest as possible.
Card 1 – $ 250.00 per month
Card 2 – $ 25.00 minimum per month
Card 3 – $25.00 minimum per month
Notice that you didn’t raise the money output every month, since you are still paying the same amount. The only thing is – – Card one will be paid off faster with a lower amount of accrued interest than it would have been. Once card one is paid off, take the step to make the payments to pay off the next high-interest credit card. Still, without changes to your budgeted credit card payments, your goal is to pay the next credit card off right?
Payment after one card is paid off:
Card 1 – $0.00 (paid off)
Card 2 – $275.00 per month
Card 3 – $25.00 per month
Still – without an increase in budgeted payments, you will be able to pay credit card 2 faster with less interest charged. After Card 2 is paid off, this will be your payment schedule:
Card 1 – $0.00 (paid off)
Card 2 – $0.00 (paid off)
Card 3 – $300.00 per month until it’s paid off.
This is not rocket science and I hope I have explained it clear enough so you can start wiping out those credit card debt. And once you do, you will feel better, save more and become financially free earlier than you can imagine.
Now, why does the title say it’s best to use credit cards for major purchases? Because it is. The protection offered by credit cards are better than paying in cash. They protect YOU, the buyer, when you make a purchase. But I would only advise doing this after you have paid off all your credit cards and using them only if you know that you have the cash to back it up.
And for me, I will only use credit cards that offer me zero interest or cash back. These days, as long as you keep your credit score high enough, offers of zero interest or cash back are not hard to come by. Once caveat, you must make the payments on time – every time until it’s paid off, otherwise you may get charged interest rates that are enough to take you back to the credit web you were in before you started.
Rules To Live By:
A good rule of thumb for drawing the lie about when to use your credit cards is never use your cards for anything you can pay cash for.
Credit card companies basically don’t want you to pay your balance in full every month. They prefer that you pay a minimum payment every month and keep the interest rolling in on your account.
There are some companies that charge their cardholders yearly fees, interest on their balance and a fee for managing their accounts. If you have one of these types of credit cards, it’s time to look at paying off your credit cards and getting a budget that you can live on together that will allow you to pay off your credit card debt.
Let’s assume that your payment is set up to pay back the very minimum balance each month. The minimum balance is around 2% each month. This means that the bulk of your payment is going towards payment on the interest. This is why it seems so long to pay off the debt. For example, if you purchased goods that originally cost $1000, at an 18% interest rate, you’ll end up paying back over $6000. That should motivate you to pay off your credit card debt!
You can jump off the merry-go-round any time you want. Don’t get any further in debt than you already are. Make an honest budget. Calculate your bring home pay and deduct your true amounts you average for bills and utilities. Then cut corners where you can.
Then calculate how much you owe on your credit cards. You can pay off the cards with lowest balances first and split that money you were using to make those payments among your other cards and give the largest payments to the next lowest credit card balance. This will allow you to see results more quickly and keep you motivated in paying off your credit card debt.Â Or, pay the one with the HIGHEST interest rate first – whichever will keep you motivated.
It’s not a bad idea to keep in your possession the budget that you created. This allows you to be objective about frivolous purchases you want to make. Use your savings if you can to pay down debt. The most that the average savings account pays is 3% interest on the balance. Why keep money in that account if you’re paying on an account charging you 17-18% interest?
Another direction to take if you find you are so in debt you cannot meet your monthly obligations is finding a good credit counseling service or debt consolidation service. These services help you negotiate a debt down to a workable solution. Be careful in this area as well though, you may want to consider that the money spent here can also be spent on paying off existing debt, read the fine print to see if there are fees and if you are already past due on your credit cards, your cards will continue to be reported to the credit bureaus as “past due” until the balance is paid in full.
It’s going to take some discipline to pay off all of your credit card bills but if you work hard enough at it and have a commitment to stay with your budget, there’s light at the end of the tunnel.
Otherwise, keep on saving – – and goodluck!
‘Have you checked your financial status lately?’
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