Paying off Your Credit Cards
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by: barrywaters
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Word Count: 788
Credit cards are a necessity for most people in this country. Consumers use them to pay for everything from gas and tuition to groceries and train tickets. Instead of paying with a check or cash, credit cards are used. 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. 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. By continually paying off only the minimum balance, the majority of the payments are just pay the interest on the balance. Consumers are then paying off less of the balance on the card and give more money to the bank in the form of interest payments. According to a study conducted by Experian in 2007, one in six families with credit cards only makes the minimum payment each month.
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. You would not write a check unless you knew you had the funds in your bank account to cover it. You should take the same approach to your regular spending on your credit cards. If you cannot pay off what you wish to buy, think twice before putting it on your card. There are some cases in which credit cards are used for emergencies, like an unexpected car repair or a medical expense. 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 owe a significant amount on your credit cards and would like to start paying down that debt, the first step is to stop paying for things that increase your balance. Next, examine your budget and reallocate any discretionary funds to make larger payments (rather than the minimum payment) to decrease that debt quickly. 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. 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. The new amount for the payments on the next card should be the same as what you were paying down on the last card, plus the minimum payment from the last 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. This will allow you to pay less on interest and more on your balance, making your snowball even bigger.
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. It is best not to make any additional purchases on your credit cards, while you are snowballing. It might melt part of your snowball and you will have to start it rolling all over again.
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