Zero Out Those Balances on Your Credit Cards
Credit cards are a part of everyday life in the United States. 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. Often, instead of using credit cards as a representation of cash, consumers will use them buy things they cannot yet afford. 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. By continually paying off only the minimum balance, the majority of the payments are just pay the interest on the balance. 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. 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. 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. But if you keep your regular everyday spending in check, you will have more wiggle room for emergency expenditures that you may have to pay off over 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. 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 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. During your snowball, it is wise to evaluate the rates of your cards and consolidate the balances to the card with the lowest interest rate when you can. 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. It lets you see solid results and gives you an opportunity to see the rewards of paying off debt on your credit cards each step of the way. 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.