There’s no doubt about it: credit cards can be convenient.
You don’t have to waste time carefully writing out a check or counting quarters from your wallet. Simply swipe, sign the receipt, and take your latest purchase home with you.
Because of this convenience, the average American adult owns at least 2 credit cards, and as many as 18% of adults own 3 to 4 credits cards. Chances are likely that you have more credit cards than cash in your wallet right now.
Unfortunately, the more we rely on credit cards, the more likely we will fall into debt. The average household owes at least $15,611 in debt on their cards.
If you’ve accumulated a great deal of debt on your credit cards, you may feel frustrated as you try to manage all of your payments. Here are a few tips and strategies to make paying those bills a little easier.
Short-Term Lump Sum: How to Choose Which Card to Pay First
If you’re like many Americans and you own multiple cards, you may have difficulty deciding which card to pay off first. On those rare occasions that you receive a lump sum or sudden windfall, consider using the following strategies to tackle some of your debt.
Strategy 1: Smallest Balance First
Dave Ramsey, personal money-management expert and author, recommends building momentum by paying the card with the smallest balance first. This enables you to quickly see progress as you completely knock off your first few debts. As you see results, you can use that mental energy and enthusiasm to push you through larger, more difficult debts.
Strategy 2: Highest Interest Rate First
While Dave Ramsey’s technique works well for some individuals, it doesn’t make as much mathematical sense to others. Suze Orman, financial advisor and motivational speaker, recommends paying off the debt with the highest interest rate first. She suggest this because high interest rates indicate you’ll have to pay more money to the lender over time. Depending on how long it takes you to pull yourself out of debt, this technique could save you thousands of dollars in interest and credit card fees.
Strategy 3: Highest Balance First
While the first two strategies represent the most popular techniques for eliminating debt, many financial experts also point out that you need to take your credit score into account. Your FICO score depends on how much you owe and your credit limit. Using more than 10% of your credit limit can adversely affect your score.
So if you have to choose to pay a maxed out $1,000 credit card with a low interest rate or pay that $1,000 you owe on a $10,000 credit card with a high interest rate, you should focus on the maxed out card first.
Strategy 4: Debt Consolidation
This technique blends all three of the above strategies. Debt consolidation enables you to put all your credit card debt in one place, so you only have to worry about one payment at a time. You can make steady payments for an extended time, which positively affects your credit score.
But keep in mind that debt consolidation isn’t a perfect cure-all solution. If you have a spotty credit history, you might not find great rates, so you may end up paying higher interest rates as a result.
Long-Term Gradual Payments: Tips and Techniques for Managing Your Cards
Even if you’ve paid off a large chunk of your debt with a lump sum, you may still have some debt left over. Use these strategies to manage your remaining credit card debt.
Pay More than the Minimum
Paying the minimum amount due will leave you in debt for a long time, and you can end up paying more in interest than you ever spent on the initial purchase. For example, let’s say you had a credit card balance of $1,500 at an APR of 18%. If you pay the minimum payment of $37 per month, you’ll still pay for that debt for the next 13 years. And you’ll also pay a total of $1,760 in interest.
Paying $10 more than the minimum payment each month in this scenario could save you $1,202.41 in interest payments. And you’ll get out of debt almost 10 years sooner.
Ask for Lower Interest Rates
Many credit card lenders are willing to work with their clients to ensure that they receive payments for their debts (rather than defaults on the loan). Because of this, many lenders may lower your interest rates by a few percentages to help you make consistent payments. Often times, you just to call the issuer and ask for a reduced rate.
Seek Financial Help
If these techniques don’t work for you, don’t hesitate to seek help from a financial advisor. He or she can guide you on how to use your lump sums or budget your income so you can kick those credit cards to the curb.