Credit cards have the potential to make our lives a lot more comfortable and to also save us quite a bit of money. But they also have the ability control our lives and lead to debt, when not handled correctly. For the majority of us, the first step in collecting miles and points is to paying off credit card debt that already exists and to make it a habit to pay the entire balance each month. Roughly a third of U.S. households that carry credit card balances do not pay the entire balance each month. There are several ways to pay off existing credit card debt and I’d like to discuss some of these with you.
Paying Off Credit Card Debt
Pay as much as you can into your credit card account with the highest interest each month. Do not worry about the account with the highest balance, but the one with the highest APR. Once you’re done with the highest interest card, move on to the next highest and keep making those same payments. I’d even go as far as saying to temporarily stop contributing to any monthly savings and to put that amount towards your payments instead, because the interest you’re paying on your credit card balance far exceeds the interest you’re earning on that savings account. Paying off debt is also considered a savings method. The average credit card has a 12-18 percent APR, whereas your typical savings account will yield you but 1-2 percent in interest, if you’re lucky. So you’re really not gaining anything by contributing into savings until your debt is paid off, or at least your credit card debt. I put mortgages and auto loans into a separate category of debt. They are much more essential to daily life than credit cards, their payments are more structured and their interest rates are at a decent level. I’ve had auto loans with a 0.79 percent APR. That is pretty much on par with your average savings account, or even a bit lower. With that being said, I do not promote carrying any sort of debt. Everyone’s ultimate goal should be to, eventually, live entirely debt free. That is very possible with enough self-discipline. But credit card debt should be first on your list to eliminate. It is the most expensive type of debt.
Balance Transfer Cards
There is another tool at our disposal to eliminate credit card debt: Open a dedicated credit card account to consolidate all of your credit card debt into one and pay it off, interest free. I know, you’re paying off credit card debt with a credit card, which seems crazy. Bear with me on this. In essence, it uses the same method as a debt consolidation loan, but with all the pros and hardly any of the cons. That is, if you use it correctly and remain disciplined. With a debt consolidation loan, you pay monthly service charges and loan processing fees. More importantly, however, you will still pay interest. The main point of a debt consolidation loan is to spread out the payments over years, even decades, to lower the overall monthly payments. That may sound enticing at first, but as stated, you will still pay interest, so you still lose a lot of money.
A balance transfer card, on the other hand, serves the same purpose, but comes with a fairly generous interest free period and does not have monthly service charges. Some charge a balance transfer fee, others don’t. These interest free periods range anywhere from 6-24 months. That makes this a quicker, and cheaper, way to settle your debt than with a debt consolidation loan. Since balance transfer cards are regular credit cards, they also help boost your credit rating, because any new credit card lowers you debt utilization ratio.
If your credit card debt is $8,000 or less and have a credit score in the mid-600s or higher, a balance transfer card may be a good option for you. Chances are fairly high you’ll be approved and end up with a credit limit that is higher than your current credit card debt. Keep in mind, these figures are based on average salaries. There are plenty of people that regularly have credit card balances much higher than that but are able to pay the entire balance each month.
If you do not fall into that category, carry a balance of more than $8,000 and/or have a fair credit rating (often a consequence of credit card debt), then you should hold off on applying for a balance transfer card. You may be denied, which further impacts your credit score. Or, if you do get approved, then perhaps not for the amount that you need to transfer over, which defeats the whole purpose. In your case, a debt settlement organization may be the wiser route, and credit card points really shouldn’t be at the top of your priority list at this time. Your main priority should be to put a lid on that debt. There is absolutely nothing wrong to consult with a debt settlement organization, they can help negotiate the overall amount owed. If you do not want to work with such an organization, then the snowball method will likely give you the best results.
Using a balance transfer card requires a fair amount of discipline. Before you make that balance transfer, you have to divide the total amount to be transferred by the number of months with zero percent APR offered by the new card. THAT IS YOUR NEW MONTHLY PAYMENT! If you do not stick to it, it will all have been for nothing and you are back to paying interest on your debt. Plus, you did exactly what that credit card company was counting on you to do. While these balance transfer cards are an excellent option in my opinion, let’s be realistic about this: Credit card companies aren’t offering these deals out of the kindness of their hearts, they have a business to run. If you abide by the zero percent APR period, congratulations, you are officially credit card debt free. If not, you are right back where you were before.
Paying off credit card debt requires proper planning, dedication, and discipline. You have to know that this is your next step in life. It has to be “what you do”, not just “something you do”. Think of it as a lifestyle change. Also, keep in mind that once your original credit cards are paid off, through whichever method, you WILL have to continue monitoring those accounts for another three months or more, as those accounts will continue to be charged interest. But once that is settled, you are all clear to start earning points.
Look forward to ThePointSoldier balance transfer card review very soon.
What was your method to eliminate credit card debt from your life? Do you have a favorite balance transfer card? Please comment below and follow us on social media.
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