It’s no secret that financially-strapped people often wonder: How can I pay off my credit card debt? But do you ever wonder why you should you quickly repair your debt problems? Because credit card interest rates can be as much as 20% or more, it’s extremely important to pay off your credit card debt as fast as possible. That’s why!
Of course, this can seem especially challenging when your debt is spread out across multiple cards. The good news is, with the right battle plan, tackling credit card debt is a surprisingly manageable proposition.
Generally speaking, there are two basic strategies for retiring credit card debt:
Paying off credit cards with the smallest balances first
This is commonly referred to as the snowball method because it retires balances from smallest to largest without regard to interest rates. This creates the illusion that you’re making quicker progress. But while the snowball methods psychological gimmickry may motivate some people, it doesn’t make a lot of financial sense. That’s because it sometimes leads to retiring the most expensive debt last.
Retiring credit cards with the highest interest rates first
Those who are motivated by saving as much of their hard-earned money as possible, are financially better off when they pay down their credit card balances with the highest interest rate first because it saves money and who doesn’t like that?
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(Readers: This is article 3 of my 25 part quick reference series on credit card basics.)
Photo Credit: GotCredit
I know someone who really had a hard time paying his credit card debts. He told me that his monthly salary is not enough because of his credit card debts and car loan. I should introduce him to snowball method.
First of all cut up all credit cards but keep one to be used strictly for emergencies only or freeze them in a freezer bag. If youre in a hole stop digging. Train the mind the body will follow.Debt is bondage and one will never be free until one acknowledge that one has a problem.
The problem with paying the highest balance first is that it may be the largest balance so you don’t feel you’re making progress. Then a person gets discouraged and stops making prepayments. The beauty of the “snowball” method is that the debtor sees concrete progress. He / she thinks, “I paid off one debt. There is a light at the end of the tunnel and maybe it isn’t the train.” After paying off the first debt that monthly payment amount is applied to the second smallest debt as prepayment until that is paid off. The debtor then thinks, “I’m making real progress, I’ve paid off my SECOND” debt!” Then he / she tackles prepaying the amount of the two retired monthly payments as extra on the third smallest debt, and so on. Yes, paying off the loan with the highest interest rate is intellectually the best choice. Unfortunately people are quirky and easily discouraged. The snowball method gives early gratification which encourages the person to continue to prepay to get out of debt. Getting out of debt is the important part. After all, when you get to the gin with your load of cotton, the owner doesn’t ask, “What route did you take to get here?”, he says, “How good is your cotton?” Whichever method you choose, get rid of credit card debt.
Well said, Karen!