Do you carry a balance on more than one credit card? If so, it helps to formulate a strategy to pay them all off quickly. Obviously you should avoid using them any more so your debt doesn’t grow, and you need to make at least the minimum payment on each card.
But after that, your best bet is to focus all your attention on just one card at a time. There’s two reasons why you should maximize your payments toward just one debt instead of spreading it all around evenly.
First, you can save money and pay less in interest charges. Odds are the interest rates on your cards are all different. By paying off the card with the highest interest rate first you’ll be reducing the amount you pay in finance charges and you’ll be able to pay it all off faster.
Second, you get a very powerful psychological win by seeing at least one balance dramatically fall. If you just pay a little bit here and a little bit there you can easily get frustrated because it feels like you’re not making any progress. By focusing your energy on one debt at a time you can do a lot more damage and that will motivate you to keep chipping away.
According to financial author and radio personality Dave Ramsey, the psychological boost you get from knocking off small debts will give you the momentum needed to knock out the big ones. He suggests ignoring interest rates and starting with the smallest balance first. When that debt is all gone you move on to the next smallest one and so forth. He calls his method the debt snowball.
While Ramsey certainly has an ardent group of followers, simple math will tell you that is makes far more sense to pay off the debt with the highest interest rate first. The faster you pay down that debt the better!
Combine and Conquer
Consolidating your debt will allow you to combine multiple high-interest credit card balances into just one monthly payment with a lower interest rate. This way you can focus your complete attention on just one debt and pay down your balance faster without increasing your payment amounts.
An easy way to consolidate debt is by taking advantage of a balance transfer offer with a low interest rate. Many cards offer zero percent interest for an introductory period and then the rate increases. Keep in mind that balance transfers typically come with a transfer fee between 3% and 5%, so that will eat into your savings.
Another option for consolidating high-interest debt is to take out a home equity loan or line of credit. You’ll get a bit of a bonus using this method because the home equity interest payments are usually tax-deductible. However, there is a significant downside because you’ll be putting your home’s equity on the line and if you don’t make your payments you could lose your home.
If you do decide to consolidate your debt, remember that it’s important to stop spending and avoid using your credit cards going forward. If you don’t change your spending habits you’ll just end up right back where you started from.