You have credit card debt and you’re tired of paying just the minimum each month, feeling as though you’re not making any impact on the amount you owe. If you’ve decided that it’s time to start tackling your debt head on, there are a few ways to go about doing it. How you prioritize credit card payments depends in large part on what your goals are. You might wish to increase your credit score so that you can achieve other financial ambitions. Or, your major goal might be to pay as little as you can. Knowing what you want to accomplish can help you get your priorities in order when paying down your debts.
To Bump Up Your Score
If your big concern when it comes to paying down your credit card debt is increasing your credit score, in order to qualify for a mortgage in the future or a better interest rate on another loan, you will most likely want to prioritize credit card payments on cards that have a high balance compared to the amount you can borrow. One factor that plays a big role in determining your score is your credit utilization ratio. The more of your available credit you’re using, the riskier you look to lenders. According to Experian, one of the credit reporting agencies, ideally you want to keep your credit utilization below 30 percent of the amount you’re able to borrow. That means if you have credit card debt on three cards, each with a $1,000 limit, and the balance on one of those cards is $750 and the balance on the other two is $200 each, you should focus on knocking out the $750 balance first, to lower your credit utilization ratio more quickly.
To Pay Less Interest
You might be less concerned with the state of your credit score and more concerned with how much your credit card debt is going to cost you over time. In that case, making the credit cards with the highest interest rates your priority might be your best option. According to US News and World Report, focusing on the card with the highest interest rate first is usually the way to go for most people, as it means you can save a considerable amount of money in the long run. For example, if you have a card that has an interest rate of 20 percent and a balance of $1,500, and you pay $50 per month towards it, it will take you 42 months to pay it off, and will cost you $600 in interest But, if you double your monthly payments to $100, it will only take you 18 months to pay off the debt and you’ll only pay $300 in interest.
To Feel More Accomplished More Quickly
One way to feel as though you’re making real progress on your credit card debt is to focus on paying off the card with the smallest balance first. Knocking out the small debts first can give you a sense of accomplishment and push you on to paying off the higher balances or higher interest rate cards. Paying off the smallest debts first can be good for your credit self esteem, but keep in mind that it won’t necessarily save you any money in the long run.
Speaking with a credit counselor can help you prioritize your debt payments and make a plan for your financial future. You might be feeling the burden of debt now, but with careful planning and commitment, it’s possible to break free from debt.
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