Paying off Your Credit Cards as Part of Your Budget
A debt reduction category should be created in your budgeting process for paying off your credit cards. Since credit cards are based on revolving credit that compounds monthly, they can be very tough to pay off—especially if you have several cards with varying balances and interest rates to tackle. And there is really no one certain way to retire your credit card debt either. You have to use a variety of methods and implement them in your budgeting process. Let’s look at a few here:
Use software to try different payoff projections. Like with any goal for paying off credit card debt, your budgeting process should include modeling tools to plan your credit card debt payoff. If you are good with Microsoft Excel or some other spreadsheet software, you can actually build a credit card payoff planner that will tell you what you need to allocate each month in your budgeting process in order to pay off a credit card by a certain date. Then, you can enter different payment amounts to predict how long it will take to pay off the balance. Get an understanding of what average daily balance is and how interest is computed against it. Then, in your budgeting process, you can predict what the next month’s balance will be after you make this month’s payment and they apply the next month’s interest.
Start with the smallest balance and pay it off. Not everyone suggests this method but it really comes to what you are comfortable with. Let’s say you have several credit cards and a couple of them have really small balances like less than $1,000.00 each. You are probably paying a minimum payment around $30-40 on each card totaling $60-80 per month. When you pay off these two small cards quickly, you can direct the monthly payments used for them to pay off larger balances. The advantage of paying off your credit cards with lower balances first is that it gives you somewhat of a mental motivation as having used the budgeting process to actually retire some debt. These little successes can motivate you to go after the larger debts.
Start with the highest interest and pay it off. This is just the opposite of the previous point. There are those who advise to tackle the card with the highest interest rate first. This makes good sense too. The choice is really what you are comfortable with. You can even use a combination of making large payments to credit cards with high interest rates and at the same time work on those with small balances. You just want to make sure that your budgeting process for retiring your credit card debt is working.
Pay down cards with the higher cash advance balances. Those convenience checks you wrote to get cash or pay bills and their special promotional interest rates are hurting you much more than you think. And, when you take out a cash advance from an ATM machine or at the teller window, it is usually subject to higher interest rates. Credit card companies will allocate your payments to cash advance balances first. If you wrote convenience checks with special promotional interest rates then your payment is going against that balance while your purchase balance remains at the same interest rate and interest accumulates against that balance with no payment applied to it until the cash advances are paid off.
Maintain a consistent payment amount even though the balance drops. Unless you are having problems where there is not enough money to pay everything in a month don’t reduce the amount you have designated in your budgeting process for retiring credit card debt just because the balances and minimum payment amounts are going down. If you can keep it consistent then it is like a fixed expense and as credit card balances drop, more of the principal gets paid off.