When cash is low, credit cards seem like a lifeline you hold onto with your fingernails. Except, when misused, they’re more like anchors that weigh you down. For instance, it’s very easy to get approved for multiple credit cards because the minimum monthly payments can be very low. But, did you know that if you use over 30% of your credit card limit(s) for more than 30 days that your credit score will get hurt?
Should You Carry a Balance on Your Credit Cards or Pay Off Credit Cards in Full?
It depends. The rule of thumb is you should never carry a balance over 30% of your credit card limit for more than 30 days. First, a credit card can get really expensive if you don’t keep the balance low because the average cost or Annual Percentage Rate (APR) in the U.S. is ~17%, according to creditcards.com. For example, you will pay $28 a month in interest alone on an outstanding balance of $2,000. If you miss a minimum payment (typically 2% of your balance), then you’re likely going to pay another $30 per month in late fees. Although these numbers seem small, these they can add up to thousands if you have several credit cards maxed out and no way to pay them down.
Secondly, using more than 30% of your credit card limit will begin to negatively impact your credit score. Lower credit utilization rates suggest to potential lenders that you can use credit responsibly without relying too heavily on it. But the flipside also applies, resulting in a lower credit score and access to only expensive credit cards or loans.
Unless you’re investing in something that will help you make more money, we recommend paying off your credit card balances entirely, EVERY MONTH. If that’s not a possibility, then keep your balance below 30% of your credit limit and NEVER miss a minimum payment. We know this is easier said than done, so here are some quick tips on how to manage your budget and credit card balances.
Methods to Pay Off Credit Cards
- Debt Avalanche Method: As you work your way through your credit card pile, choose the credit card that has the highest interest rate, and pay off that account first. Send the largest payment to this creditor. Remember, you’re still making minimum payments on your other credit card accounts. Once you pay off your biggest debt, focus on the next card with the highest interest rate.
- Debt Snowball Method: With this method, you pay off credit cards with the smallest balances while maintaining minimum payments on all credit card accounts.
Once you have selected the method of your choice, start working on creating new purchasing habits and practices to keep credit cards from becoming credit monsters.
Habits and Best Practices to Pay Off Credit Cards
Purchasing habits begin as a mindset. You have to decide that you’re in control of credit and not the other way around. Your goal to pay down debt and keep debt paid off can become a way of life. To begin the process of change, here are actionable tips to pay off credit cards and save money.
- Keep a Spreadsheet: Use a free Google Docs spreadsheet to monitor how you’re doing on repaying debt. Track balances, payments, interest rates, due dates, and minimum payments. You can see at a glance how much money you need to make minimum payments and what debt reduction strategies to implement.
- Get a 0% APR Credit Card: Look for a card that offers an introductory zero percent rate for 12 months or more. The same card may also allow you to transfer balances from other credit accounts to consolidate debt at the same rate and term. After the term rate expires, cards usually have a high variable rate between 15 to 25 percent. It’s a win-win deal when the card doesn’t have an annual membership fee.
- Pay More Than Minimum: In addition to debt avalanche and debt snowball strategies, pay more than the minimum amount to get ahead of debt.
- Stop Charging: You’ll keep digging a deeper hole when you continue to rack up charges. If you have money in the bank to cover purchases, use a debit card instead.
- Set Up Automatic Payments: Only go forward with this option when you know there’s money in the bank to cover payments. Otherwise, you could face bank overdrafts and late fees and establish a history of delinquent payments.
- Cut Costs: Take a hard look at your expenses to see what you’re buying. For example, your taste buds may like gourmet coffee but what is it costing you per day, month, or year? You may be surprised at how everyday expenditures can add up to thousands.
- Stick to a Budget: Learn how to live within your means. It’s as simple as expenses can’t exceed your income. Set up another spreadsheet. This time, segregate every expense listed on your checking accounts and credit cards into categories; i.e., food, utilities, entertainment, rent, etc. for a period of three months. Don’t fudge on cash expenditures. List them too. That way you’ll know exactly where the money goes.
- Dip Into Savings: Without depleting the account, pull out $500-$1000 monthly to pay off smaller balances. You’ll feel better instantly knowing you’re making positive progress.
- Get Another Job, But Not Really: Do you like to bake, cook or declutter your home? Clean out your garage and closets and set aside items in good condition. Have a garage sale and sell baked goods or second-hand articles. You could set up an online account with eBay or CafePress to receive your payments. Need more ideas? Find some work on Upwork to do in your free time, or drive people around or deliver packages by signing up with Uber.
Once You Pay Off Credit Cards, Make Some Vows
- Vow to use credit cards wisely. You can use them responsibly by keeping balances low and paying them off in full at the end of each month. That’s a good habit that pays off handsomely in your checking account
- Vow to keep your credit card accounts open. Closing all of your accounts can hurt your credit score. That’s because credit cards with zero balances remain on your credit card history indefinitely thereby enabling creditors to review your positive credit data. You can leave your cards at home if you’re tempted to use them.
Learn here the Do’s and Don’ts when it comes to credit cards
As you’ve read, you’re never without options. You can use credit cards to your advantage: by keeping zero balances on your credit card accounts, you’re in a position to wield your credit sword should you ever need to apply for a small business loan.
But if you carry a high balance and want to pay off credit cards quicker, there’s also a solution. You can apply for a business loan and use the funds to pay off credit cards. Keep in mind, that’s not an option offered by most lenders. Luckily, some do. You can use a small business loan from Camino Financial to pay-off personal loans or credit cards that had been utilized for business purposes or that are negatively impacting your ability to fund your business.
These are other additional benefits: our interest rates vary from 1% to 2.5% per month, which are lower than most credit cards, and applying for a loan won’t affect your credit. All you have to do is submit your online application. It takes only a few minutes and you’ll find out immediately if you pre-qualify for financing.