How To Pay Off Your Credit Cards

Knowing how to pay off credit cards is a big issue for many Americans. It’s too easy to get in to debt and not be able to find a solution to get out of it. If your credit card debt is adding up, here are a few simple ways you can pay off that debt with ease.

Avoid Minimum Payments

Making the minimum payments on your credit cards seems like a great way to free up your current cash flow, but doing this can have devastating effects on your finances later. Making minimum payments now can greatly extend the amount of time you end up paying off the debt. Many times it can take decades to pay off the credit card if you only make the minimum. Not to mention the interest you end up compounding on the debt is great.

You can avoid this by making payments above the minimum. Try not to spend what you can’t pay off each month, and if you have to go over your budget make sure you are sending a payment that is at least 5% above the minimum. This is what most financial advisors will tell you, and it will help to decrease the debt faster.

Make Two Payments Each Month

Interest on a credit card is generally compounded using the average daily balance method. What this means is that if you’re starting and ending balance for the month averaged $1500, this is what the credit card companies will charge you interest on. Even if you make a payment a few days before the statement closes, the interest is still going to be based on the higher amount. To lower your average daily balance you can make a payment about two weeks in to the new cycle, and then again by the due date. This first payment will help to lower the average balance since you’ll have 15 days with a lower balance. This lowers the overall interest you pay, and enables you to pay the card off more quickly.

Balance Transfers

While it’s not a good idea to have a bunch of credit cards, transferring a balance from a high interest card to a card that offers an introductory balance transfer rate can be a good idea if you can be faithful about making larger payments. Just be sure you completely understand the terms of the new card and that you can pay off a big chunk of the debt before the introductory rate expires.

Understand the Payment Terms

Many people get trapped when it comes to where their payments go. Most people assume if you take a cash advance of $200 from the card, then make a payment that’s $200 over the minimum that the extra money automatically applies to the cash advance. Most credit card companies apply payments in a very specific way, and of course, it maximizes the money the credit card company makes.

In most cases payments are applied to balances with the lowest APR first, then the 2nd lowest, then the highest. This means if you have made purchases totaling $500 and have a $200 cash advance, the payments you send in under the $500 will apply solely to the purchases since purchases carry a lower interest rate. Because of this, that cash advance you took at a higher rate will only be paid when you pay the card in full. This is generally spelled out in the terms and conditions the card company sends you, and if you wish to challenge how a payment was applied you will have an uphill battle.

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