Mastering Credit Card Usage: Part 2
Tailored Strategies for Every Situation
Let's delve into the art of strategically managing credit card payments. While there is an abundance of advice available online, it often lacks consistency and coherence. To navigate this vast sea of information, it is essential to explore various payment strategies tailored to different situations. It's worth noting that most the strategies I'll be sharing are based on my personal experience of successfully paying off credit card debt. While my experiences have shaped the practical tips shared here, it's essential to consider insights from trusted financial sources, like reputable blogs or financial experts..
Disclaimer
Please keep in mind that I am not a financial advisor, I am not a lawyer, and I am not your real estate agent. The information you will see below are examples from my personal and professional experience. I hope these examples provided you with ideas on how to take action in your own life and serve as conversation starters with the professionals who are currently or will be assisting you in reaching your goals.
Paying off Credit Card Debt with a Good Credit: Effective Strategies
If you have credit card debt and possess good to excellent credit, I highly recommend obtaining a new credit card with a sign-up bonus that offers 0% interest for 12-16 months. The 0% interest for 12 months provides you with a year-long period to pay off your debt without incurring any interest charges. First, check if you qualify for such a credit card, as reputable companies like Chase, Discover, and CitiBank often offer these enticing deals. However, it's important to note that you must have a strong credit profile to increase your chances of approval. If your application is declined, refrain from applying for a new credit card for 4 to 6 months to avoid a significant impact on your credit score due to multiple inquiries.
Once you are approved for the new credit card, the next step is to initiate a balance transfer. Keep in mind that there is a fee associated with transferring the debt to this card, which typically ranges from 3% to 5%. Before proceeding, it’s important to carefully evaluate whether the transfer is financially beneficial, ensuring that the fee is not greater than the interest you are currently paying on your existing credit card.
Let’s use an example of when this type of transfer is worth it. Suppose you have $10,000 in credit card debt and decide to transfer it to an interest-free credit card. In this case, you would need to account for an additional $500 (5% of $10,000) in transfer fee added to the debt, resulting in a total balance of $10,500. Although the transfer incurs a fee, this strategy can prove advantageous in the long run. For instance, if your current credit card carries an interest rate of 18.99%, you could potentially spend up to $1,900 in interest alone over the course of a year. By utilizing the balance transfer option, you can effectively work towards eliminating your credit card debt and ultimately become debt-free.
Considering the balance of $10,000, if you are granted a 12-month interest-free payment period, your monthly installment would amount to $833.33 ($10,000 divided by 12) in order to pay it off before interest hits. Alternatively, if the no-interest period extends to 18 months, you can adjust your monthly payment to $555.55 ($10,000 divided by 18) while still accomplishing your objective of becoming debt-free. It is crucial to perform the necessary calculations to determine whether the transfer fee associated with the balance transfer is justified and makes financial sense.
Remember that the objective is to keep all your credit cards' balances below 10% of their limits and ideally paid off before each billing cycle. Therefore, it is crucial to diligently manage your budget, reviewing it at least weekly, to ensure your spending remains under control.
Alternatively, you may consider obtaining a personal loan to pay off your credit card debt. Unlike a no-interest credit card, a personal loan begins accruing interest as soon as the funds are disbursed. However, the interest is typically calculated using Simple Interest, which I discuss in detail in this blog. This option proves advantageous if you anticipate being unable to meet the timeline provided by a no-interest credit card before the interest begins to accumulate. You can always try to get another no-interest credit card to do the transfer once again, however, make sure the transfer fee makes financial sense.
Once you have successfully eliminated your credit card debt, it is still important to maintain credit cards to sustain a healthy credit score and enhance your eligibility for mortgage loans. Remember, the age of your credit accounts contributes to your credit health. However, it is crucial to exercise discipline by avoiding excessive spending beyond your means and adhering to a payment schedule. Personally, I pay off my credit card balance within 10 days of each purchase and typically make payments every Wednesday to prevent any interest charges. By adopting such habits, you can ensure that your credit score remains strong and receive the best deals when mortgage loan shopping!
Join me on my next blog Mastering Credit Card Usage: Part 3. There we will discuss how to pay off credit cards when you have bad credit, however, you have disposable income. See you there!
Visit the other parts of this series:
Sources:
“A Guide to Paying off Simple Interest Loans.” Rosa Javier Real Est, 4 July 2023, www.rosajaviersales.com/post/a-guide-to-pay-off-simple-interest-loans.
McGurran, Brianna. “Is It Better to Pay My Credit Card Bill Weekly or Monthly?” Experian, June 2021, www.experian.com/blogs/ask-experian/is-it-better-to-pay-credit-card-weekly-or-monthly/#:~:text=Making%20smaller%20weekly%20payments%2C%20or,for%20rent%20and%20other%20bills.
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