Unlocking Opportunities for Your Home Buying Journey
While creditworthiness is not solely determined by income, individuals with bad credit may encounter challenges such as high interest rates on mortgage loans or even rejections due to excessive credit card debt. If you have disposable income, there are strategies to navigate this situation.
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 provide 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.
Mastering Credit Card Usage: Part 3
Paying off Credit Card Debt with Bad Credit and disposable income: Effective Strategies
First, many individuals in this scenario have credit cards with high interest rates. According to Wendy De La Rosa's study, 50% of people who called their credit card companies to request lower interest rates were successful. So, it's worth contacting your credit card companies and inquiring about the possibility of reducing your interest rate. Remember, even if they decline, it's okay to ask, the worst thing they can say is, “no”.
Secondly, for individuals with a consistent history of on-time payments, consider requesting a due date adjustment from your credit card companies to align with your paycheck. This tailored approach minimizes the risk of diverting funds and works exceptionally well for those with a proven track record of timely payments.
Once you've taken these steps, it's crucial to stop using your credit cards and focus on paying them off. This period should be used to adjust to living within your income and breaking the dependency on credit cards. It's essential to learn how to manage your expenses solely based on your income while prioritizing credit card debt repayment.
How to Make Extra Payments on a Weekly Basis:
When dealing with credit card debt, it's crucial to understand that credit cards often use compound interest, which means interest is charged and calculated daily. Making more frequent payments, such as weekly payments, can result in lower interest charges compared to making only monthly payments. The goal is to reduce the outstanding balance more frequently, leading to less interest accumulating.
Steps to Implement Weekly Payments:
Evaluate Your Credit Cards: Look at the Annual Percentage Rate (APR) on all your credit cards. This information can be found on your credit card statements or by contacting your credit card companies directly.
List by Interest Rates: List your credit cards from highest to lowest interest rates.
Determine Disposable Income: Figure out the amount of extra disposable income you have available to make additional payments on your credit cards.
Allocate Extra Income: Allocate this extra disposable income to the credit card with the highest interest rate while making only the minimum payments on the remaining cards.
Calculate Weekly Payment: Calculate the minimum payment for the credit card with the highest interest rate and add your monthly disposable income to this figure. Divide this total by four to get the weekly payment amount.
Implement the Strategy: Make a payment of this calculated weekly amount on the credit card with the highest interest rate every single week. This helps in reducing the outstanding balance more frequently, resulting in lower interest charges.
Proceed to Next Card: Once you've successfully paid off the credit card with the highest interest rate, move on to the next one with the second-highest interest rate and apply the same strategy.
Additional Tips: While focusing on the highest interest card, consider splitting the payments on the other cards into four parts as well, even if they are just minimum payments. This approach, when applied consistently, can lead to significant interest savings over time.
Implementing this strategy requires discipline and a set schedule. If possible, set up automatic payments to ensure consistency. This approach is particularly effective for those looking to efficiently pay off credit card debt and save on interest charges.
Example:
Daily Interest Calculation: If you start implementing the strategy on July 5th, the daily interest would be $10.68. This is calculated by multiplying the total balance of $15,599 by the 25% interest rate and dividing it by 365 days in a year.
Weekly Payments with Reduced Balance: Continuing with weekly payments of $164.50 using a reduced balance of $15,509.29 results in a daily interest of $10.62. For instance, if you make the $164.50 payment on July 12th, your balance decreases to $15,328.58.
Paying Off the Card: Following this approach, you would pay off the card in three years, with a total interest payment of $5,253.74 and a final paid amount of $20,891.50.
Monthly vs. Weekly Payments: Comparatively, making the same payment of $650 per month, once a month, would take an additional four months to pay off the card. This results in $6,604.02 in interest and a total payment of $22,521.81. The difference is a savings of $1,350.28 in interest.
Discipline and Set Schedule: This strategy requires discipline and a set schedule. Consider setting up automatic payments if your credit card company allows it.
Proceeding to the Next Card: Once you've paid off the highest interest credit card, proceed to the next one with the second-highest interest rate. Now, you have $650 in extra disposable income instead of $350, so add this amount to the payment of the new card.
Additional Tips: While paying the minimum on other cards, consider splitting the payments into four parts. For instance, if the minimum payment is $200, pay $50 per week. The interest-saving strategy still applies even if you can't make extra payments on this card while focusing on the other one.
Improving Credit Score: Implementing these strategies will lead to an improvement in your credit score. If your score reaches around 750-760, consider applying for a credit card that offers a sign-up bonus and free interest for 12-16 months.
Continued Responsible Credit Card Usage: After paying off your credit cards, continue building your credit score and practicing responsible credit card usage. Maintain old accounts, high credit limits, and low utilization. Set up automatic bill payments on your credit card and ensure weekly balance payoff. Be mindful of additional fees associated with credit card bill payments and opt for your regular bank account if fees exist.
Click here to see an illustration of making minimum payments on a credit card once a month
Click the link here to see a Google Sheets illustration of paying an extra $300 on top of the minimum payment once a month:
Click here to see an illustration of paying an extra $300 on top of the minimum payment and dividing the payment to four times a month:
In conclusion:
Mastering Credit Card Usage: Part 3 provides effective strategies for paying off credit card debt, especially for those with bad credit and disposable income. The blog emphasizes negotiating lower interest rates, aligning due dates with paychecks, and employing a disciplined approach of making extra weekly payments to minimize interest. The strategy, illustrated through calculations, aims to save on interest and improve credit scores. It concludes with advice on maintaining responsible credit card usage for long-term financial health.
Visit the other parts of this series:
Sources:
Fernando, Jason. “The Power of Compound Interest: Calculations and Examples.” Investopedia, May 2023, www.investopedia.com/terms/c/compoundinterest.asp#:~:text=Compound%20interest%20is%20calculated%20by,subtracted%20from%20the%20resulting%20value.
How to Calculate APR on a Credit Card | Chase. www.chase.com/personal/credit-cards/education/interest-apr/how-to-calculate-credit-card-apr-charges#:~:text=Calculate%20your%20daily%20APR%20in,by%20your%20daily%20periodic%20rate.
“Mastering Credit Card Usage: Part 2.” Rosa Javier Real Est, 7 July 2023, www.rosajaviersales.com/post/mastering-credit-card-usage-part-2.
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.
TED. “Pay Off Your Credit Cards Faster With These 4 Easy Changes | Your Money and Your Mind.” YouTube, 3 Feb. 2021, www.youtube.com/watch?v=QqABUDCiIVI.
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